A Game-Changer in the Tech Space
The converged mobile device will affect more tech stocks than you might think.
My colleague, equity strategist Toan Tran, has recently been bitten by the converged mobile device bug. Ever since purchasing Apple (AAPL) several months ago for his Morningstar GrowthInvestor portfolio, he has been speaking nonstop about the iPhone and the rumors of an upcoming 3G (next-generation wireless network) version of the gadget. He's become enough of a fanatic to mention the idea of camping outside the Apple Store the night before the 3G iPhone launches, so he can be first in line to buy one. Keep in mind, though, that Steve Jobs hasn't even officially announced the 3G iPhone yet.
Nonetheless, Toan's incessant talk about the iPhone and other similar gadgets is warranted. The convergence of various functions onto a single handheld device has been one of the most important trends in the technology space. Take a minute to think about how far the mobile phone has come. In the 1980s, it was an inconvenient brick that happened to have phone capabilities. It eventually evolved into a true mobile device that could fit in your pocket in the 1990s, with basic functions such as text and contacts. Since then, additional capabilities have "converged" into the mobile phone, with smartphones like the iPhone and Research in Motion's (RIMM) Blackberry being the most advanced devices on the market today. These gadgets are jam-packed with neat functions, including e-mail, music and video players, cameras, global positioning systems (GPS) and Web browsing, while still serving as phones.
Currently, converged mobile devices only make up just over 10% of the overall mobile phone market but happen to be the most dynamic and fastest-growing segment. Aside from Apple and RIM, other key players in the market include Nokia (NOK), Palm (PALM), Motorola (MOT) and Samsung (SSNLF). As price points come down and functionalities are continually added, converged mobile devices may become nearly ubiquitous in the future. Like all other hot technology trends, the converged mobile device carries ramifications throughout the technology space. Some of the most fascinating developments aren't occurring in the converged mobile device market itself but rather in adjacent segments, where various companies stand to either win or lose from the trend. In technology investing, it's never too early to keep an eye on such auxiliary themes, as they will likely carry implications down the road for some of the stocks in your technology portfolio. Several of these themes, and their key players, are discussed below.
Remember: Convergence, not Divergence
As converged mobile devices continue to gain in popularity, some of the biggest casualties will be firms that sell gadgets that will be converged away. Some pundits argue that there is room for stand-alone gadgets to co-exist with converged mobile devices. But remember, it's all about convergence and not divergence. Why would you want to carry around separate GPS, camera, music, phone, and other devices when they can all be merged into one solution? Already, the MP3 player has become a standard feature in every smartphone, cannibalizing the stand-alone portable music player market. Next up is one of the hottest electronic gadgets in recent years: the stand-alone GPS system.
Some of the latest smartphones already have GPS navigation capabilities, and as this function becomes a standard feature, stand-alone GPS device makers like Garmin (GRMN) are at risk. Garmin dominates the stand-alone GPS market with more than 50% share and has realized the threat of convergence, going defensive with plans to roll out the Nuvi smartphone by the end of 2008. However, the mobile phone market is completely foreign to Garmin, and it is unlikely that the firm can dominate the converged mobile device market like it has the stand-alone GPS space. A silver lining for Garmin may be Apple's triumphant foray into the smartphone market with the iPhone. But, then again, very few companies can replicate Apple's success at rolling out elegant, trendy, and user-friendly devices.
Battle of the Brains
The battle is on in the semiconductor industry to be the premier supplier of processors that act as the brains behind the converged mobile device. The incumbent is ARM Holdings (ARMH), which licenses its microprocessor "blueprints" to chipmakers such as Samsung, Texas Instruments (TXN), STMicroelectronics (STM), and Nvidia (NVDA). In turn, these licensees customize ARM's designs to create their own differentiated processors for mobile phones. Currently, pretty much all smartphones are powered by ARM-based cores.
Over the next several years, however, a key trend for the converged mobile device will be its shift from having adequate (yet limited) computing capabilities toward something with more of the qualities of a miniature computer. This is where Intel (INTC), with its Atom processor, enters the picture. The Atom is essentially a computer microprocessor that has been extended down into a tiny, low-power chip intended to provide future converged mobile devices with full-fledged computing functions.
The result is a collision course that's been set up between Intel and ARM, with each firm aiming to corner the future of the converged mobile device processor market. Who's going to win? It's too early to tell, but there are some points to think about down the road. Intel holds the upper hand in performance but must improve the power efficiency of its chips to drive adoption of the Atom in mobile devices. ARM is in the reverse position, as the firm's strength in smartphone processors has come from the ultra-low power consumption of its chip designs. But it remains to be seen as to whether ARM can keep up in the processor performance race against Intel. Also, keep in mind that if Intel wins, then it's not just ARM that loses; Intel will also be taking business away from ARM's licensees.
Google vs. Apple?
Many tech companies have been trying to get in on the converged mobile device action, and Google (GOOG) is no exception. The firm's upcoming Android is a software platform intended for mobile devices and will pit Google against the likes of Microsoft (MSFT) and Symbian, both of which already have mobile software offerings. For example, Samsung uses Microsoft's Windows Mobile software in its smartphones, while the Symbian OS can be found in Nokia devices.
By having separate companies focus on software and hardware, the idea is that such specialization will allow for best-of-breed features on each end. This is prevalent in the personal computer market today, where Microsoft supplies the Windows software that runs on hardware built by PC manufacturers like HP (HPQ) and Dell (DELL). However, some converged mobile device makers, such as Apple and RIM, have taken an opposite approach in their strategy and have kept the development of both the software and hardware in house. The argument is that by having control over each component, Apple and RIM can provide better integration between software and hardware, which makes for a more elegant end-user experience.
If the stand-alone MP3 player market is any indication, the Apple and RIM-type strategy will likely win out over time. The snazzy and user-friendly iPod was the result of Apple's in-house development of both software and hardware, which allowed the firm to corner the portable music player market. In contrast, Microsoft's PlayForSure software platform for MP3 devices never really took off. Additionally, the reason why the separate software/hardware model has prevailed in the PC market is because of the network effect of Windows. However, in a nascent market like converged mobile devices, there is no network effect for any software platforms to leverage, which means that the gadgets that can provide the best overall experience will likely triumph.
An Amazing Gadget
We're still in the early stages of the emergence of the converged mobile device market, and it will be interesting to see how the themes we've touch upon play out. As we've seen, a diverse collection of tech companies have skin in the game, and they each stand to win, lose, or maybe even draw. Whatever happens, one thing is for certain: The converged mobile device is an awesome technological feat.
Andy Ng does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.