The Real Winner of the Smartphone Wars?

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you already have a smartphone, chances are you're passionate about your choice, whether it's an Apple (NASDAQ: AAPL) iPhone or one of the various phones running Google's (NASDAQ: GOOG) Android platform.

The situation mirrors the split between Macs and PCs in the 1980s and 1990s. Android is the PC: cheap, ubiquitous, and runs on a wide variety of phones from different manufacturers. The iPhone is elegant, sleek, integrated and available only from Apple.

Android has the majority of the smartphone market share with 61 percent, and Apple has the imagination of popular culture and the press behind it (and investors, with phenomenal profit last year of $25.9 billion and sales of $108 billion last year), but the real winner of the smartphone wars is the firms who actually make the hardware: Original Equipment Manufacturers or OEMs. Apple and other phone manufacturers are architects. OEMs are plumbers and electricians, making sure the infrastructure behind the pretty exterior works perfectly. (Though with sales of $24.7 billion and a profit of $9.7 billion last year, Google is doing pretty well.)

The biggest winner in the OEM field is ARM Holdings (NASDAQ: ARMH) The company's chips power the iPhone, the iPad and the various Android phones. The company posted a profit last year of $175.06 million, with sales of $764.65 million. ARM is a fabless company, which means they don't actually do the manufacturing themselves. This allows them to keep their costs down. The company's cost of sales was only $22.58 million, which is remarkable for their level of sales.

One of the companies that ARM licenses its designs to is Qualcomm (NASDAQ: QCOM). The company's Snapdragon is a complete system on a chip based on ARM that companies like HTC, Samsung and others use in their own smartphones and tablets. Qualcomm posted a profit of $4.5 billion last year, with sales of $14.96 billion. Qualcomm is also a fabless manufacturer, which is also evident in their cost of goods sold. It's only $3.8 billion, about 25 percent of its sales.

OmniVision (NASDAQ: OVTI) manufactures the front-facing camera on the iPhone, among cameras for other companies. The company suffered a black eye after it was revealed that Sony provided the back-facing camera for the iPhone 4S. The company posted a profit of $65.85 million last year, down from $124.48 the year before that, a decrease of around 47 percent. Buoyed by the success of the iPhone, the company is actually in pretty good shape.

All of these companies are technological mercenaries, not beholden to any one customer base. This makes them a lot more nimble than companies who sell to consumers, like Apple or Samsung. No matter what the product is, whether it's a PC or a tablet or a laptop or a smartphone, the electronics inside aren't really all that different from each other.

These OEMs do have one vulnerability: consumer confidence. If people aren't buying computers or tablets or smartphones, the companies that make them won't buy hardware from them, either. Fortunately, the consumer confidence index has hit a seven-month high in September. As we move into the holiday season, we can probably expect those numbers to increase. The end of the year is especially good for electronics manufacturers, as people give shiny new electronics, including smartphones, as gifts.


Fool blogger David Delony has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Qualcomm. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus