Smartphones: In Apps We Trust

• ByBob Faulkner, RealMoney Contributor
• On 7:01 am EST, Thursday December 4, 2008

It's no secret that Apple's iPhone 3G and Research In Motion's new BlackBerry Storm are doing quite well this holiday season. The iPhone changed the entire smartphone category while the BlackBerry already had a strong and dedicated customer base.

However, HTC's (formerly High Tech Computer of Taiwan) new G1 based on Google's Android platform has attracted a lot of press and the company has reportedly increased production targets. In addition, Nokia recently announced its first touch-based device, the N97, with availability expected to be in second-quarter 2009.

They will be dozens of other entries into this arena but the question investors want to know is who will win? From my perspective, it's an easy answer: Apple, but not for the reasons you might expect. I think the iPhone is great and its competitors are telling you the exact same by copying it.

Sure, the competition will add some bells and whistles to claim they are better, but that's not going to matter very much in the long run. What will make the difference is applications. This is essentially a rerun of the early days of the personal computer and video game industries.

Generally speaking, software developers are not charities and, like many creative individuals, they enjoy being compensated for their talent and efforts. As a result, those with good ideas for an application tend to target the largest possible platform to make the most money possible. It's why software was developed for IBM PCs long before it was available on Wang PCs, TRS-80s or Xerox PCs. It's why Sony's Playstation was a huge hit for years, Sega bit the dust and Nintendo wandered alone in the desert until it stumbled upon the Wii.

Here's where the current smartphone players stand:

• Apple has more than 13 million units in the hands of subscribers today and that figure is certain to be significantly higher after the holiday selling season. The Apps Store was introduced in July; it features 5,500 applications from more than 60 countries that have been downloaded a staggering 200 million times as of October by iPhone users.
• HTC's G1 hit the market in September as the first phone based on Google's Android platform. The attraction of Android is its open platform status allowing everyone and anyone to develop software unlike Apple, which controls which apps live and which don't. Right now, Android Market (Google's application distribution site) only includes a few dozen apps with another couple of dozen on sites like AndroidApps.org in various stages of "testing." Suffice to say, the current Android applications market is limited at best, but a year from now who knows.
• With a November launch, the BlackBerry Storm is the latest entrant. However, given that the famed BlackBerry has been around for many years, it has its own very large applications infrastructure already in place (Where do you think all those iPhone applications came from?) in its Applications Center. The new Storm is based on the company's version 4.7 of its operating system, so there are a wealth of resources already available. Exactly what trade-offs have to be made to accommodate for a touch-screen is yet to be determined, but this put Research In Motion in the game.
• Lastly, Nokia announced its new touch screen-based N97, which unfortunately doesn't ship until next spring. Download!, Nokia's applications center, is somewhat limited at this point to a few dozen basic functions that were developed for devices other than the N97. What Nokia will do to enhance these capabilities is yet to be seen, but if history holds true, "incentives" may be in the offing.

Simply put, Apple's iPhone 3G is 50 meters ahead in a 100 meter race and on cruise control. The silver medal could go to either the BlackBerryStorm or the G1, but the jury is still out on both.

Nokia could very easily wind up out of the money in this race, which has big implications. The smartphone market will significantly outpace growth of the cell phone market over the next three to five years. The mid-tier has been Nokia's bread and butter for years and will shrink dramatically as smartphones expand, which doesn't bode well for Nokia's P&L.

Buzz up!