The Next Phase of the Smartphone War Is About to Begin

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With the market for smartphones largely saturated, and handset innovation grinding to a standstill, the war for mobile dominance is about to change completely.

From a consumer’s perspective, when it comes to buying a phone, it may no longer be a question of screen size or operating system; rather, it will be one of interface -- how does the device fit in with my other gadgets?

Companies’ ability to answer this question will determine their success or failure.

An operating system for your life

When one thinks of mobile operating systems, they are inclined to think only of tablets and smartphones -- but increasingly, that’s no longer the case. Mobile operating systems are going to start appearing in cars, home appliances, TVs, and even clothing.

To some extent, they're already there. But what’s coming in the next few years will take it to the next level.

The first wave: smartwatches

The watch looks to be the first frontier. Sony’s SmartWatch 2 is set to be released in September, and similar devices from Samsung, Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG), and Microsoft are said to be waiting in the wings.

If the other watches are like Sony’s forthcoming model (and it seems likely that they will be), they'll act as smartphone extensions. There’s obviously some value in being able to control your smartphone without having to take it out of your pocket.

But from an investor’s perspective, the more crucial aspect is how the existence of watches affects the survival of the overall ecosystem.

For example, the typical US consumer may upgrade their smartphone every two or three years. If they’ve bought a lot of apps on iTunes or Google Play, they may be less inclined to consider switching to different ecosystem. For example, surveys suggest that iPhone owners are less likely to consider switching, and they're more likely to spend money on apps and media content -- there’s an obvious link between the two.

The watch can further cement a given consumer in a particular ecosystem. If you've dropped several hundred dollars on a watch that works only with iOS or only with Android, you're probably not going to want to abandon that ecosystem lest you render your watch completely useless.

Smartphones in the car

Watches are the most concrete example, given that they’ll start hitting store shelves in the next year (the Pebble has been around for a while), but they're far from the only one.

The car is already setting itself up to be a major mobile battleground.

The next version of Apple’s iOS (iOS 7) will include car connectivity. Owners of several different model cars will have the ability to “beam” a stripped-down version of iOS to their cars’ dashboard. Based on patent filings, Apple has a much bigger vision in mind.

Will a consumer’s choice of car depend on its smartphone connectivity capabilities? Probably not. But if your car offers a level of connectivity, it may influence your smartphone purchase.

Home appliances and clothing

Integration with the home may be further off than integration with the car, but already products like Philips’ Hue and LiftMaster’s MyQ allow users to control their lights and garage doors with their smartphones.

As for smart clothing, it remains in its infancy, but researchers in the lab are experimenting on clothing that could interface with one’s phone. These types of garments would likely appeal to athletes, and in addition to its smartphone interfacing FuelBand, Nike is rumored to be working on such clothing.

Android’s open system could dominate

Given its move into autos, and its partnership with Nike, Apple appears to have the upper hand in this sector. But in the long run, Google’s Android could be poised to dominate.

Take the aforementioned smartwatch. Like Apple’s iPhone, consumers have a limited choice when it comes to device. Sure, the Pebble works with the iPhone, but because of Apple’s built-in limitations, third party connectivity is limited.

Someone who owns an iPhone and wants a smartwatch will likely have one choice: Apple’s iWatch. In the immediate term, that’s good for Apple’s bottom-line, but limits the growth of iOS.

Contrast that with an Android user. They may not like the look or feel of Sony’s SmartWatch 2, but that’s fine, because they’ll have other choices -- options from Samsung and Google itself.

Another roadblock for BB10

As for how this turn of events affects other operating systems, it will be devastating over the long term. A company like BlackBerry (NASDAQ: BBRY) is already facing an uphill battle when it comes to convincing consumers to adopt its BB10 operating system.

BB10 lacks the robust app ecosystem of iOS or Android, and thus many consumers who otherwise might have adopted it are loathe to make the switch. The rise of device connectivity will make the gap between the dominant mobile operating systems and upstarts like BB10 even wider.

Going forward, not only will potential customers lose out on Candy Crush and Snapchat, but they'll also lack the freedom to buy a smartwatch or other connecting device.

Investing in the smartphone sector

Over the last year, smartphone stocks have disappointed investors as growth in the space has slowed. Yet, the sector appears to be on the verge of a radical new shift. Over the next few years, device connectivity will become a major selling point -- if the phone doesn't connect to a consumer's watch or car, it isn’t going to be purchased.

Apple's iOS seems to have the advantage right now, but Android’s open nature could become more attractive over time. Meanwhile, alternative operating systems like BB10 have an even tougher road ahead of them.

So Who Wins?

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Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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