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FEBRUARY 25, 2005
By Andy Reinhardt The Buzz Is Back in Mobile [Page 2 of 2]
CHECK BACK LATER. Ollila concedes that Asian makers are ahead in 3G in Europe, in part because Nokia held back introducing phones until operators finished building their networks and started marketing 3G services. But Nokia unveiled several new 3G handsets in Cannes and is investing heavily in multimedia. "Check back in a year from now," Ollila says. By then, he predicts, Nokia's market share in 3G handsets will match or exceed its overall market share of around 32%. No category of handsets gets more press attention than so-called smart phones, which combine traditional voice calling and messaging with built-in personal organizers and multimedia functions. Smart phones are a hot topic in part because Nokia, Microsoft (MSFT ), and others have jousted for the last five years over who would provide the underlying operating system to power such devices. For now, Nokia and its close partner, Britain-based software consortium Symbian, have the clear lead: More than 80% of the smart phones sold to date use the Symbian operating system, vs. single-digit share for Microsoft's Windows Mobile and the PalmOS from PalmSource (PSRC ), the company that supplies the basic software for Palm handhelds. All the hoopla obscures an important fact: Smart phones represent only about 5% of the handsets sold last year. They remain expensive, relatively large and heavy, and often complex to use. Now, operating-system providers are trying to push smart phones into the mass market. Symbian and Nokia have announced plans for a lighter-weight version of the operating system that would allow it to be used on smaller, less-expensive devices. Feeding the trend, Taiwanese manufacturers such as Arima and BenQ (BNQCF ) are already churning out Symbian-based phones that they relabel for brand-name handset makers or sell directly to operators. OUTSOURCED DESIGN. Not to be outdone, Microsoft is seeking new avenues for getting its mobile version of Windows into the hands of consumers. Its original plan to sell the operating system to handset makers a few years back was stymied by their mistrust of the PC software giant and by Symbian's successful counter-marketing. That forced Microsoft to take a different tack, selling the software to contract manufacturers such as Taiwan's HTC, which produces custom-made Windows phones for several operators including Orange. Still, such devices represent only a fraction of the handset business. Microsoft is trying a new strategy in partnership with the world's leading contract manufacturer, Flextronics (FLEX ). The two companies announced in Cannes that Flextronics will manufacture mass-market Windows-based smart phones for resale to handset makers who can relabel their phones as their own. Handset-makers may feel more amenable to such an arrangement today than they did a few years ago, because price pressure and growing commoditization of phones are forcing them to outsource more manufacturing and design than they used to. Working with giant Flextronics, "gets us to lower price points and higher volumes," says Pieter Knook, the head of Microsoft's mobile initiative. PalmSource is also trying to go down-market. For several years, it has sold a phone-friendly version of its operating system, with limited success except in the popular Treo line of handheld organizer/phone hybrids. Now, PalmSource is aiming a new version of the software, called PalmSource Feature Phone, at mid-market devices. (Though definitions vary, the difference between smart phones and so-called feature phones is that smart phones are programmable devices, like PCs, that can run a wide variety of third-party software programs, while feature phones tend to be more fixed-function, analogous to consumer-electronics products. Their more limited functionality makes them lower-cost and often easier to use.) COST REDUCER? PalmSource is also jumping on the Linux bandwagon. Last year, it bought a four-year-old Chinese company called China MobileSoft that had developed a low-cost Linux-based operating system for phones. That software now forms the basis for a new PalmSource offering called mFone, which the company says will allow for less-expensive but still feature-rich multimedia phones. PalmSource CEO Dave Nagel sees Linux as a natural direction for the company. "Most consumer-electronics products are now built on Linux because it's virtually free," he says. Add to that the collaborative contribution of thousands of volunteer Linux programmers the world over, and mFone could allow PalmSource to deliver whizzy devices for a fraction of the cost of earlier smartphones. The final installment of this Reporter's Notebook will appear on Monday, Feb. 28.
 Reinhardt is a correspondent for BusinessWeek in Paris Edited by Beth Belton
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