Technology

Apple, Google vs. Big Wireless


The tech giants' mobile software efforts could give developers the long-awaited upper hand over cellular carriers—and even Symbian and Microsoft

Mac software developer Craig Hockenberry has never been very interested in creating applications for cell phones. "It's a lot of politics, and less money" to be made compared with creating software for computers, he says, explaining that programmers have always been forced to bow to a litany of requirements set by wireless carriers, handset makers, and other software companies.

With billions of people carrying cell phones, software makers large and small have long eyed the wireless market hungrily as the next big growth opportunity. Instead, they've found that the bountiful profit margins they've enjoyed creating software for computers and the Web don't exist in the mobile realm. While they rarely need to pay a computer maker or an Internet service provider when their wares are used on those machines and networks, software firms find palms extended at every turn in the wireless industry.

A developer who creates a mobile ringtone from a song may only receive 5% of the revenue from the sale of that application, with cellular providers grabbing a healthy cut of the proceeds on top of those that go to musicians and studios. If it's not the carrier, then it's the handset maker or the creator of a phone's software operating system. Or sometimes several of them extract an extra fee from application developers. "The ecosystem is not healthy," says Daren Tsui, CEO of mSpot, a mobile software firm that has chosen to partner with carriers to get its mobile music and video applications on cell phones. Those deals with six North American carriers have produced 2 million monthly subscribers. Yet despite his firm's success, Tsui says, "You've got the developing community basically starving."

The Appeal of Apple's Opening Up

Now Apple (AAPL) and Google (GOOG) are trying to throw them a bone. In February, Apple will release a software developer's kit (BusinessWeek, 10/16/07), allowing independent programmers to create applications for the iPhone. Because the iPhone costs an extra $200 or more compared with an average phone, those who buy it are seen as more likely to spend more for premium services every month. Developers hope both Apple and its exclusive carrier partners will be eager to meet that demand with new third-party services and applications. And with a bigger pie to share, they hope Apple and the carrier will cut them a better deal.

Apple's decision to open the iPhone, which followed months of lobbying by programmers, also offers more appeal for developers: As the iPhone is built on the same operating platform as Macintosh computers, those programmers familiar with Mac development tools should enjoy an easy transition.

When the developer's kit becomes available, Hockenberry, for one, hopes to create an iPhone version of Twitterific, a Mac computer application that allows users of the social networking site Twitter.com to view and publish posts. "Come February, we could see an iPhone [software] tsunami," says Richard Doherty, director at consultancy The Envisioneering Group.

Google's Kindred Effort

Google, meanwhile, is expected to come out with a new operating system for mobile devices called gPhone to extend its hugely profitable search-and-ads business to the wireless market. As part of this effort, Google is expected to release a software kit to spur development of innovative third-party services and applications that would help lure consumers to gPhone-based handsets (BusinessWeek, 9/6/07).

One expected feature of the gPhone platform, dubbed gPay, would simplify commerce for third-party providers by enabling users to pay for their services via short text messages. Today, carriers force most transactions to flow through a subscriber's monthly bill, keeping up to half the revenue for serving this role as an unwanted intermediary between developers and consumers. Were Google to introduce an alternative billing system that charges developers lower fees, "we could really flourish," says mSpot's Tsui.

Google may also remove obstacles and financial burdens that typically confront developers by offering an alternative wireless network where the selection of applications available to users isn't tightly controlled by mobile carriers. Google has said it may bid for wireless spectrum licenses in early 2008 to build, possibly with a partner, a new mobile network with no restrictions on what applications customers can use.

Smaller Developers Aim to Benefit

If the iPhone's popularity continues to spread with its imminent arrival in Europe and Asia, and if the first gPhone handsets win a large user base, developers may gravitate to those platforms just to save on costs. Compared with the computer market, where there are just three widely used operating systems, the handset industry is fragmented across roughly 40 different software platforms. Only a handful, such as Symbian, Microsoft's (MSFT) Windows Mobile, Palm (PALM), and BlackBerry (RIMM), offer programmers a platform on which they can write an application that will work on multiple devices without much customization.

As a result, smaller software firms are forced to create multiple versions of the same application to make it compatible with even a small subset of the hundreds of phone models available to consumers—an inefficient process at best. "It's extremely expensive," says Jason Whitmore, general manager of mobile devices at Wind River (WIND), a maker of mobile software. But if the market consolidates around certain platforms, including Apple's and Google's, a developer's costs and the time it takes to bring an application to market could both drop by 30%, he figures.

There's yet another tide shift under way in the wireless industry that may strengthen the hands of software developers: Today, consumers primarily choose their wireless service provider based on call quality, according to researcher J.D. Power & Associates, which like BusinessWeek is a unit of The McGraw-Hill Companies (MHP). But with network operators such as Verizon Wireless and Sprint (S) continuously expanding and enhancing their wireless coverage, call quality is becoming less of a concern. In a September survey of more than 25,000 consumers, J.D. Power found that wireless users encountered dropped calls or sound quality problems on 15 of every 100 calls, down nearly a third from the 21 problems per 100 calls they reported a year earlier.

In the Future, Software Over Service

With reliable call quality becoming more of a given, more phone purchases may be driven by special features. The iPhone offers the best proof. At a time when U.S. subscriber growth has been slowing, Apple's U.S. partner just posted its best quarter ever. AT&T's (T) subscriber base grew by 1.2 million, thanks in large measure to the allure of the iPhone's sleek design and applications, from Wi-Fi and Web browsing to the built-in iPod. AT&T's call quality played little role in those decisions. In fact, though perceptions of worse network quality dog AT&T, more than 40% of the 1.4 million people who have bought an iPhone switched from rival carriers to get the device.

Within a year to 18 months, "customers will make their choice by software, not service," says Michael Mahoney, managing director at investment adviser Falcon Point Capital. "Those [companies] that attract software developers will end up being the winners in the long run. The future growth and the premium pricing will go to the product [with better software]."

Interestingly, this emerging danger to the wireless establishment's revenues may be hastened by industry efforts to neutralize the Apple-Google threat. The arrival of a device as completely different and successful as the iPhone will no doubt compel handset makers and carriers to experiment with new designs and business models. "Compared to the iPhone, every mobile device user interface looks woefully inadequate," Nomura analyst Richard Windsor wrote in an October report.

The Establishment Strikes Back

In response to these gathering forces, carriers, handset makers, and leading mobile software producers are gearing up their own initiatives. Some carriers are investing in open-source software: Vodafone (VOD) and Japan's NTT DoCoMo recently co-founded LiMo, one of nearly two dozen mobile flavors of Linux. And when another mobile Linux purveyor named Trolltech (TROLL) released a limited batch of handsets for developers to play around with in June, "a surprising number of handsets were bought by operators," reports Benoit Schillings, Trolltech's chief technology officer.

Symbian, majority-owned by Nokia (NOK), has already built one of the biggest mobile developer communities with more than 75,000 registered developers. But now it's trying to make participation less expensive. In October, it began allowing developers to register applications faster and cheaper, for $20 a pop, rather than several hundred dollars. And Microsoft is trying to make Windows Mobile more attractive through innovative alliances. On Oct. 24, chipmaker Qualcomm (QCOM) announced a smartphone chipset with built-in support for the Windows Mobile operating system that would enable handset makers to build such devices more cheaply.

Among handset makers, Motorola has also released new software tools for its phones to spur third-party development, and Nokia is coming out with a new kit as well. Motorola (MOT) also recently bought half of UIQ, a Symbian-based platform, from Sony Ericsson. Together, the phone makers plan to beef up UIQ's staff by nearly half, to 500 people, says Naresh Chouhan, head of developer programs at UIQ. "Both shareholders see UIQ as being a very strategic platform," he says. "They are encouraging us and funding us. In the future, I want to be able to compete with Apple and Google."


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