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Smartphone 'Ecosystem' Will Be Instrumental

Though smartphone hardware continues to improve processing power, screen quality, and other features, the ecosystem around the devices will also play a crucial role.

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Jeremy Glaser: For Morningstar, I'm Jeremy Glaser reporting from the 2012 Consumer Electronic Show.

Smartphones have become ubiquitous across the United States, but the question is, what's next in the product category and what is that going to mean for investors?

The real innovations that we've seen this year at CES in terms of smartphones have to do a lot with the internals. We've seen quad-core processors versus the dual-core or single-core processors that were common among phones beforehand. Screen sizes continue to get bigger, sharper, more high definition screens, enormous cameras--just huge--16 megapixel sensors in the cameras on a lot of these new phones, as well as connectivity to 4G LTE networks.

Our analysts, of course, are always looking for some of the investment impacts of the new technology they're seeing here in the handsets. And here is what they have to say about that.

Brian Colello: I think you're going to always need more processing power. That's been the trend in the chip industry for the past 40-plus years. I think you're going to see more and more. We always want quicker processing power; we want more graphics; we want more features, more functionality--and it's really the processors from guys like Qualcomm, TI, NVIDIA, they really are making that happen. I think you're going to see more and more connectivity, more and more features coming in. And again, there are still features to connect phones to the rest of ... now you have tablets to connect to, TVs to connect to, things like that. You're going to have a lot more going on in your phones. So, I think that processing power is going to be very necessary.

Glaser: With all of the stuff that's coming out, the question that people are asking, just as with the ultrabooks, is what does this mean for market share between Apple's iOS, between Android and between some of the emerging competition from Microsoft with Windows Phone.

And I think that it's very difficult to look at some of these devices in isolation, and say, "Oh this device might be slightly better, or this ecosystem might be slightly better," because each one really does something very different.

iOS does a great job of creating a unified seamless experience. It runs on a very limited number of hardware, piece of hardware; it runs only on the iPhone, and it's relatively easy for consumers to use.

Android devices--there is a huge range. You have very low-end devices that might be popular in some emerging markets, among lower-end consumers, up to the highest-end devices that are priced even higher than the iPhone right now.

And then Windows Phone is really starting to make an effort to hit that easy-to-use features, where people can really just dive into the phone without needing to worry about all the different applications or how those interact with each other.

But beyond which of these is actually going to win, and which is going to get a little bit more market share there, a little bit more market share here, we've really been looking at the ecosystem that has been developing around these phones. And the truth is, a lot of different companies from Facebook to Groupon to LinkedIn to Pandora to Netflix, all of these content providers are creating different applications that work on all of the major platforms, and that's where a lot of the attention, that's where a lot of the excitement is. It's less with what's happening with, let's say, the new version of Android and more about the new apps that different companies are bringing to the fore.

We've even seen this in the investment community. If you look at the excitement around a lot of the tech IPOs, look at Zynga, look at Groupon, even if we think the stocks are wildly overpriced in the market, they are seeing really great growth, and that growth is coming on the back of smartphone adoption.

So, what really matters most is that this platform is getting built, that it's being rolled out across the entire world, that different companies are going to be able to build on it--whether it's Apple, which is open enough to do that, or Android which can do that, or even if it's Windows Phone.

We had a chance to talk with the chief economist of the Consumer Electronics Association about this, and here is his take on the ecosystem.

Shawn DuBravac: Now, certainly there is reason if you're Android or if you're Apple with iOS or if you're Microsoft Windows that you want to be that hub device. You want to be the conduit that gets content to consumers, that gets other service offerings to consumers.

But to me the more interesting story, especially from a consumer standpoint, is everything that's happening around that hub device. And from an investment standpoint, I think there are much more interesting stories happening around the device than what's per se happening between the devices.

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.