Who Will Win Technology's Biggest Battle

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

Over the last four years the smartphone industry has seen superb growth. This unexpected growth was triggered by Apple’s (NASDAQ: AAPL) iPhone. This one product has been responsible for totally revolutionizing an entire industry and I believe it continues to change the entire sector. This shift in industry dynamics has propelled Apple to new heights of technology stardom and its market cap to record breaking heights. On the other hand, players who have failed to evolve e.g. Nokia (NYSE: NOK), Research in Motion, Motorola are eroding shareholder value and struggling to bounce back. Their respective smartphone operating systems are central to turnaround efforts of these companies.

Google (NASDAQ: GOOG) has established itself as the leader in smartphone Operating Systems (OS), with a 45% global share. The lack of penetration in tablets and unavailability in PC/Ultra Book computing has proved to be the Achilles heel of the android operating system. Microsoft's (NASDAQ: MSFT) Windows 8 and WP8 platform has been launched with more than a 1000 devices. Microsoft plans to capitalize on this weakness of Google’s Android and provide one umbrella for different devices. RIMM has announced a January date for the launch of its own, much-awaited BlackBerry10 platform. The company is making efforts to market its OS to potential device markers but no success has been reported thus far.

Going forward, I envision the PC, tablet, and smartphone industry to merge together. It does not make sense from a consumer's perspective to invest in a 7-inch tablet, a smartphone, and a personal computer at the same time. Therefore, I believe hybrid devices such as Ultra Books, Phablets, Surface, and others are the future of the industry. The companies best positioned to benefit from this eventual shift are Microsoft, Nokia, and Apple. This is because these companies have the capability to give a uniform experience across different devices.

Merging Industries

There would be a lot of changes in the computing industry in the coming couple of years. The increased pressure on companies to provide eco-systems has already pushed industry leaders, such as Nokia, to adopt homemade platforms (Symbian). In turn, these platforms are under pressure to provide a uniform experience across different devices. On the other hand, the wide range of computing devices is increasing the demand for hybrid devices that can be used to perform multiple tasks.

Phablets and Ultra Books are glimpses into what the future holds for the Technology Industry. The feature and basic phones would be taken over by smartphones pretty soon considering the fact that companies such as Q-Mobile and Nokia are coming up with smartphones that are only slightly more expensive than feature phones. On the other hand, PCs would soon be merged with tablets to give an experience similar, to that provided by an Ultra Book or Microsoft's Surface tablet. Devices such as Lumia 920, Galaxy Note and Samsung's S3 give an experience similar to that of 7-inch tablets and leave little room for 7-inch tablets as a separate product.

Industry Highlights

Nokia has lost the most market share in the last few years. The Finnish technology giant was the largest cell phone only four years ago. What turned out to be Nokia's biggest mistake was sticking to its Symbian operating system. The company has turned a corner by striking a deal with Microsoft that would result in WP8 on all Nokia Lumia handsets.

The biggest success in the smartphone industry has been Apple and its iPhone. The company has reported sales of 125 million phones for the fiscal year 2012, which represents a YoY growth of 73% over the sales figure of 73 million for 2011. The iPhone 5 will be instrumental in driving iPhone sales in 2013 and the company should be able to sell around 150 to 170 million iPhones in the fiscal year 2013.

RIM has also suffered from a negative growth in sales. The company had a market share of 19% in 2009 which has now reduced to 11%.The share reduction has been more prominent for Nokia, primarily because RIM has a comparatively stronger support services network. RIM's BB services have ensured a steady stream of cash flow for the company, despite negative growth. I believe BlackBerry 10 OS is a quality product and would help RIM retain its existing user base. The company should look to license its OS to other competitors in order to derive growth.

 Source: Gartner, IDC

The surprise package for the smartphone industry remains the Windows platform and the response it can garner from customers. As explained above, there is a change in the dynamics of the industry and users are now looking for a uniform experience across devices. After Apple, Microsoft is in the best position to achieve that. Microsoft's OS has the largest user base in the world and if Windows 8 proves to be a hit with users, it will be able to give a uniform experience across all devices.

Winners

Google: Google's Android OS is the leading smartphone platform. As the chart above shows, fortunes can change fairly quickly in this industry. The biggest weakness of Google remains its lack of penetration with regards to computing. This weakness renders Google unable to provide a uniform experience across all devices, which I believe will put it at a significant disadvantage going forward.

Microsoft: I expect Windows 8 to be the OS leader in tablet/hybrid devices. If Windows 8 successfully penetrates tablets/hybrids, as I expect it to, it will give Android a run for its money. The key for Microsoft, therefore, remains the success of its Windows 8 OS. At a forward P/E of 8x and 3.5% dividend yield, the stock remains a strong buy.

Nokia: Nokia will play a major role in the success of WP8. The company has a very loyal customer base in places like Asia pacific, India and Europe. The stock is still trading at very cheap multiples and is a strong buy. The company has a major upside and sales figures for WP8 Lumia should boost the stock considerably.

Apple: Apple remains the most promising smartphone manufacturer going forward. The company is uniquely placed due to its rich ecosystem. Services such as iTunes, iStore, and so on give it a unique selling proposition (USP), which cannot be easily replicated. The recent 25% slide in AAPL is a good entry point for investors. However, shrinking margins due to iPhone 5 and iPad Mini remain a concern.

Based on this analysis, I believe Nokia, Microsoft and Apple are the best bets in the industry for 2013.


Vamosrafa7 has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, China Mobile, Google, and Microsoft. 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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