Wireless Industry - The New World Order

Wireless Industry The New World Order Smartphones – and Challengers - To Take Global Share We believe smartphones represent the next wave of computing, and are truly “3C” devices – embodying the convergence of communication, computing, and content. In this report, we size the smartphone market, which we view as large, nascent, and underpenetrated. We also forecast the vendor landscape; predicting vertically integrated “challengers”, like Apple, RIM, Palm, and possibly others, will take significant market share from some incumbent cellphone, PC, and consumer electronics vendors. Others that, in our view, are positioned to benefit include: 1) carriers that “get it”; 2) smartphone suppliers/partners; and, 3) emerging/transplanted web, software, content, and media businesses.

• Smartphones: The Next Wave of Computing. We believe smartphones represent the next wave of computing, leading to mobile experiences both consumer and business users crave. Unlike tethered TVs, PCs, and desktop phones, smartphones offer the convenience of going everywhere and, as such, may become the next web, a mass medium, the principal way millions communicate, email, browse the Web, compute, listen to music, play games, watch TV/movies, get news, stream radio, interact, transact, do business... and, in some ways do all of these better.

• Smartphone Market: Huge, Nascent, and Underpenetrated. We are raising our smartphone forecast due to: 1) the expected global shift by millions upgrading to smartphones for email, browsing, applications, and content; 2) smartphones’ potential to take market share, not only from voice and/SMS cellphones, but also from PCs, TVs, consumer electronics, and Internet markets – collectively representing over 2 billion users. We are raising our smartphone penetration forecast to 35.1% of global handsets or 504 million units (395 million prior) by calendar 2012. Additional revenue upside may come from new services (carriage fees, advertising, subscriptions, transactions, etc.) and revenues shifting from traditional media (TV, newspapers, web, etc.).

• Data is Hard: Challengers to Dominate. Due to important differences from the PC, cellphone, and Internet markets, iconic smartphones are difficult to make, distribute, sell, and support. Thus, we predict a select group of challengers will dominate the smartphone market, given their deep vertical integration (e.g., software/ hardware/ service ownership) and “special sauce” through which they create unique, iconic smartphone experiences – i.e., making complexity simple. We believe successful challengers may double or triple their revenues by 2012.

• Some Incumbents to Face Challenges. We believe some incumbent cellphone/PC/consumer electronics companies (e.g., Nokia, Motorola, Dell, HP, Sony, Sony Ericsson, and LG) will face challenges and lose market share competing in the smartphone space – held back by technology, cannibalization, and organizational, customer, and shareholder barriers. These issues are not insurmountable; other incumbents may successfully evolve and compete.

• Raising Price Targets. The shift to the next wave of computing will likely develop over the next several years. In our opinion, the emerging leaders in the smartphone market such as Research in Motion Limited (NASDAQ: RIMM; $70.72; Outperform; Above Average Risk), Apple Inc. (NASDAQ: AAPL; $159.59; Outperform; Above Average Risk), and Palm, Inc. (NASDAQ: PALM; $13.23; Outperform; Speculative Risk) represent compelling investment opportunities which warrant investor attention. We are raising our price targets on RIM from $100 to $150, on Apple from $190 to $250, and on Palm from $18 to $25, justified by increased market shares which, as visibility improves to the huge smartphone opportunity, offer upside to financials and potential multiple expansion.

RBC Dominion Securities Inc.

Mike Abramsky (Analyst) (416) 842-7840 [email protected]

Paul Treiber, CFA (Associate) (416) 842-7811 [email protected]

August 18, 2009

This report is priced as of market close August 17, 2009 ET.

All values in U.S. dollars unless otherwise noted.

For Required Conflicts Disclosures, please see page 90.

Wireless Industry August 18, 2009

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Table of Contents The New World Order....................................................................................................................3 The Rise of the Mobile Data Consumer ......................................................................................15 The Global ‘Data Gap’....................................................................................................................19 Mobilization of Business ................................................................................................................21 Sizing the Smartphone Market....................................................................................................23 Huge, Nascent, Underpenetrated ....................................................................................................23 Consumer versus Business..............................................................................................................25 International Smartphone Forecast .................................................................................................27 Smartphone Market Segmentation .............................................................................................33 Challengers To Dominate Smartphone Markets........................................................................37 Some Incumbents To Face Challenges........................................................................................49 Vendor Share Outlook..................................................................................................................57 Apple...............................................................................................................................................58 RIM.................................................................................................................................................59 Palm ................................................................................................................................................60 HTC Corporation ............................................................................................................................61 Nokia...............................................................................................................................................62 Samsung..........................................................................................................................................63 Motorola .........................................................................................................................................64 Sony Ericsson .................................................................................................................................64 Other Vendors (PC, Phone, etc.).....................................................................................................65 Mobile OS Share Outlook ............................................................................................................66 Google Android ..............................................................................................................................67 Microsoft.........................................................................................................................................69 Symbian ..........................................................................................................................................70 Other Platforms...............................................................................................................................71 Smartphone Market Profitability................................................................................................72 RBC CM Smartphone Margin Outlook ..........................................................................................74 Smartphone Market Scenario Analysis ......................................................................................76 Raising Targets ...............................................................................................................................78 Derivative Smartphone-Related Markets ...................................................................................83 Companies Mentioned ..................................................................................................................84 Company Descriptions..................................................................................................................84 Glossary .........................................................................................................................................85 Required Disclosures ....................................................................................................................90 Disclaimer.......................................................................................................................................92

August 18, 2009 Wireless Industry

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The New World Order “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” - Roy Amara, engineer, futurist

The Next Wave of Computing. As profound as the historic technology shift from mainframes to PCs, we believe smartphones (connected mobile devices with 2G, 3G, 4G, Wi-Fi, etc.) with advanced PC-like features, QWERTY input, unique form factors, personalization, advanced software, integrated and third-party applications, represent a transformational evolution in the technology landscape – the “next wave of computing”. Smartphones have the potential to unleash novel, rich, computing experiences – enhanced with the convenience of mobility (location, communication, awareness, presence, proximity, and immediacy) – leading to the next level of consumer computing, the next level of doing business.

Smartphones: Converged Devices. Smartphones offer improved ways to communicate and connect (email, instant messaging, social networking, multimedia messaging, etc.); browse and search the Internet with the richness of a desktop; entertain (music, movies, games, pictures, videos, etc.); interact and collaborate (blogs, MySpace, Twitter, Facebook, Flickr, etc.); organize life and work (calendar, contacts, notes, PIM, etc.); transact (search, browse, shop, buy, bank, etc.); find and guide (location-based applications, local search, directory services, mapping, etc.); stay informed (news, alerts, weather, traffic, etc.); mobilize the office (corporate email, corporate applications, private branch exchange (PBX) integration, mobile desktop, etc.) and do thousands of things we haven’t yet thought of or foreseen. Advances in network and handset technology are allowing smartphones to deliver on the promise of “converged” portable computing devices, with high-resolution, interactive displays, longer battery life, faster processors, greater storage, multimodal wireless technologies (2G/3G, GSM/CDMA, Wi-Fi, Bluetooth), media features (higher quality cameras, speakers, music players, etc.) and other features (GPS, etc.).

Exhibit 1: Smartphones: The Next Wave of Computing • Hardware – Fast processor, multimodal wireless voice/data technology (3G, 4G, Wi-Fi, etc.), high-

resolution screen, QWERTY input, touchscreen, high capacity memory and/or SD card, high-resolution camera, headset jack, GPS, Bluetooth, other (accelerometer, ambient light), voice/data integration features (contact/phone integration, email/web/phone integration, etc.), sealed or removable battery.

• Software – Data-centric operating system, UI, powerful, personalizeable, third-party application integration, other embedded applications (PIM, contacts, calendar, etc.), email client, web browser, bundled apps, App Stores, other; For enterprise users, security and manageability.

• Style, fashion, form factor – QWERTY, touchscreen, candy bar, flip, slider, as appropriate to market, geography.

• Messaging/Data Capabilities – Integration with popular consumer email platforms (Gmail, Hotmail, Yahoo Mail, AOL), Cloud services (e.g., Mobile Me for Apple, MyPhone for Win Mobile, etc.), popular enterprise messaging server platforms (Exchange, Notes, IMAP, POP3).

• Mobile Web - Dedicated mobile browsing capable of properly delivering a desktop-like browsing experience, supporting forms, CSS, JavaScript, Flash, Ajax.

• Multimedia/music/video experience – Mobile media players (audio ,video, movies) with support for popular media formats, and integration with jukeboxes / online stores (e.g., iTunes, Windows Media, Amazon MP3 store).

• Apps/Developers – Thriving application ecosystem and developer community, developer-friendly SDK, application stores, one-click search/buy enablement, etc.

• Content – Wide breadth of leading/popular content and applications, critical mass of applications and content to support competitive user experience, OTA/sideloading capabilities for transferring content (music/video) from PCs, support for carrier-branded stores and applications (e.g., turn-by-turn navigation).

• Enterprise Features – IT manageability/control; ROI and TCO leadership; IT level security; integration with popular enterprise apps (SAP, Oracle, Microsoft, BI, ERP).

Source: RBC Capital Markets


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Exhibit 2: Global Data-Centric Smartphone Milestones and Evolution

3.6 7.1 14.328.5

57.0

83.3

126.8

164.9

0.0

0

20

40

60

80

100

120

140

160

2000

A

2001

A

2002

A

2003

A

2004

A

2005

A

2006

A

2007

A

2008

A

2009

E

Smar

tpho

ne U

nits

(M

M)

Launch of the first

touchscreen BlackBerry

Launch of the Apple iPhone

Launch of the

BlackBerry SureType

keyboard

Launch of the first

Smartphone with voice -

Handsprint Treo 180

Launch of the

Mobitex RIM 950

and launch of the

Symbian-based

Nokia 9210

Communicator

Launch of the

Windows Mobile 5

based Motorola Q --

with push email.

Source: RBC Capital Markets estimates

Transforming 4 Previously Discrete Markets In the past, it has been iconic, transformational technology innovations – e.g., the PC, the Internet, the cellphone, the iPod – that have accelerated market expansion and shifted market share from incumbent vendors to new challengers. Over the last five decades, four discrete technology markets – PC and computing, Internet, consumer electronics, wireless phones – have grown via transformational innovations, each successively attracting larger markets and users. In our opinion, smartphones are uniquely transformational, because they represent the convergence of these four technology markets – adding the convenience of being able to go everywhere.

Exhibit 3: How Iconic Innovations Accelerated Global Technology Markets

0

200

400

600

800

1,000

1,200

1980

1985

1990

1995

2000

2005

PC U

sers

(M

M)

1.1B

1. PC and Computing – Complex and massive, mainframes dominated computing in the 1950s, followed by the minicomputer (e.g., DEC PDP-11, VAX). But it was the PC that upended the computing industry in a few short years. The early PC looked nothing like it does today – embodied by the $400 do-it-yourself Altair launched in 1975 - but inspired subsequent copies, upgrades, add-ons, etc. The launch in 1981 of the IBM PC, with its standard architecture, MS-DOS, and upgradable components, was a seminal industry event; Commodore 64, launched in 1982, was arguably the best selling computer (17M total units sold) in the early 1980s, with 64K RAM and Microsoft Basic. Eyeing the growing PC market, multiple contenders like Wang, Commodore, Amiga, and Radio Shack, also emerged but only a few survived, with early leaders Digital Equipment and Burroughs (and later IBM) ceding ground to new challengers like Dell, Compaq and Apple. Software developers shifted their sights to the PC, and Microsoft standards PC-DOS and Windows accelerated growth and software momentum. Popular applications like Lotus 1-2-3 and word processing from MultiMate and WordStar (later Microsoft Word) popularized the PC, which grew from <10M users in the early 1980s to 1.1B users globally by 2008; Organizers, personal data assistants small enough to ‘fit in your pocket’, debuted in the late 1990s, including the Sharp Wizard, Newton Messagepad and Palm Pilot. Laptops became popular in the early 1990s with the launch of the Apple PowerBook 165c which brought color VGA screens, ergonomic keyboards and mouse positioning. In 2009, laptops are expected to rise to >50% of PC shipments, with netbooks (small ultra-light laptops) jumping from 0% of laptops in CY07 to >15% in CY09. Total # of 2008 Users: 1.1B


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0

500

1,000

1,500

2,000

1980

1985

1990

1995

2000

2005

Inte

rnet

Use

rs (

MM

) 1.6B

2. Internet – Initially developed for military and academic purposes, Internet usage began to proliferate with transformational innovations which improved usability (e.g., hypertext links – Tim Berners-Lee at CERN in 1989; the Mosaic browser and Netscape Navigator – Marc Andreessen in 1993 and 1994). Mass market adoption further accelerated with the bundling of Microsoft’s Internet Explorer 4 with Windows 98 in 1998. Web usage rapidly grew from 45M users in 1995 to 400M users in 2000, and subsequently quadrupled to 1.6B in 2008. Businesses rushed to develop an online presence, many struggling early on to find successful marketing and financial models, with advertisers experimenting to leverage the new medium. Web pages continued to grow from 26M in 1998 to 1B in 2000 to 1T by 2008. Email, which started off slowly, began to accelerate in adoption, cannibalized paper correspondence and fax. Proliferation of high-speed Internet connections from cable and telcos helped further accelerate adoption as they vastly improved the user experience (56K dialup modem vendors quickly commoditized – 3COM/US Robotics, Hayes, Telebit, Microcom). With Google search popularizing the Web, new Internet-based businesses, viable advertising models and popular portals/destinations emerged – Ebay, Priceline, Amazon, Yahoo – in some cases cannibalizing brick-and-mortar businesses. AOL’s acquisition of Time Warner in 2000 was a watershed event marking the ascendance of the Web as a business power, as was its famous unwinding in 2009. Total # of 2008 Users: 1.6B

0

500

1,000

1,500

2,000

2,500

1980

1985

1990

1995

2000

2005Con

sum

er E

lect

roni

cs U

sers

(M

M) 2.4B

3. Consumer Electronics – Consumer electronics usage emerged in the 1920s with the first AM radio broadcast. The post-war (1948-49) boom, along with initial broadcasts in the late 1940s put television on the ‘must have’ list, with sets from Admiral, Emerson, Motorola, RCA and Philco. Penetration grew from 9% of households in 1950 to 86% in 1959. Sony’s introduction of the first portable transistor radio in 1960 ushered in low-cost, portable consumer electronics, but it was Sony’s Walkman launched in 1979 which broke records, selling 10M units in 1984, 100M in 1993 and eventually reaching 385M total unit sales in 2009. Released in 1977, the Atari 2600 ushered in home video gaming, with hits like ‘Space Invaders’ driving total console sales to 8M units by 1984 and eventually reaching 30M total units sold. Nintendo Gameboy popularized the handheld gaming market. Apple’s $399 iPod digital media player in 2001 and its iTunes PC jukebox/store popularized MP3 usage. Following releases of iTunes for Windows and a 40GB iPod, iPod sales rose from 1.5M units in 2003 to 55M units in 2008, with total users estimated at more than 200M in 2008. With gaming consoles, like Nintendo (NES), Sega Genesis, Sony PlayStation, Xbox, and Nintendo Wii, the home gaming market has grown to more than 250M users in 2008. Cameras also grew popular with consumers, starting with the Polaroid Land Camera in 1972, which produced images instantly following capture, combining simplicity and immediacy. Film-based compact and SLR (Single Lens Reflex) cameras dominated the industry, to be usurped by digital cameras from Fuji, Nikon, Canon, and Kodak which transformed the industry, with sales reaching 6M units in 1999 and exceeded film camera sales in 2004; over 125M digital cameras were sold in 2008. Total # of 2008 Users: 2.4B


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0

1,000

2,000

3,000

4,000

1980

1985

1990

1995

2000

2005

Phon

e U

sers

(M

M)

3.7B

4. Wireless Phones – In 1983, Motorola released the DynaTAC handheld mobile phone, weighting 28 ounces, 10 inches high, and costing $4,000. In Europe, Nokia launched the Mobira Talkman in 1984 and the more portable Mobira Cityman in 1987. The mobile GSM wireless network standard was adopted by most global networks; Mobile subscribers in the US grew from 200k in 1983 to more than 2M in 1989. Digital-based 2G networks like TDMA, iDEN and CDMA launched in the early 1990s, offering significantly higher spectrum efficiency and call quality. Motorola introduced the sleek Star-Trek-like StarTAC in 1996, the first clamshell mobile phone with vibrating alert. With the release of its Nokia 1011 in 1992, its first GMS handset, Nokia continuously reduced the size and cost of its phones, launched new designs, added new features, like ringtones, changeable faceplates and games (‘Snake’ was launched on the Nokia 6110 in 1997). Other vendors launched popular designs, like Ericsson with its T28; and Sony with its Z5 and Z7. Global mobile phone users grew to nearly 180M in 1998. In late 2004, Motorola introduced the RAZR, the world’s thinnest handset (13mm), which went on to sell more than 110M units. 3G networks like HSDPA, UMTS and EV-DO launched in 2001 and 2002 in Japan and Europe (2004/2005 in North America), capable of supporting both voice and data services. However, beyond proprietary mobile services (e.g., i-mode in Japan) and SMS, adoption of mobile data – particularly, mobile email – in North America and Western Europe did not occur until the emergence of iconic data devices like RIM’s BlackBerry – starting with the chubby 850 Wireless Handheld in 1998 – with its unique Crackberry mobile email experience. The Handspring Visor and Treo phones emerged in the late 1990s and helped popularize the smartphone with email and PIM features, followed by BlackBerry’s 5810 and 6210 voice/data smartphones, which combined its legendary email with integrated voice handsets. While previous phones (e.g., Nokia 7110 in 1999) offered limited (WAP, etc.) mobile web experiences and others offered integrated music/media (e.g., Sony W800 Walkman), it was the launch of Apple’s iPhone in 2007 – arguably the most significant event in smartphone history, popularized the mobile web, mobile applications and advanced mobile phone MP3 experiences to new levels with its integrated iPod media experience. Competitors and carriers followed Apple’s lead, and as a result, smartphone users more than quadrupled to 165M in 2008 from 40M in 2006. Total # of 2008 Users: 3.7B


4 Technology Markets + Mobility = Smartphones Greater Than the Sum of its Parts. The integration of these four previously discrete technology markets in smartphones creates a “mobile mashup” – the convergence of these technologies to become greater than the sum of their parts, yielding new, compelling, convenient user experiences, appealing to millions of new buyers, raising broader interest in smartphones, and accelerating expansion and global adoption.

Exhibit 4: Greater Than The Sum of its Parts

Categories Examples

Communication • Making phone calls, sending emails, SMS and IM, browsing, and uploading photos and other data to social networking websites (e.g., MySpace, Facebook, Twitter)

Multimedia • Listening to music, watching YouTube videos, watching downloaded movies and TV, listening to the radio

Information • Browsing news, weather forecasts, sports scores, blogs; local search (e.g., Yellow Pages)

Apps and Games • Using personal/lifestyle apps like finance, health and fitness, reference, productivity, travel, etc; Playing games

Navigation • Personal navigation, turn-by-turn directions

Commerce • Using a single device to make payments in-store, logging into online bank accounts for checking balances and paying bills – all on a single device



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Convenience of Mobility. Just as Internet connectivity (ISPs via telephone or cable) enhanced the PC experience, smartphones make these four formerly discrete technology experiences richer and more convenient by adding mobility – which offers users portability, presence, location, proximity, immediacy, and always on functionality.

Exhibit 5: Added Convenience of Mobility

Mobility Adds Examples

Portability ‘Pocketable’, goes everywhere

• Can’t take a laptop to a sporting event or into a formal meeting

• Personalized mobile companion -> wristwatch & wallet replacement

Presence Identifies activity and presence

• Dynamic search of interest/ attractions/ retail stores/etc. • Friend location, find, presence-based mobile marketing • Dynamic, activity-based, location-based social networking

Location Location, Speed, Direction • Adapt content based on location • Location-based mobile marketing/commerce • E.g., Coffee shops send coupons to attract nearby buyers;

shows/movie theatres offer discounted tickets to unfilled seats to people walking by

Proximity Capture data (e.g., content, video/camera, GPS, etc.) in proximity to event or place

• Transaction in proximity to purchase, banking to ATM, etc. • Bar code or image-based data capture transactions • User-generated content captured on location • Proximity to event • E.g., save GPS location when park car

Immediacy Access answers, resources immediately

• Where? When? Why? How? • Indispensable mobile information kiosk

Always On Two-way immediacy • Peers/colleagues can contact users • Emergencies, time-sensitive requests



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Exhibit 6: Smartphones Enhance Tethered Technology Experiences

Tethered Usage Added Value of Mobility Enhanced User Experiences Examples

Unconnected Desktop PCs, Laptops

• Applications, PIM, email, rich web, IM, etc.

• Presence • Location, speed, direction • Voice communication • Proximity • Portability – goes

everywhere • Rich web browsing • Video/camera/Bluetooth • Purchases • Voice communication,

online collaboration

• Mobile web which leverages location, proximity and community

• Presence and location-based PIM

• Community and instant messaging (IM) combined with location, activity, etc.

• Location-based collaboration

• User-generated content– can deliver and capture data in proximity to event or place – banking, purchases, community

• Rate the bus stop you are standing at

• Rate the best fast food hot dog stand around

• Who wants to buy tickets? • Who needs a ride? • Who just had an accident

(tow trucks, insurance companies, rental firms, hotels, restaurants -> local community in proximity is huge)

• Call – see pictures of everyone in one mile that express interest

• Want to party? See, call all at once

High-End Feature Phones

• Communications, messaging, contacts, etc.

• Location-based services • Mobile marketing • Video capture for on spot

transactions, content • Mobile commerce, mobile

payments

Consumer Electronics

• Music, video, gaming, GPS, movies, etc.

• Portable video • Upload video and pictures

to file sharing and social networking websites

• GPS integration with mobile web, content and applications

• Deliver and capture data in proximity to event or place – banking, purchases, community


The Next Web The Mobile Web is the Next Web. Just as the Web ushered the birth of new business models like eBay, Amazon, Ticketmaster, Expedia, Open Table, MLS, Priceline, and Google, the Mobile Web on smartphones is likely to usher in new industries and businesses, unleash new business models – the next eBay, Amazon, or Google – creating new wealth for entrepreneurs and investors.


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Exhibit 7: Mobile Web Business Models That Could Yet Emerge

Web Business Model

Web Examples Mobile Web Business Models Could Yet Emerge

Examples

Community global peer-to-peer transactions

eBay • Presence-based person-to-person market and transactions

• New communities based on mobile

• Buying a car, other large physical goods • Walking past stores – what sales are on? • Driving around for garage sales

Online retailing Amazon • Mobile transactions • Location-based services • Mobile marketing • Video capture for on spot

transactions, content

• Take a picture – how much it is? Can I buy it cheaper on the Web? Can I get it on eBay for cheaper and nearby?

Ticketing Ticketmaster • Deliver and capture data in proximity to event or place – banking, purchases, community

• Walking past theatre – get availability, seat map, can buy tickets immediately; stores – what sales are on?

Travel Expedia, Travelocity

• Proximity-based notification and marketing of available flights and hotel rooms

• Take picture of a barcode and book hotel online • Pass by hotel, take picture and identify location –

see features, community rankings, room rates and book room

Restaurant reservations

Open Table • Proximity-based notification and marketing of restaurant availability

• As walking down street, pass restaurants, get reviews and descriptions of restaurants; find out availability, make online reservations

Portals, search Google, Yahoo • Mobile search, local search • Proximity-based filtering news and

content

• Take picture of a barcode and book hotel online • Receive news relevant to current location

User-submitted video

YouTube, Flickr • Mobile content uploading, sharing and viewing

• Presence-based communities

• Have pictures taken during vacation automatically upload to Facebook

• View pictures and video from other users in your network from within a certain proximity

Content Netflix, iTunes • Portable video, other content • GPS integration with mobile web,

content and apps

• Download content on the go, with seamless synchronization with home PC

• Presence-based gaming, mobile content updates for gaming, apps

Real estate MLS • Presence-based notification of properties under defined criteria

• When driving around a neighborhood, see houses for sale within your budget

• See a house for sale – bring up features, pricing, other details

Lead generation Salesforce.com • Continuous two-way communication & collaboration with contacts and leads

• Presence-based notification of nearby contacts

• Mobile search of contacts and related data

• Client is able to email and IM sales people when they are out of the office

• Sales person is notified that a client is at the same conference

• Sales person looks up transaction records and account stats on the go

Business connections and community

LinkedIn • Continuous two-way communication & collaboration with contacts

• Presence-based notification of nearby contacts

• Users are able to email and IM other users when they are out of the office

• User is notified when someone in their network is at the same conference

Source: RBC Capital markets


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A Next Mass Medium 3C Convergence. Prior media (radio, TV, Internet, newspapers, etc.) – along with voice phones and cellphones – while offering some convergence (e.g., cellphones and music, using the PC while streaming radio, or reading the newspaper with TV or radio on), remain discrete, one-to-many, activities (it is still not universal to watch movies or stream radio on PCs, or to make calls on PCs, or shop on TV, or use a laptop while at a concert, or read/compose email on a PC while in a meeting, etc.). As well, mobile electronic wallets and mobile transactions have not caught on yet in North America with traditional mobile phones, as they have in Asia where 24 million users executed 240 million mobile payment transactions in 2008. However, because they are “3C” – the convergence of communication, computing, content – smartphones represent the first opportunity to converge formerly discrete media on a single device – i.e., combined with the convenience of going everywhere users do. Thus, smartphones possess the power to become the way some consumers may principally (i.e., versus their PCs or TVs or newspapers or radios) listen to music, surf the Web, do email, watch TV/movies, get news, stream radio, use apps, etc., and in some ways do these better. Examples may include: • Content Hub. Smartphones already manage content subscriptions, downloads and playlists,

and store some of a user’s content locally. But because they are connected constantly as well as personal and portable, smartphones have the potential to become a hub for all a consumer’s content – regardless of source or location. While many have pointed to the TV, set top box or PC as the holy grail of ‘converged home entertainment’, it may be the smartphone that becomes a hub (or remote control) for a user’s content, interfacing (at home or remotely) to PCs, content servers, PVRs, digital set top boxes, TiVOs, SlingBoxes, etc. (some of this is already happening on BlackBerries and iPhones). Smartphone consumers may browse, purchase, watch, archive, update, even transfer and exchange content to other devices/accessories/peripherals – and other mobile users. Regardless of where a user's content resides, it’s the smartphone which can untether it for them. An HBO subscriber for example might access content while on the go (e.g., playback on the device), or while at home on their TV (synced with smartphone), etc.

• Smartphones + Peripherals. Even with advanced computing capabilities, carrying around multiple devices (PCs, phones, etc.) is an inconvenience. This is compounded by the need to have multiple wireless subscriptions and multiple content/data/application stores for each device. It’s unlikely we will ever see one converged device addressing all user needs, given the diversity of functionality demanded by different activities (i.e., even if you could, it’s inconvenient to make phone calls every day with a laptop, nor is it convenient to do full word processing on a handset). However, with their always on wireless connectivity and other capabilities, smartphones can reduce the need, cost and inconvenience of carrying multiple devices, by serving as the hub for other computing, gaming and media peripherals. By adding an inexpensive computing peripheral (keyboard, screen, mouse), a smartphone can serve as a mobile PC or laptop at a far lower cost with less bulk, and still use the smartphone’s mobile data connection (via wireless tether) to draw on the same content, applications, storage, etc. Similarly, a media-centric user could use a media tablet peripheral, with a larger screen, to watch movies or view photos – at home on the wall or on the go on a plane – with less bulk and cost, drawing upon the smartphone’s connectivity and resources. Likewise, a gaming user could use a gaming peripheral with controls tied to the smartphone.

• Mobile Marketing. With smartphones, targeted mobile marketing based on activity, proximity, objective, immediate need, content downloads, and personal navigation may become far richer than today. Unlike other media, smartphones can provide much richer information for advertisers to target marketing with potentially much more impactful results (mobile coupons are just the beginning; smartphones may enable advertisers to reward real-time behavior – based on a user’s activity, privacy preference, objective, location – visit this store, this dealer, go to this restaurant at this location, time, etc.). With smartphones as the hub for content, collaboration, information and other services, some advertising spending may transition from traditional media (e.g., TV, radio, direct mail, Internet) to mobile, representing another source of revenue, which may help enrich carriers, smartphone vendors, etc. and subsidize the cost of the device and service.


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• Mobile Peer-to-Peer Collaboration. SMS and voice communications on mass market handsets are, in our opinion, just the beginning of mobile peer-to-peer collaboration; smartphones facilitate real-time, location-based collaboration, allowing users to collaborate dynamically and locally with peers – on content, discussions, activities, interests, etc. – regardless of location or device. This extends to all platforms – whether it be MSN Messenger on a home PC or Facebook on a smartphone while sitting at the bus stop.

• Explosion in User-Generated Mobile Content. Although mass market phones have the capability to record video and audio, users are often challenged to capture and share user-generated content. Higher quality digital cameras, GPS and compass sensors, as well as popular smartphone applications that dynamically and easily capture user-generated content, all combine to enhance the smartphone user’s power to immediately, at location, create and upload content. In our opinion, this creates significant opportunities for user-generated content yet to emerge. For example, Micro-blogging services (e.g., Twitter) on smartphones unleashed first-hand reporting from people attending an event, rather than third-party journalist impressions. Video content from smartphones could match, or even eclipse, video content currently provided from PC users onto popular destinations such as YouTube or social networking sites.

• Reach Out And Touch Someone. Transcending traditional “one-to-many” media channels, smartphones with their technology capabilities and personalization have the power to become a “one-to-one” mass media; politicians are already using YouTube and blogs to reach out to constituents. It may be sooner than expected when politicians, business leaders, regulators, religious leaders, entertainers, educators, etc. use the power of smartphones to communicate – interactively, en mass or one-to-one – with congregants, employees, constituents, etc.

Replaces Your Wallet Shift of Revenues to Mobile. Future upside to smartphone hardware/service revenues (at high margins) may come from future smartphone services (carriage fees, advertising, subscriptions, transactions, etc.), with revenues shifting from traditional media (TV, radio, cable, Internet, books, etc.) to mobile media (SMS, mobile search, contextual advertisements, etc.).

May Take Time, But Huge Potential. In 2008, worldwide mobile advertising was just over $3 billion or less than 0.5% of total advertising ($650 billion), most of which was SMS marketing. It took several years before Internet advertising began to cannibalize existing media – but it eventually did. U.S. online advertising grew from $4.6 billion in 1999 to $23.4 billion in 2008, or by a 20% CAGR, and is now the fourth largest category of advertising in the U.S. (out of a $295 billion total U.S. advertising market). Similar to the path of online advertising, we believe mobile advertising will quickly accelerate as users transition from traditional media to mobile, along with mobile’s additional value to advertisers (location, presence, immediacy, activity, etc.).

Exhibit 8: Addressable U.S. Advertising Market (2008)

$7.2

$10.0

$12.7

$13.8

$17.2

$23.4

$28.8

$34.4

$39.4

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45

Out of Home

Trade Advertising

Consumer Magazines

Directory

Radio

Online

TV Distribution

Newspapers

TV Networks

US Advertising Market ($B) Source: Interactive Advertising Bureau (IAB)


12 Mike Abramsky

Transformation to Commerce. With the shift away from traditional media (TV, music, print, etc.) and related advertising to handsets, vendors can also directly transact with millions on the wireless network. The smartphone becomes not only a shopper’s aid but also a dynamic catalog, a marketing/sales channel to rival TV – even better when combined with location, presence, etc. Carriers can bypass Visa, MasterCard and banks and become their own integrated billing provider for transactions and services. When integrated with carrier billing systems, carriers can have their own currency and points system (e.g., free service credits versus money), a possible significant business case for wireless operators. Nearly 24 billion credit card transactions with a $2.1 trillion purchase value (accounting for 31% of all purchases) were made in the U.S. during 2007.

Japan an Example. Internationally, Japan has been ahead of the market in mobile commerce owing to early deployment of 3G networks, strong uptake of DoCoMo’s i-Mode mobile data services, smartphones / high-end mobile phones, standardization on Sony’s FeliCa mobile payments system, and DoCoMo’s aggressive strategy to accelerate mobile payments (large number of compatible storefronts, compelling services, ease of use). Mobile advertising revenue in Japan was $1 billion in 2008, or $9/subscriber/year, owing to high uptake of mobile data services. In mobile payments, Osaifu-Keitai – DoCoMo’s mobile payment platform based on FeliCa – is the premier mobile payment system in Japan, where mobile phones can be used as electronic money, loyalty cards, electronic tickets, membership cards, airline tickets and for other uses. Barcode scanning has become a means for advertising and gathering information; for example, scanning the barcode in an advertisement will transfer a mobile phone user to an online website where they can complete an order for the product. As a result, nearly 50 million Japanese consumers (50% of total) use their mobile phones to make mobile transactions or redeem mobile coupons. Mobile transactions in Asia-Pacific and Japan more than doubled to 240 million in 2008, from 103 million in 2007.

Mobile Content and Applications The Mobile Content and Applications Market is Still in Early Stages and Underpenetrated. The mobile content and applications market is only just beginning to emerge, following the launch of the iPhone App store in July 2008, BlackBerry app store in April 2009, and the surging popularity of innovative mobile applications. For example, in just over one year since release, iPhone’s App store already has over 65,000 apps and achieved over 1.5 billion downloads, equating to 33/user/year. We see the pace of innovative mobile applications accelerating given: 1) rising customer demand for mobile versions of desktop and web-based applications; 2) increasing popularity of constantly-connected activities like IM, social networking, blogging, location-based services; 3) broader availability of developer tools; 4) higher uptake of smartphones; and, 5) demand for Internet radio, personal navigation, games and other apps. Specific areas of mobile content and applications include: • IM, Social Networking. Instant messaging, social networking, and blogging are applications

with the potential to significantly increase consumer smartphone penetration, in our view. Instant messaging platforms like Windows Live Messenger, AIM, and Yahoo! Messenger (allowing users to chat, share files/pictures, video conference, in addition to other features) have achieved widespread penetration, attracting more than 400 million active users. Only launched in 2003/2004, social networking sites like Facebook and MySpace (where users maintain profiles/web pages, photo albums, chat, and share videos) have already gained significant popularity, with more than 350 million users. The increasing prominence and use of IM and social networking sites to communicate and coordinate with friends are raising the demand to maintain continuous connections with IM and social networking platforms, hence the value-add of smartphones. Although some traditional mobile phones are integrated with large IM platforms and social networking sites, we believe only smartphones with data plans can offer a compelling mobile user experience, where social networking applications proliferate and users can make use of mobile features like photo uploads, location awareness, and status updates. For example, the Facebook app is the second most popular downloaded app for iPhone, and there have been more than 15 million downloads (more than 50% of all users) of social networking apps like Facebook or MySpace for BlackBerry.

• Personal Navigation. Personal navigation for smartphones (with built-in GPS) is another significant driver of smartphone adoption. Navigation increases the appeal of smartphones as a “converged” device, with users able to justify a smartphone purchase as replacing a standalone


Mike Abramsky 13

GPS device. Examples include free mapping applications, like Google Maps or BlackBerry Maps, to paid turn-by-turn navigation apps, like TeleNav GPS Navigator or TomTom for the iPhone. Smartphones go beyond simple maps, with innovative applications that integrate the user’s current location with searches for restaurants, attractions, geo-tagged photos, social networking and other applications.

• Games and Productivity Applications. Games, productivity applications, and news readers are enhanced via the smartphone experience. Well-known games like Guitar Hero, Pac-Man, and Super Monkey Ball, news readers for popular sites like CNNmobile or CNBC, and productivity applications like dictionaries, tip calculators and expense trackers have sprouted up overnight, with some applications generating over $1 million in download fees in a short time from launch. Yet this is only the beginning; just as gaming consoles launched innovative games, just as the Web spawned multi-player gaming and virtual worlds, the Mobile Web with the power of portability, convenience, etc. represents another opportunity for new gaming experiences.

• Browsing, Multimedia and Mobile Content. Browsing, multimedia and other mobile content should remain a top driver of smartphone uptake and data services. Smartphone browsers, optimized for mobile usage, are now replicating a desktop browsing experience adapted for the mobile world (navigation, user interface (UI) on smartphones (like Apple’s Multi-Touch), processing, and in the case of BlackBerry, bandwidth consumption). The smartphone browsing experience may become so satisfying that some users may justify switching from PC browsing to smartphones. And, like the Internet where browsing matured and integrated new innovations that became commonplace (speed improvements, navigation innovations, customization, new formats, features, etc.), mobile browsers of the future may evolve to advantage the mobile medium, becoming far different than today. Initially popularized by Apple’s iPhone, downloadable multimedia and content is now moving to mobile. As it has with the iPhone and iTunes, the convenience, ease and satisfaction of spontaneously browsing and buying music and other content while mobile will shift the smartphone to a media hub for managing content and playback on other peripherals (e.g., at home, in the car, etc.)

Hands Off My Content. The practical realities of privacy, rights management, copyright and content ownership rights have already begun to assert temselves into mobile content and applications. Two recent examples include Apple's blocking of Google Voice application (offering free SMS and cheap long distance calls), and Amazon remotely deleting books from its Kindle e-book reader it was not legally authorized to provide. While the extent to which these issues might support or hinder innovation in smartphones, mobile content or applications is not yet clear, either way these issues are likely to play a significant role in evolving mobile content models and businesses.

The Cloud Adds the Cloud. With the growing pervasiveness of wireless networks, the smartphone user experience is expected to increasingly leverage “the cloud”. The cloud is a general term used when data, applications and content, along with services such as storage, are provided over the wireless network – versus from software locally installed on a PC using local storage or accessed from land-based networks. Google’s Chrome OS, a recently announced browser-centric PC Operating System, is an example of Google’s effort to transform the computing experience via the cloud. Also Google Docs, a free, web-based hosted Office Suite (that can be accessed from anywhere via a web browser and where users can collaborate, share and store data on Google servers) launched in 2006, offers an alternative to PC-based Microsoft Office.

The Cloud May Transform the Mobile Smartphone Experience. The cloud may become an increasingly significant dimension of smartphone functionality over time, because of the potential enhancement to the mobile user experience. Applications, functions, services, storage and content can all be accessed from the cloud, offering the ease of tapping vast resources immediately and conveniently, adapting and customizing to the convenience of the user based on interest, need, proximity, location, activity, etc. The cloud also means applications (accessed via a browser) might not need to be customized to each device, simplifying and reducing development costs.


14 Mike Abramsky

Exhibit 9: The Cloud May Further Transform the Computing Experience

Cloud Enhancements to Mobility:

• Real-time information (weather, traffic, news, financial data)

• Real-time collaboration (email, IM, blogs)

• Ease of use (apps always up-to-date)

• Off-device processing (complex functions and searches performed at the service), yields better battery life

• Data storage (media, docs, other information)

• Device backup (contacts, calendar, etc.)

• Developer apps would not need to be customized to each device

Examples:

• Traveling - subscribe, pull resources, adapts to location and interest

• Gaming - ad-hoc multi-player

• Community Content - easier sharing of user-generated content (blogs, posts, photos, video, calendars, etc.)

• Shopping - location, payments, info (e.g., ticket info after walking the theatre district)

• Remote access: e.g., to home security systems, PCs, DVRs, etc.

• Social networking (live proximity discussion, instant collaboration)

• Entertainment - mobile music mashup in the audience - e.g., playlists

• Help, Assistance - health, safety, support (how do I do this?)

• Location-based marketing - rent and try as you walk by; discounts/coupons for nearby customers

• Business – real-time lead generation - pulls in resources, captures opportunity

• Live on site: posts, pictures, videos, comments, discussion threads, etc.


Practical Realities. Hypothetically, using the cloud, smartphones could be thinner, lighter, and less expensive to make (less storage, memory, processing power, power consumption). However, the speed, stability, coverage and bandwidth constraints of mobile networks could undermine the cloud-based user experience, and raise carrier resistance to cloud-based computing. As well, consumers may resist migrating personal and corporate data to the Web.


Mike Abramsky 15

The Rise of the Mobile Data Consumer Larger Than the Phone Market. Because of their convergence capabilities, we believe that smartphones possess the ability to capture users, revenues, market share and profits from not only the 1 billion unit+ per year handset market – but also from the PC market (300 million units per year), TVs (200 million units per year), personal media players (230 million units per year), digital cameras (125 million units per year), personal gaming devices (37 million units per year), portable navigation devices (32 million units per year) and other formerly discrete market segments.

Exhibit 10: Global Data-Centric Smartphone Addresses More than the Phone Market

PC Install Base

1,123MMMobile Phone Install Base3,713MM

Internet Users

1,596MM

Consumer Electronics2,500MM

Data-Centric Smartphone Users

165MM

PC Install Base

1,123MMMobile Phone Install Base3,713MM

Internet Users

1,596MM

Consumer Electronics2,500MM

Data-Centric Smartphone Users

165MM


Huge User Opportunity. At the end of calendar 2008, only 2.5% of the ~7 billion people in the world had smartphones and 24% had Internet access (only 8% are Internet subscribers, the difference being multi-user households and Internet cafes). A huge market opportunity for smartphones exists, given that globally there are 3.7 billion mobile phone subscribers, 2.5 billion consumer electronics users, 1.6 billion Internet users, and 1.1 billion PC users.

Exhibit 11: 2008 Global Data-Centric Smartphone Users vs. Other Markets… Lots of Growth Potential

6,671

3,713

1,5961,123 915

530 480 368 165

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Wor

ld

Popu

lati

on

Mob

ile

Subs

crib

ers

Inte

rnet

Use

rs

Tota

l PC

s

Tele

phon

e

Line

s

TV

Subs

crip

tion

s

New

spap

er

Cir

cula

tion

Broa

dban

d

Subs

crib

ers

Dat

a-C

entr

ic

Smar

tpho

ne

Use

rs

Inst

all B

ase

(MM

)



16 Mike Abramsky

Global Secular Upgrade Cycle to Smartphones. There is a massive global shift underway from voice-only phones (including SMS) to smartphones. Growing at a CAGR of 62%, an estimated 63 million mobile phone users upgraded to smartphones in 2008, from approximately 15 million upgrading in 2005. In the past 18 months, more people globally have upgraded from voice to smartphones than in the past six years.

Exhibit 12: Surging Global Data-Centric Smartphone Users

7.2 22.0 42.8102.3

247.5

374.1

553.7

766.1

165.2

0

100

200

300

400

500

600

700

800

900

2004A 2005A 2006A 2007A 2008A 2009E 2010E 2011E 2012E

Smar

tpho

ne U

sers

(M

M)


Massive Replacement Cycle. We estimate annual global data-centric smartphone shipments will exceed those of voice handsets within the next six years, and will exceed PC sales in just three years.

Exhibit 13: Global Data-Centric Smartphone Shipments to Exceed Voice Handsets by 2014

1,113952 966 947 933

783 724 650 650

127165

250 376504

674 804 944 1,003

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2008A 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E

Uni

ts (

MM

)

Voice-Only Phone Units Global Data-Centric Smartphone Units Source: RBC Capital Markets estimates


Mike Abramsky 17

Exhibit 14: Global Data-Centric Smartphone Shipments to Exceed PC Shipments by 2011

0

50

100

150

200

250

300

350

400

2005A 2006A 2007A 2008A 2009E 2010E 2011E

Ship

men

ts (

MM

)

Smartphones PCs Source: RBC Capital Markets estimates

"Perfect Storm". This massive upgrade cycle is being driven by a “perfect storm” comprised of: 1) cheaper, more powerful, iconic smartphones; 2) the proliferation of mobile email and mobile browsing; 3) a growing interest in multimedia messaging (photo, video, etc.), mobile music, social networking, location-based services, etc.; 4) the momentum of mobile application platforms and the proliferation of third-party mobile applications; 5) an increasing buyer interest in customization (third-party applications, games, software, etc.); 6) lower handset/data plan pricing trends globally; 7) faster 3G networks; 8) device convergence (GPS, music, camera, game console, media player, etc.); and, 9) the mobilization of business.

Exhibit 15: ‘Perfect Storm" Driving Smartphone Adoption

• Powerful, iconic smartphones like the Apple iPhone, BlackBerry Bold

• Rising demand for mobile email and mobile browsing, multimedia messaging (photo, video, etc.), mobile music, social networking, location-based services, etc.

• Momentum of mobile applications platforms and proliferation of third-party mobile applications

• Increasing buyer interest in customization (third-party applications, games, software, etc.)

• More affordable handset/data plan pricing trends globally

• Faster 3G networks and carrier focus on data

• Device convergence (GPS, music, camera, game console, media player, etc.)

• Mobilization of business Source: RBC Capital Markets

New Segments Driving Adoption. While the early-adopter smartphone base has been business users and early consumer adopters, the penetration opportunity remains huge, as the growing global adoption of mobile email, mobile browsing and mobile applications is expanding the smartphone market into new segments (youth, students, mature users, women, small businesses, vertical markets, etc.). These buyers are seeking user-friendly, media-centric experiences, the convenience and productivity of continuous connectivity for email, social networking, IM, multimedia messaging (photo, video, etc.), and fingertip access to information from mobile browsing, location-based services, and anywhere/anytime multimedia downloads. They also crave distinctive designs, superior user experiences, trusted purchasing experience, and “hip/cool” differentiated brands.

Mobile Data Devices and Usage Leaps. As a leading indicator and precursor to mobile data adoption, mobile phone subscribers with 3G devices/services (those who only have 3G devices, not necessarily a mobile data plan) have risen 50% annually, growing from 7.9% of total global mobile phone subscribers (or 110 million 3G subscribers) in calendar 2003 to 19.6% (or 727


18 Mike Abramsky

million 3G subscribers) in calendar 2008. Accordingly, carrier mobile data revenues (which include SMS/MMS messaging) rose 30% annually from $62 billion (12% of total revenue) in 2004 to $182 billion in 2008 (21% of total revenue), far outpacing the 11% increase in mobile voice revenue. We expect global mobile data traffic to grow at a CAGR of 131% from 2008 to 2013.

Consuming More Data. And more users are starting to use more data: from 2004 to 2008, global data ARPU rose from $3.00/user/month to ~$3.80/user/ month, while voice ARPU fell from $21.80/user/month to ~$14.50/user/month over the same period. Key drivers of this data growth were rising mobile messaging (text), email usage, web browsing, and content downloads (ringtones, media, etc.).

Exhibit 16: Global Voice vs. Data ARPU

$3.00 $3.10 $3.16 $3.49 $3.81

$19.28$17.11

$15.96$14.49

$21.80

0

5

10

15

20

25

2004A 2005A 2006A 2007A 2008A

Serv

ice

ARP

U (

per

mo)

Data ARPU Voice ARPU Source: RBC Capital Markets

Exhibit 17: North America Voice vs. Data ARPU

$2.38 $3.91$6.07

$8.50$11.32

$39.60$42.09$43.08$44.66$45.99

0

10

20

30

40

50

2004A 2005A 2006A 2007A 2008A

Serv

ice

ARP

U (

per

mo)

Data ARPU Voice ARPU Source: RBC Capital Markets

“Data-Centric” Smartphone Users Our smartphone market forecasts exclude voice/SMS-only users (such as those who just use high-end feature phones or smartphones for voice only, SMS and PIM features) and focus on those users using data plans (or other connectivity such as Wi-Fi) to utilize connected, data services: wireless email, web browsing, applications (social networking, location services, video, etc.), OTA (over-the-air) downloads and streaming content, video, etc.


Mike Abramsky 19

Exhibit 18: Global Data-Centric Smartphone Users Global Mobile Phone Users

Smartphones Users

Voice-Only

Smartphones Data-Centric

3.5B users and1.1B units CY084% CY08-CY12E

CAGR

220M users and 140M units CY08

165M users and 127M units CY08

41-47% CY08-CY12E CAGR


165M Global Data-Centric Users. Thus, we see “data-centric” smartphone user penetration growing from 4.4% of phone users in calendar 2008 (an estimated 165 million users) to 15.4% by calendar 2012 (an estimated 766 million users), representing a 47% CAGR.

Exhibit 19: RBC Capital Markets Data-Centric Smartphone User Definition • Data Services – uses carrier data services or other connectivity for mobile email and messaging, heavy

web browsing, content downloads, real-time weather and mapping, news updates, one-click search/buy, etc;

• Data-Centric Connected Functions - frequently uses mobile email, messaging, mobile browsing, applications, navigation, push-based content, social networking, blogging, synchronized PIM (calendar, contacts, notes), etc.

• Mobile Media/Content/Apps Consumption – uses music, pictures, content, video, and applications, along with seamless integration from third-party media stores (e.g., iTunes, Amazon MP3 store, RealNetworks Rhapsody, others) and application stores (iTunes App Store, Google Android Market, BlackBerry App World, Windows Marketplace for Mobile)

• Content creators – utilizes applications (e.g., PIM, social networking, etc.) and data capture (GPS data, picture/video capabilities, etc.) to create user content and message content via SMS, email, MMS, applications, etc. and for personal entertainment, to avoid carrying multiple devices;

• Voice/Data Integration – relies on tight integration of voice and data features - phonebook/phone/contact integration, messaging/phone integration, email/web/phone integration, etc.

• Reliable Data Experience – demands data devices that deliver high productivity; phone reliability, serviceability, security, battery life, sufficient storage. Also seeks easy usability for sophisticated data functionality.

• For Work - seeks integration of work functionality and data with personal data and applications, IT ‘approved’ integration with work email and servers, etc.


The Global ‘Data Gap’ Large International Smartphone User Opportunity. Internationally, where PC and Internet penetration is low, smartphones have the opportunity to become the first and primary exposure for millions of consumers to the Internet, email, mobile applications and content – bypassing PCs and tethered Internet altogether. In many countries, voice/SMS phones have extremely high penetration rates; nine of the 10 countries with the fastest mobile phone subscriber growth are emerging markets like India, China and Indonesia. Despite limited disposable income, people in emerging markets are still buying mobile phones at an unprecedented rate – 45% of people in China own mobiles, 24% in India, 122% in Russia, and 39% in Africa – well beyond the penetration of landline phones and Internet users.


20 Mike Abramsky

Exhibit 20: Top 10 Fastest Growing Mobile Phone Countries

Country CY08 Mobile Phone

Subs (MM) CY08 Mobile Phone

Net Adds (MM) Mobile % of Population

Landline % of Population

Internet Subscribers % of Households

India 282.2 100.6 24.2% 3.2% 1.1% China 599.4 97.9 45.0% 27.5% 11.3% Indonesia 116.7 38.1 50.6% 13.0% 1.4% Brazil 135.3 27.5 70.7% 21.2% 5.9% Pakistan 87.6 24.5 52.5% 2.7% 2.2% U.S. 261.5 18.1 87.6% 51.8% 23.8% Nigeria 50.4 17.0 32.6% 0.9% 0.1% Bangladesh 43.5 15.0 26.8% 0.8% 0.1% Russia 173.8 13.4 122.5% 31.0% 21.4% Philippines 60.3 12.5 65.4% 4.4% 2.8%


The Growing International ‘Data Gap’ is Massive. The smartphone opportunity internationally can be viewed as massive, given the large number of non-North American phone users who don’t have TVs and PCs, and can’t afford Internet connectivity. For example, although 24% of people in India have a mobile phone, just 1.1% have Internet access. As the global upgrade cycle to data progresses, users may bypass PCs altogether and upgrade directly to smartphones.

Exhibit 21: Data Gap in Top 10 Fastest Growing Mobile Phone Countries (2008)

United Kingdom

France

United States

Canada

Brazil

China

Indonesia

India

50.6%

24.2%

45.0%

70.7%

64.7%

87.6%

93.6%

123.8%

1.1%

1.4%

11.3%

5.9%

30.9%

23.8%

30.2%

31.8%

Mobile % of Population Internet Subscribers % of Households Source: RBC Capital Markets, International Telecommunications Union


Mike Abramsky 21

Mobilization of Business Broader and Deeper Enterprise Adoption. We believe, ultimately, the potential benefits of wireless enabling the enterprise may become as profound as the historically realized benefits of fax machines, PCs, networking, servers, and email. The mobilization of enterprises is expected to continue, as deployment of mobile email and enterprise applications expands beyond key executives to mobile professionals and ultimately many rank-and-file employees. Business data-centric smartphone users (typically larger enterprises, small to medium businesses (SMBs) and executives whose smartphone usage is primarily business related and whose service is often expensed) rose from 3 million in calendar 2004 to 30 million in calendar 2008, or 18% of the estimated 165 million global smartphone users. Drivers of enterprise smartphone adoption include: productivity and return on investment (ROI) of mobile business email and desktop/mobile integration; deployment of enterprise applications, like enterprise resource planning (ERP), customer relationship management (CRM), sales force automation (SFA), desktop applications, field service, document workflow and collaboration, vertical applications for various industries and company applications; mobile VPN (remote network access); mobile/PBX integration (desktop/mobile phone); and the promise of “mobilizing” the corporate desktop.

Still Underpenetrated. Despite their high visibility within business, wireless email solutions like the BlackBerry remain nascent and underpenetrated, and in our opinion will remain a priority for corporations looking to mobilize solutions which are easy to deploy and provide rapid productivity gains. We estimate there were only 30 million enterprise smartphone users in calendar 2008, or 6.1% of total enterprise email users, up 57% from 8 million enterprise smartphone users in calendar 2005 or 2.0% of total enterprise email users. Enterprise email users have grown to 490 million in calendar 2008 from 389 million in calendar 2005 (8% CAGR) on growing international corporate email usage. In our view, most knowledge workers who currently are provided a phone and a PC should be eligible for a mobile device. Drivers of enterprise mobile email and smartphones include: 1) improved productivity and responsiveness; 2) lower priced smartphones and mobile data plans; 3) compelling mobile enterprise apps (like SAP, Cognos, Oracle, Pivotal, Salesforce.com); 4) lower cost and similar/better functionality versus laptops for mobile employees; 5) lower corporate telecommunications costs through PBX integration (combining cellphone and desktop phone into one device); and, 6) rising international corporate email usage.

Productivity Benefits. In an increasingly competitive world where businesses are pursuing workforce productivity advantages to remain competitive, smartphone growth in business is expected to continue to be healthy, given the rising productivity benefits of providing these voice/data devices to employees. The ROI of smartphones (238% ROI, five-month payback, according to Ipsos Reid BlackBerry ROI Study, 2007) is expected to be increasingly compelling and justifiable: • Hard dollar returns (justified by the reduced cost of providing smartphones versus more

expensive laptops for employees, as well as ROI of office/mobile phone integration which reduces infrastructure and telecom costs when employee communications and data go through a single handset) and improved productivity (and thus lowered labor and other costs) on key strategic processes core to company strategy. The convenient, real-time access to mobile data via smartphones, and the collection of employee-generated content improve real-time feedback and decision-making both by mobile employees as well as management, reducing costs and increasing revenue generation.

• Soft dollar returns, include increased revenue from capturing more sales by having updated data, content and tools on location to identify and capture more prospects and raise sales conversion rates. Other soft dollar returns include improved sales productivity, and better customer service (using data and tools on site or with the customer to solve problems).

In our view, RIM, with its enterprise functionality and features/content, superior management and security along with future productivity innovations to enterprise, should continue to remain the brand of choice.


22 Mike Abramsky

Exhibit 22: ROI of a BlackBerry Deployment • Personal productivity: 250 hours per user per year; value = $3,125/yr

• Workflow: 38% increase in team efficiency; value = $16,815/yr

• Immediacy: 2,500 time sensitive emails and 1,200 voice calls per year; value = $7,400/yr

• BlackBerry TCO (total cost of ownership): $1,315 per user per year

• ROI and payback period: minimum of 238% ROI and 5 months (based on $50k salary)

Source: Ipsos Reid BlackBerry ROI Study, 2007

Email Remains the Killer App, Favoring RIM. While browsing, applications and other functionality will rise in importance for the ‘productivity-centric’ market segment (of which business users – enterprises, SMBs, and consumers combining work/business use – comprise a significant portion), mobile email is expected to remain a prioritized requirement for these market segments for smartphones, particularly outside North America, where SMS has been the dominant messaging medium but where users are now evolving to embrace mobile email.

This global trend continues to favor RIM, given its sustained competitive advantage in providing a superior “Crackberry” mobile email experience and related experience advantages (reliability, battery life, messaging simplicity/power, keyboard design, messaging/data/voice integration, etc.), which robust mobile business email users crave. Additionally, in our view, through offering IT (a key gatekeeper for business penetration), superior security, manageability, reliability, etc., RIM should maintain its competitive advantage.

Exhibit 23: Global Enterprise Email Remains Underpenetrated

0.4%0.9%

2.0%

2.9%

5.0%

6.1%

0

100

200

300

400

500

600

2003A 2004A 2005A 2006A 2007A 2008A

Cor

pora

te E

mai

l Use

rs (

MM

)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

% E

nter

pris

e Sm

artp

hone

Use

rs

Corporate Email Users % Enterprise Smartphone Users Source: RBC Capital Markets


Mike Abramsky 23

Sizing the Smartphone Market Huge, Nascent, Underpenetrated Larger Than the Phone Market. Because of their convergence capabilities, we believe that smartphones possess the ability to capture users, revenues, market share and profits from not only the 1 billion unit+ per year handset market – but possibly also from the PC market (300 million units per year), TVs (200 million units per year), personal media players (230 million units per year), digital cameras (125 million units per year), personal gaming devices (37 million units per year), portable navigation devices (32 million units per year) and other formerly discrete market segments. Internationally, in countries where PC and Internet penetration is low, smartphones could have the opportunity to become the first and primary exposure for millions of consumers to the Internet, email, mobile applications and content – bypassing PCs and tethered Internet altogether.

Raising Smartphone Forecast. We are raising our global smartphone user estimate to ~766 million by calendar 2012 (622 million prior), representing a CAGR of 47% (39% prior) and 15.4% of total mobile phone users (12.4% prior). We expect smartphone units to rise to ~504 million by calendar 2012 (395 million prior), representing a CAGR of 41% (33% prior) and 35.1% of global mobile phone handsets (24.6% prior). Our revised forecast contemplates: 1) more aggressive carrier smartphone promotions (higher subsidies, lower mobile data pricing); 2) better smartphone capabilities and user experience (e.g., apps, rich browsing, GPS, messaging, media, etc.); 3) higher landline, voice/SMS and broadband replacements; 4) increasing consumer smartphone awareness and retail shelf space; and, 5) greater variety of smartphones from manufacturers.

Exhibit 24: Global Data-Centric Smartphone User Forecast (% of Total Mobile Users)

1.6%3.1%

4.4%6.1%

8.6%

11.9%

15.4%

0

100

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300

400

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700

800

900

2006A 2007A 2008A 2009E 2010E 2011E 2012E

Glo

bal D

ata-

Cen

tric

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rs% of Total Mobile Phone Users Global Data-Centric Smartphone Users (MM)

2006A 2007A 2008A 2009E 2010E 2011E 2012E

Global Data-Centric Smartphone Users (MM) 42.8 102.3 165.2 247.5 374.1 553.7 766.1% of Total Mobile Phone Users 1.6% 3.1% 4.4% 6.1% 8.6% 11.9% 15.4% Source: RBC Capital Markets estimates

165 Million Global Data-Centric Smartphone Users Growing at 47% CAGR. With 56% of the world’s population already using mobile phones, we estimate that millions of global users will shift to smartphones over the next decade due not only to the strong global replacement cycle as buyers upgrade from voice-only/SMS phones to smartphones, but also due to market share gains from PC, consumer electronics (e.g., portable media, portable gaming, portable navigation, digital cameras, etc.), and others segments (e.g., Amazon Kindle, vertical market reader, peripherals, etc.) as users switch to smartphones. Internationally, for many users, the smartphone will be their first introduction to the Internet, email, and social networking (e.g., Facebook, Twitter, MySpace, etc.). We , thus, see “data-centric” smartphone user penetration growing at a CAGR of 47%, from 4.4% of phone users in


24 Mike Abramsky

calendar 2008 (an estimated 165 million users) to 15.4% by calendar 2012 (an estimated 766 million users).

127 Million Global Data-Centric Smartphone Units Growing at 41% CAGR. Under our data-centric smartphone definition, units shipped globally are expected to expand four times (41% CAGR) between calendars 2008 and 2012, from ~127 million sold in 2008 to an estimated 504 million units by 2012. Our outlook is based on an 18- to 24-month replacement cycle – faster than the three to five years (average) in the mobile phone market. This assumption is based on the fast pace of smartphone innovation (3G, GPS, digital cameras, media players, interfaces, form factors, etc.), along with the growth in applications and proliferation of new designs and functionality. Our view is that at the early innovation stage, smartphone buyers tend to upgrade faster than regular phone buyers since technological improvements (like 3G) provide more urgency to upgrade and subsidies are greater, which makes upgrades more affordable.

Exhibit 25: Global Data-Centric Smartphone Unit Forecast (MM)

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Global Data-Centric Smartphone Units % of Total Addressable Market (TAM) 2008A 2009E 2010E 2011E 2012E CAGR

Global Data-Centric Smartphone Units 126.8 164.9 250.4 376.5 503.9 41.2%

% of Total Addressable Market (TAM) 10.2% 14.8% 20.6% 28.5% 35.1% Source: RBC Capital Markets estimates

Smartphones to Exceed Voice-Only Phones in 2014. Our outlook calls for data-centric smartphone units to rise from 10% of the total addressable market (TAM, i.e., total mobile phones sold) in calendar 2008 to an estimated 35% TAM by calendar 2012. Looking out further, we see smartphone shipments rising to ~800 million units by calendar 2014, exceeding voice-only phones.


Mike Abramsky 25

Exhibit 26: Long-Term Global Forecast: Data-Centric Smartphones vs. Voice-Only Phones (MM)

10.2%14.8%

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Smartphones to exceed

50% of total units

CY2014

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Smartphones as % of Total Phones 10.2% 14.8% 20.6% 28.5% 35.1% 46.3% 52.6% 59.2% 60.7% Source: RBC Capital Markets estimates

Consumer versus Business Consumer Smartphone Units to Grow at 43% CAGR. The consumer smartphone market is expected to grow materially faster than the business market over the next four years and be seven times as large. On a unit basis, out of an estimated 127 million data-centric smartphones sold globally in calendar 2008, we estimate 104 million (82%) were sold to consumers and 23 million (18%) to business users. This is expected to rise to 438 million units sold (87%) to consumers by calendar 2012, ort a 43% CAGR, with 66 million units sold to business users (13%) for a 30% CAGR.


26 Mike Abramsky

Exhibit 27: Global Consumer vs. Business - Units (MM)

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Consumer Business % of TAM 2008A 2009E 2010E 2011E 2012E CAGR

Consumer 104.0 136.1 207.8 320.0 438.4 43.3%

Business 22.8 28.9 42.6 56.5 65.5 30.1%

Worldwide 126.8 164.9 250.4 376.5 503.9 41.2%

% of Total Addressable Market (TAM) 10.2% 14.8% 20.6% 28.5% 35.1% Source: RBC Capital Markets estimates

Consumer Smartphones Users to Rise at 49% CAGR. Out of 165 million total estimated data-centric smartphone users globally in calendar 2008, we estimate over 80% (~136 million) were consumers. This figure is expected to rise to ~667 million in calendar 2012 (87% of total) or a CAGR of 49%. There were ~30 million business data-centric smartphone users (18% of total) – typically, larger enterprises, SMBs and executives whose smartphone usage is primarily business and whose service is often expensed – in calendar 2008, a group expected to rise to ~100 million by calendar 2012 (13% of total) or a 35% CAGR. Our outlook calls for faster growth in consumer data-centric users versus business users, given the larger size of the potential consumer market, earlier penetration of smartphones in businesses versus consumers, favorable factors for consumer growth (pricing, applications, iconic devices, form factors, mix-shift from voice-only to smartphones, etc.) and international expansion, where consumers represent a larger portion of the market.


Mike Abramsky 27

Exhibit 28: Global Consumer vs. Business - Users (MM)

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Consumer Business % of Total Mobile Phone Users 2008A 2009E 2010E 2011E 2012E CAGR

Consumer 135.5 204.2 310.5 470.6 666.5 48.9%

Business 29.7 43.3 63.6 83.1 99.6 35.3%

Worldwide 165.2 247.5 374.1 553.7 766.1 46.7%

% of Total Mobile Phone Users 4.4% 6.1% 8.6% 11.9% 15.4% Source: RBC Capital Markets estimates

International Smartphone Forecast International Market User Forecast. We expect the data-centric smartphone market opportunity to rise globally, driven by: • Global adoption of mobile data services like web browsing, email, navigation, and apps, with

growth expected to be greater in emerging markets as users experience the Internet for the first time through a smartphone – includes over 300 million “experimenting” with mobile email in late calendar 2007;

• Rising awareness and distribution of iconic smartphones (e.g., iPhone, BlackBerry Storm, T-Mobile G1) into Europe and Asia, along with iconic phones with localized form factors (e.g., “Slider” smartphone with slide out keyboard, and touchscreens);

• Global proliferation of fast 3G networks that significantly improve the user experience of mobile browsing, multimedia viewing, and downloads;

• Introduction of lower cost, entry-level and pre-pay smartphone data plans aligned to local buyer preferences (e.g., in January 2009, Orange UK launched prepaid BlackBerry data plans at £5/month);

• Increased focus on data by international carriers (e.g., Indonesia BlackBerry subscribers are expected to grow from 300,000 currently to 1 million by the end of calendar 2009, according to Indonesia’s Department of Communication and Information Technology), given aggressive competition between mobile operators, rising consumer BlackBerry appeal and desire, and innovative data plans; and,

• Availability of region-specific and language-specific third-party apps and services.


Mike Abramsky 28

Exhibit 29: International Data-Centric Smartphone User Penetration (% of Total Mobile Phone Users)

North America (38% CAGR)

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Mike Abramsky 29

Exhibit 30: International Data-Centric Smartphone User Penetration (% of Total Mobile Phone Users) and Drivers International Smartphone User Penetration (% of TAM)

2008A 2009E 2010E 2011E 2012E CAGR Adoption Drivers Potential Adoption Inhibitors

North America

Total Mobile Phone Users (MM) 296.2 314.0 332.2 349.8 368.4 5.6%

Smartphone % of Mobile Phone Users 14.4% 18.5% 25.0% 33.0% 41.5%

Data-Centric Smartphone Users (MM) 42.7 58.1 83.1 115.4 152.9 37.6%

Western Europe

Total Mobile Phone Users (MM) 498.6 511.1 525.9 540.1 554.7 2.7%



Asia-Pacific

Total Mobile Phone Users (MM) 1,557.5 1,753.7 1,953.7 2,143.2 2,351.1 10.8%



Rest of the World (RoW)

Total Mobile Phone Users (MM) 1,360.7 1,469.6 1,560.7 1,627.8 1,697.8 5.7%



Mobilization of Asia-Pacific content and apps; new innovative Smartphones; increasing user desire for mobile browsing, collaboration (email, IM, social networking, etc.), advanced multimedia, navigation; lower data pricing and subsidized device pricing; greater awareness/distribution of BlackBerry and iPhone; Symbian introduces compelling mobile data services; broad distribution of Android devices; proliferation of 3G networks.

Availability of Asia-Pacific content and apps; speed of Smartphone component cost reductions and introduction of low cost 'emerging markets' Smartphones; per capita income limitations; consumer electronics spending slowdown; sustained high data plan pricing due to network capacity constraints; competition from mass market phones with 'good enough' social networking and messaging features.

Mobilization of local region content and apps; new innovative Smartphones; increasing user desire for mobile browsing, collaboration (email, IM, social networking, etc.), advanced multimedia, navigation; lower data pricing and subsidized device pricing; increasing use of Smartphones to replace Internet cafes; greater penetration of MS Exchange and Lotus Notes for business users; Symbian introduces compelling mobile data services; broad distribution of Android devices; proliferation of 3G networks.

Availability of local region content and apps; speed of Smartphone component cost reductions and introduction of low cost 'emerging markets' Smartphones; per capita income limitations; consumer electronics spending slowdown; sustained high data plan pricing due to network capacity constraints; competition from mass market phones with 'good enough' social networking and messaging features.

New innovative Smartphones; increasing user desire for mobile browsing, collaboration (email, IM, social networking, etc.), advanced multimedia, navigation; lower data pricing and subsidized device pricing.

Consumer electronics spending slowdown; sustained high data plan pricing due to network capacity constraints; competition from mass market phones with 'good enough' social networking and messaging features.

New innovative Smartphones; increasing user desire for mobile browsing, collaboration (email, IM, social networking, etc.), advanced multimedia, navigation; lower data pricing and subsidized device pricing; reduction in data roaming fees; greater awareness/distribution of BlackBerry and iPhone; Symbian introduces compelling mobile data services; broad distribution of Android devices.

Consumer electronics spending slowdown; sustained high data plan pricing due to network capacity constraints; competition from mass market phones with 'good enough' social networking and messaging features.

Source: RBC Capital Markets Research estimates


30 Mike Abramsky

North America and Western Europe. Out of 165 million total data-centric smartphone users globally in calendar 2008, we estimate there were ~43 million users in North America (14% penetration), which is expected to rise to ~153 million in calendar 2012 (42% penetration) or a 38% CAGR.

We estimate Western Europe data-centric smartphone users at ~43 million in calendar 2008 (9% penetration), rising to ~180 million in calendar 2012 (33% penetration), which represents a CAGR of 43%. Considered a leading indicator of data-centric smartphone growth, Western Europe (U.K., France, Spain, Germany and Italy) was ranked at 17% of users “experimenting with mobile email” versus 12% of users in North America.

Asia Pacific and Rest of the World Markets. Regions outside North America and Western Europe accounted for an estimated 79 million data-centric smartphone users in calendar 2008 or 48% of total, but are expected to grow rapidly, reaching 433 million users or 57% of total data-centric smartphone users by calendar 2012, representing a 53% CAGR. • We estimate Asia-Pacific (including Japan, China, Korea, India, Australia, New Zealand,

Indonesia, Thailand, and Singapore among others) at ~55 million data-centric smartphone users in calendar 2008 (3.5% of 1.6 billion mobile phone subs), growing to ~306 million users by calendar 2012 (13% of 2.4 billion total subs), or a 54% CAGR. An estimated 11% of mobile users in China and 84% in Japan were “experimenting” with mobile email, suggesting a strong emerging Asia-Pacific data-centric smartphone opportunity.

• We estimate RoW (Rest of the World, including Latin America, Russia, Eastern Europe, Africa, and the Middle East) to grow from ~25 million data-centric smartphone users in calendar 2008 (1.8% of 1.4 billion total subs) to ~127 million by calendar 2012 (8% of 1.7 billion total subs) or growing at a 51% CAGR.

Exhibit 31: International Data-Centric Smartphone Market Forecast – Users

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North America 42.7 58.1 83.1 115.4 152.9 37.6%

Western Europe 43.4 57.4 86.8 126.9 180.3 42.8%

Asia-Pacific 54.5 93.5 146.5 225.0 305.6 53.9%

RoW 24.7 38.5 57.7 86.3 127.3 50.8%

Worldwide 165.2 247.5 374.1 553.7 766.1 46.7% Source: RBC Capital Markets Research estimates


Mike Abramsky 31

International Unit Shipment Forecast. Our outlook calls for North American data-centric smartphone unit sales to rise from 31 million units in calendar 2008 (18% of TAM) to 98 million units (64% of TAM) in calendar 2012, representing a CAGR of 33%. In Western Europe, smartphone units are expected to rise from 31 million units in calendar 2008 (17% of TAM) to an estimated 120 million units in calendar 2012 (71% TAM), or at a 40% CAGR. In Asia-Pacific, we expect data-centric smartphone units to rise from 44 million in calendar 2008 (9% of TAM) to an estimated 199 million units by calendar 2012 (27% TAM), representing a CAGR of 46%. In other regions (RoW), smartphone units are expected to increase from 21 million units in calendar 2008 (5% of TAM) to an estimated 87 million units by calendar 2012 (23% TAM), or at a 43% CAGR.

Exhibit 32: International Data-Centric Smartphone Market Breakdown – Units

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North America 31.1 36.8 54.0 76.1 98.2 33.3%

Western Europe 31.3 35.8 58.1 85.8 120.1 40.0%

Asia-Pacific 43.8 66.2 99.8 155.6 199.0 46.0%

RoW 20.6 26.2 38.5 58.9 86.5 43.1%

Worldwide 126.8 164.9 250.4 376.5 503.9 41.2%

% of Total Addressable Market (TAM) 10.2% 14.8% 20.6% 28.5% 35.1% Source: RBC Capital Markets Research

SMS: The Global Leading Indicator for Mobile Data. With 2.5 trillion SMS messages and 50 billion MMS messages sent in calendar 2008, mobile messaging is hugely popular around the world, affirming the long-term opportunity for smartphones and mobile data. With approximately 700 SMS/subscriber sent in calendar 2008 (an average of 2/subscriber/day), developing nations are high users of SMS, sending 1.6 SMS/subscriber/day, ahead of Western Europe at 1.4 SMS/subscriber/day (versus North America at 4.3 SMS/subscriber/day). This suggests a large opportunity for smartphone growth, as these users – already familiar with text entry – begin to seek to enhance their mobile experience beyond voice/SMS by adding mobile email and browsing features.

China, Korea, Japan: Huge but Tough to Crack. China (estimated 600 million mobile phone subs and adding approximately 100 million per year), Korea (45 million subs, single-digit growth) and Japan (110 million subs, single-digit growth) present attractive long-term growth opportunities for data-centric smartphones, but remain difficult to crack for some smartphone manufacturers, due to: • Cheap knockoffs/counterfeits, with a high percentage of ‘grey market’ devices; for example,

many iPhone clones offering a similar multi-touch UI have come onto the market; China Mobile’s “Redberry” is a clone of RIM’s BlackBerry push email service at a fraction of the


32 Mike Abramsky

price; unlocked Apple iPhones – minus warranty and some features – are commonly sold in China via the black market, fueled by the iPhone fever there, called "Ai Feng" ("Love Craze");

• Favoritism, barriers and bias towards local solutions; for example, South Korea has remained largely closed to foreign phone manufacturers due to regulations mandating all mobile phones support Korea’s proprietary WIPI (Wireless Internet Platform for Interoperability) standard; the requirement was abolished in April 2009, leading to the launch of BlackBerry in South Korea (iPhone and other smartphone launches are still pending);

• Lower disposable income for mobile data services (ARPU in China is approximately $10/month versus $52/month in the U.S.);

• Unique cultural differences. Japan was one of the earliest adopters of mobile Internet, with more than 90% of the estimated 110 million mobile phone subs using mobile data services. The success of mobile data in Japan is primarily due to NTT DoCoMo’s i-mode and KDDI’s EZWeb. Foreign smartphones have previously struggled in Japan, lacking local preferences for features like TV viewing, embedded chips enabling mobile payments, and Emoji (picture characters or emoticons) support; however, recent smartphones like the iPhone and BlackBerry Bold are rising in popularity given their superior multimedia, browsing and productivity user experiences.

Japan: Leading the World in Mobile Data. Owing to its early deployment of 3G networks in 2001 and launches of mobile services like HTML web browsing, email, weather forecasts, games, ticket booking, sports results, and mobile TV, Japan is one of the leading regions in mobile data. Mobile data represented 37% or $23 billion of total service revenue in Japan in calendar 2008, up from 28% or $17 billion in calendar 2006. 3G penetration in Japan rose to 93% of total subscribers in calendar 2008, up from 67% in 2006.

Other Asia-Pacific Opportunities. Outside China, Korea and Japan, the Asia-Pacific market represents a large opportunity, including India (estimated 280 million subs), Indonesia (estimated 120 million subs), Thailand (estimated 60 million subs), the Philippines (estimated over 60 million subs), Taiwan (estimated 24 million subs), Australia (estimated 23 million subs), and Hong Kong (estimated 10 million subs) among others. Data-centric smartphone penetration in Australia and New Zealand is expected to be similar to North American and Western European trends, with relatively comparable levels of disposable income, interest in mobile services (email, IM, social networking, etc.), brand recognition (e.g., iPhone and BlackBerry), and recently in Australia, the deployment and promotion of Telstra’s 3G network. Smartphones are an attractive status item in other Asia-Pacific countries like Indonesia, Thailand, the Philippines, Taiwan, Hong Kong, etc., with high sales of Symbian (e.g., Nokia N96 or E71) and Windows Mobile smartphones featuring large digital cameras or robust media players. However, data plan uptake in these regions significantly lags North America and Western Europe, given low disposable income, limited integrated services available on smartphones and other factors. Smartphone penetration in Asia-Pacific is expected to rise over time, given the compelling services offered by smartphones versus the low wireline Internet access (e.g., eliminates the cost of using Internet cafes), along with competitive entry-level data pricing.


Mike Abramsky 33

Smartphone Market Segmentation Smartphone Segmentation. While some view the smartphone vendor landscape as already “set” with RIM and Apple the leaders, we believe it is early in the smartphone race and that significant evolution of the vendor landscape could lie ahead. While we agree (as discussed in the “Challengers to Dominate Smartphone Markets” section) that only a handful of smartphone vendors possess the skills to dominate the market, we believe there is room in the nascent, underpenetrated smartphone market for perhaps two or three other leading smartphone vendors to emerge. While many contenders will rise and fall, we think the smartphone market (at least for the next few years) will evolve into discrete market segments, dominated by four to five leading smartphone vendors.

4-5 Smartphone Leaders. Apple has been successful with its media-centric iPhone platform that incorporates iTunes, and RIM with its message-centric BlackBerry platform, leading to speculation that other contenders (challengers or incumbents) will face an uphill battle to lead the smartphone market – or, conversely, that Apple and RIM’s competitive advantages will diminish as competitors flood the market. Our view is different; we believe Apple and RIM have staked out two smartphone market segments, “media-centric” and “productivity-centric”, while other smartphone market segments (some of which haven’t emerged yet) represent significant new opportunities ahead. (Amazon’s Kindle wireless eBook reader, while perhaps not reflecting a discrete market segment, illustrates how new market segments served by new vendors remain possible). It is our view that only a select few smartphone vendors possess the necessary and sustainable competitive advantages (versus some incumbents or lower-cost challengers) to dominate the market. Thus, rather than supporting 10 to 20 or more vendors and segments, we foresee the market supporting four to five because of the unique ‘gating factors’, including: a) the complexity of making iconic (craved, non-intimidating) smartphones that sell sustainably, limiting the vendor field; b) wireless carriers’ inability to support or subsidize more than one or two smartphone OSs or iconic handsets each; c) iconic smartphone platforms gaining a critical mass of developers and content, who also can only support two to three platforms; and, d) the size of segments sufficient as to be commercially attractive to carriers, developers, smartphone vendors, and other stakeholders.

Likely Market Segments. We define smartphone market segments not by user type (geography, age, sex, etc.) but by common smartphone buying/usage behavior and prioritized preferences. Apple, in our view, has staked out the “media-centric” segment – users who prize media and content before other features – while RIM has staked out the “productivity-centric” segment – users who prize push email, work/life integration, and other productivity-enhancing functionality before other features. While difficult to accurately predict what other segments may emerge and their significance or sustainability, we believe market segmentation in smartphones will continue. Some valid segments which could emerge include: • PIM-centric – users who prize personal organization above other features; • Cloud-centric – users who prize the cloud-centric smartphone user experience, and; • Specialized (video, books, gaming, collaboration, texting, etc.).

Some of these segments (and vendor shares) may become large (e.g., 20-30% of the total smartphone market), while others may remain niche (e.g., <5% global share).


34 Mike Abramsky

Exhibit 33: Smartphone Market Segmentation


Form, Function Follows Market Focus. Smartphones and services from leading vendors targeting these different market segments may share common characteristics (cellphone, wireless email, mobile browsing, applications, functionality, form factors, etc.); however, in our view, it is their execution of smartphone features, form factors, operating systems, content, applications and related services which differentiate them, driven by each vendor’s unique philosophy and market focus (e.g., Apple’s choice of its designs, features, form factors, software and content versus RIM’s differentiated choices of the same).

Market segment focus – a key to smartphone leadership – means declining to try and be all things to all people (“that’s not what we choose to do”), choosing instead specific designs, application types, content, functionality, etc. in order to deliver differentiated, innovative, simple, powerful user experiences best suited to the desires of their target market. For example, although all leading smartphone platforms will likely share similar popular applications and content, each may specialize in featuring certain applications and content prized by their target audiences. Productivity-centric smartphones from RIM may disproportionately offer applications and content that improve personal productivity, whereas media-centric smartphones may disproportionably feature premium multimedia and content (like high-end gaming).


Mike Abramsky 35

Candidate Segment Definitions

Media-centric users are data-centric users who, while still prizing data experiences and voice, primarily acquire a smartphone for superior multimedia and content experiences. Media-centric users are attracted to data-centric smartphones with powerful media players; music, movie and picture capabilities; seamless integration with third party multimedia stores (e.g., iTunes, Amazon MP3 store, RealNetworks Rhapsody, and others); sufficiently available scope of music, movies, games, and content for the device; and a compelling “casual” web-browsing experience. Personalization is prized by these users particularly for media-centric functionality, including support for third-party consumer email

platforms, IM, and web services. For personal entertainment and other experiences, these users prize powerful picture/video capabilities (high-resolution cameras, storage, applications, MMS, etc.) and sufficient storage and battery life. Work-email integration is a consideration, but not a requirement. Media-centric users are satisfied with casual data entry (versus frequent email, messaging), willing to trade off speed and productivity (via a virtual keyboard for example) for elegance and simplicity in multimedia usability and design, such as via a sleek UI and intuitive media player and web browser. Cost/pricing/features of multimedia features, applications and content, along with related service costs, are key purchase requirements.

Productivity-centric users are data-centric users who still prize multimedia and voice, but are primarily interested in their smartphone’s data capabilities to improve personal productivity, more frequently using email, messaging, third-party productivity apps, than media-centric users, along with more purpose-driven web browsing (i.e., seeking information for productivity versus casual surfing). Integration of work use, functionality and data with personal data/life on a single device is often also a high priority for message-centric users. Features such as PIM (calendar, contacts, notes) with wireless synchronization are more important to these users. Productivity-centric users seek speed and

productivity for data entry and usage (such as offered by a tactile QWERTY keyboard, BlackBerry Storm’s clickscreen or slide-out QWERTY keyboard), and are interested in the reliability/robustness/versatility of the smartphone’s messaging and PIM capabilities. Heavy email/messaging users may prefer a QWERTY keyboard, which offers better tactile feedback (e.g., for voicemail systems, form-filling, some Web use , like typing URLs or searches or typing new phone #s). Scope of content (music, movies, games, applications) and mobile web browsing remain important, but users are willing to accept ‘functional’ capabilities in these areas as a trade-off for productivity-centric advantages. Work-email integration is a requirement for these users, as is integration with popular enterprise messaging and security standards, along with features like attachment viewing/editing. Phone reliability, serviceability and battery life are more important, as productivity-centric users depend more on their smartphones to support their work-related needs first before play. Cost/pricing/features of productivity features, applications and content along with related service costs, are key purchase requirements, with these users taking full data plans.

Cloud-centric users are data-centric users who are heavy web users, and are looking for a smartphone to mobilize social networking, web apps and services, web-based email, along with rich and powerful web browsing (support for Java, Flash, etc.). Cloud-centric users are attracted to smartphones with tight integration with a broad number of web-based email platforms, instant messaging systems, social networking websites, and multimedia capabilities, such as powerful media players,

photographic capabilities (e.g., high-resolution digital cameras). Seamless integration with third-party multimedia stores and web sharing sites, like Flickr, are a priority. 3G, GPS and Wi-Fi are prioritized, given the need for a fast web-browsing experience, emerging location-based services enhance the cloud experience (e.g., location-based search) and Wi-Fi improves connectivity in areas with low network coverage. Cloud-centric users may prioritize both a tactile QWERTY keyboard for rapid data entry and usage, along with a large touchscreen for a superior browsing experience or improved usability of web apps (e.g., Google Docs). Work-email integration is a


36 Mike Abramsky

consideration, but not a requirement, for these users. Cost/pricing/features of multimedia features, applications and content along with related service costs, are key purchase requirements.

PIM-centric users are data-centric users who rely heavily on traditional personal information management features like contacts, calendar, and notes, to organize their lives, along with basic email integration. PIM-centric users seek smartphones with robust mobile/connected PIM features and usability, and integration with enterprise messaging systems (like MS Exchange, Lotus Notes, and Groupwise). Integration of work use, functionality and data is important to PIM-centric users. PIM-centric users may prioritize a tactile QWERTY keyboard for rapid data entry and usage. Multimedia capabilities such as powerful media players, photographic capabilities (e.g., high resolution digital camera), and seamless integration with third-party multimedia stores are a consideration, but not a requirement for these users. Cost/pricing/features of multimedia features, applications and content along

with related service costs, are key purchase requirements.

Specialized users are data-centric users who prefer a mobile device designed for a particular task, such as book reading, multimedia, gaming, enterprise/vertical market processes, navigation, etc. While users’ needs are as diverse as the tasks, mobile data is crucial for the full experience. For example, Amazon Kindle users can purchase books over the air, iPod Touch users can download apps and multimedia, and navigation users get traffic updates over the air. Specialized users prize features that materially improve the user experience for the specific task. For example, Amazon Kindle has a large form factor (10.4" x 7.2" x 0.38"), but allows for full page text reading. Navigation

devices don’t have QWERTY keyboards, instead relying on touchscreens for infrequent data input. Cost/pricing/features of multimedia features, applications and content are key purchase requirements; in some cases, the cost of mobile data service is built into the up-front cost of the device (e.g., Amazon Kindle).


Mike Abramsky 37

Challengers To Dominate Smartphone Markets Vendor Share Shifts Expected. In our view, given their unique ability to create compelling, addictive and non-intimidating mobile data experiences users love/crave, we believe challengers like RIM, Apple, and possibly Palm and Google, among others, will dominate the smartphone market, taking market share from incumbent vendors such as Nokia, Motorola, Samsung, Sony, Sony Ericsson, LG, Dell, and HP, who may face challenges growing their smartphone franchises. Some incumbents, however, may be able to address their challenges and succeed in the market.

Data is Hard. Important differences from the traditional cellphone, PC or Internet markets make data-centric smartphones more difficult to design, engineer, manufacture, distribute, market, sell, and support than traditional voice/SMS cellphones or PCs. Those smartphone vendors well positioned to lead the industry possess unique competitive advantages and skills versus incumbent vendors in hardware, software, wireless hardware, network, design, manufacturing, sales, distribution (i.e. carrier), and support – along with cultural, execution, and organizational advantages. These differences (wireless versus PC/Internet) include: • Constraints: The constraints of mobile devices, including battery life and small-screens, make

it difficult to innovate and engineer delightful, simple, non-intimidating user experiences; • Deep Vertical Integration: Smartphone vendor ownership of hardware, software and services

combined is a requirement and a competitive advantage; • Carrier Networks: Smartphone experiences are often undermined by the spectrum, roaming,

and coverage constraints (for data) of mobile networks. Leading smartphone vendors master the carrier channel to address legacy issues which can undermine user experience;

• Enterprise: Mobile data represents heightened security and manageability challenges for enterprises – even more than traditional on-premise networks.

Many Can Sell 1 Million Smartphones, But Very Few Have Sold 10 Million+. Many smartphones (e.g., Samsung Blackjack and Instinct, LG Voyager, Motorola Q, O2 XDA, etc.) have sold well initially to early adopters. However, in an oft-repeated pattern, sales subsequently stalled as mass market buyers never materialized. (Nokia shipped 10 million+ units of smartphones like the N95, but we estimate many were sold without mobile data plans). Beyond early adopters, reaching mass markets is challenging, because most smartphones don’t sustainably delight and entice millions of users with their unique user experiences, and most smartphones are too complex and intimidating to millions of users who are only comfortable with knowing how to use simple cellphones.

Apple, RIM - What Makes Their Products So Special? In our view, it is Apple and RIM’s ability to create simple, unique, addictive smartphone experiences craved by the mass market. We believe that leading smartphone vendors possess two unique competitive advantages: 1) Create The Crave: Innovative, convenient, differentiated, iconic user experiences; 2) Overcome Intimidation: Overcome the fear the mass market holds for technology.

...and, thus, are rewarded by market share, customer loyalty, carrier leverage, margins, and subsidies.

Create the ‘Crave’. The reliable ‘Crackberry’ email experience of the BlackBerry, and the compelling mobile browsing, multimedia iPod and Apps experience of the iPhone, are two examples of unique iconic smartphone experiences that millions of consumers worldwide recognize and seek out. RIM and Apple have been successful in overcoming buyer inertia ("I use SMS and am happy, why do I need mobile email? mobile browsing? mobile apps?") in switching from voice to smartphones.

Overcome Intimidation. Most consumers globally feel intimidated by complex technology; many feel powerless when they can’t use the technology of their car, phone, stereo, TV remote, thermostat, computer, Internet, email, VCR, ATM, programmable coffeemaker, car stereo, satellite radio, etc. Smartphones that appear complex and intimidating exacerbate these fears, as for many, their phone is their lifeline and they are afraid of making a mistake. With its simple, intuitive and elegant UI – along with the safe Apple in-store buying experience – the iPhone


38 Mike Abramsky

overcomes these fears. BlackBerry’s user experience is simple, powerful, and intuitive – and works, and BlackBerry has similarly overcome IT fears of security, etc. in the enterprise.

Exhibit 34: Intimidation Factor Particularly an Issue with Smartphones

The ‘Intimidation’ Factor: “I know how to use a phone – but I’m scared of that complex-looking smartphone.”

“I want to get my email and mobile web but I’m scared to try it.”

“What if I forgot how to use it? What if I make a mistake and screw up my phone?”

“My phone is my lifeline — I want a smartphone that I’m not afraid of.”


The Power of Simplicity "I am sorry this is such a long letter, I did not have the time to write a short one." – Mark Twain "Genius is the ability to reduce the complicated to the simple." – C.W. Ceram

Making complex technology simple is among the rarest and most difficult challenges in technology, and those vendors (like Apple) who exemplify “ease of use”, are richly rewarded by millions of loyal, adoring customers. While it sounds easy, many technology vendors in many industries have tried and failed. Some of their best products demanded too much “tinkering” on behalf of the user, required a significant learning curve (with a thick instruction book to match), were non-intuitive in achieving important tasks, and detracted from (versus enhanced) convenience. Simplicity extends to sales and support as well, welcomed by frustrated owners seeking support who hate being put on hold, shuffled between support personnel, shouldering a higher burden of their own tech support, and end up being forced to raise a fuss just to get the customer service they deserved in the first place.

Just Say “No”. While “make it simple” sounds easy and obvious, it is very difficult to do, because it demands the discipline, judgment and vision of creating only those features that the consumer will embrace and use – while saying “no” to many others. Simplicity also means discoverability, e.g., the experience improves and adds additional value as the user gains expertise with the smartphone. This goal is further complicated by engineering within the aforementioned constraints and complexities of wireless data handsets, carrier networks, etc.

Deep Vertical Integration "My aim is to make things as simple as possible, but not simpler than that." – Albert Einstein

In our view, a key characteristic of leading smartphone vendors is deep vertical integration: their control over all aspects of the user experience – software, hardware and related services, even distribution, marketing, and support. RIM, Apple and Palm control both hardware and software (UI, bundled applications, software development kit (SDK), OS, etc.). RIM and Apple also control related services (Apple iTunes/Web, RIM’s network operating center (NOC)). It is the artful and clever engineering of both software and hardware together that Apple and RIM use to create their distinctive delightful, addictive user experiences. • Apple provides its multi-touch browsing experience via the integration of both software and

hardware technologies, which offer reliable UI – critical for a seamless desktop-like mobile browsing experience. Consumers like the proprietary integration between iTunes, iTunes Store and iPhone/iPods because it works so well and seamlessly.

• RIM provides its ‘Crackberry’ email experiences via push-based messaging and single inbox synchronization in a seamless, secure fashion, which others (including Microsoft) have attempted but not yet duplicated. Always-on, secure, push-based messaging is critical because it provides immediacy to messaging information, and mobile users do not need to initiate a connection to the server to check important messages – the messages find them. More functional than elegant, RIM’s integrated email, calendar, contact, etc. applications are appealing over more complex alternatives – because of their ease, power and reliability.


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• Palm delivers a compelling and unique ‘PIM-centric’ experience via Palm’s ‘Synergy’ user data unification and universal search capabilities. Palm also possesses the “special sauce” of compelling, non-intimidating software and hardware design, along with its fast, responsive, friendly, multi-touch WebOS user interface, and Webkit-based browser. Navigation is intuitive with “cards” and multi-touch, where users intuitively flick, scroll and zoom. Third-party web services are tightly integrated into WebOS’s UI and developers can access innovative WebOS features like Synergy and notifications.

Why Might Vertically Integrated Smartphone Vendors Initially Win? Traditionally, horizontal business models (where vendors outsource software, OS, manufacturing, support and use common industry suppliers) have proven successful in the PC and high-end cellphone markets, leading to reduced costs, scale and standardized user experiences. In the high-end feature phone market, horizontal integration helps drive down costs and increases flexibility in producing products for multiple markets off common components and suppliers. However, in our opinion, horizontal integration in smartphones increases the challenges of developing sustainable, mass market, iconic smartphone user experiences, given: • Data Demands Special Skills over PCs and High-End Feature Phones. With the desktop

PC, engineers have the luxury of power, memory, processing, graphics, input peripherals, display space, combining/adding multiple capabilities (webcam, sound systems, and printers), and high-speed connections. Voice-centric, high-end feature phones also do not need to contend with the constraints of data, which place special demands on smartphone hardware and software to accommodate data-centric functions like browsing, email, and applications. These constraints include the unique power consumption of data devices, such as when users check their emails frequently causing the screen to consume power, or want push email –or even 3G data –both of which consume processor cycles, in addition to storage limitations, multitasking constraints, etc. The power, interface, and other constraints of smartphones demand tight integration between the software and hardware in order to overcome these constraints while still offering superior, iconic user experiences which are both compelling and simple. This is more challenging to achieve when the OS and software is provided by a third-party, over deep vertically integrated vendors.

• Data Network Challenges. Smartphone designers must contend with spotty data network coverage, bandwidth constraints, data roaming challenges and inconsistent data connectivity, which voice/SMS mobile phones don’t face to the same extent. Controlling software, service and hardware together helps develop smartphones designed to manage these network issues for data and optimize the user experience. Smartphone software for example needs to assure it doesn’t drain the battery or overly tax the processor, and not crash or freeze or drop calls, to which smartphones are more prone, given the higher complexity of software and network instability. In the case of BlackBerry, its software and compression protocols are also designed to avoid taxing overstressed wireless networks.

• Craved User Data Experiences Are Challenging. Smartphone designers tightly engineer both the hardware and software to meet selected user data experience requirements for a specific target market. For example, Apple designed the iPhone with advanced 3D graphics (to appeal to the gaming and youth market), acceptable battery life through specific hardware choices (processor, memory), and efficient design of its OS, APIs and SDK. Given that smartphones are at the early stage in their innovation cycle, this cutting-edge user experience will, in our view, be more challenging to achieve where the OS and software is provided by a third-party, over deep vertically integrated vendors.

Other vertically integrated systems also have emerged under similar constraints in related markets: • Amazon Kindle’s book selections are proprietary format only (AZW) running on its Kindle

reader and not other readers (Sony, etc.); • Microsoft has evolved its portable Windows Media strategy (formerly similar to its mobile

strategy) from licensing (e.g., PlaysForSure) to a vertically integrated Zune media player and marketplace;

• Nintendo Wii, Sony PlayStation 3, Xbox360 and other gaming systems all have proprietary OS and their own proprietary online forums and marketplaces for community, downloads, etc.


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Creating the Future Leading Smartphone Vendor Skill: Creating The Future. Leading smartphone vendor cultures are oriented around developing new innovations that create new markets (versus enhancing existing ones). Through their success in predicting consumer trends, Apple and RIM develop smartphone innovations for nascent, emerging opportunities – despite unclear market size or justification. For example, they create, rather than chase, new markets using judgment (versus market analysis or surveys or their largest customers or an ROI analysis, etc.) regarding what technology consumers will or will not value in the future. Innovations like RIM’s BlackBerry or Apple’s iPod and the iPhone are examples of RIM and Apple acting on their judgment regarding what mobile road warriors or music lovers would want in the future – before these markets even existed.

Blaze Their Own Path. While maintaining carrier relationships, successful smartphone vendors don’t primarily take future product directions from carriers – nor from industry experts or market research firms, nor planning processes or marketing studies, nor from investors, financial or industry analysts, competitors, nor popular technology pundits, reviewers or journalists. In our opinion, successful smartphone leaders like RIM and Apple believe that they are better at predicting what customers want in the future, particularly in nascent markets that have little or no near-term ROI and for which there is little available demand or market research. Sometimes these successful vendors use a more instinctive, intuitive, “learn by doing” approach that often shifts gears as new markets develop and their learning about new markets improves. Even successful challengers sometimes initially resist or miss new innovations and products that represent sharp industry or architectural shifts. However, they retain their advantage by recognizing their error and shifting rapidly to move in the new direction (Apple portable video and Netbooks, RIM attachment viewing, HTML email and touchscreens). Failures are viewed as opportunities to learn about what works in the market, followed by reattempts at success. The successful, iconic products thus developed are often in hindsight called "brilliant vision", but can sometimes be more iterative behind the scenes than realized. What sustains successful smartphone vendor advantages is their ability to make sound predictions of future market need, willingness to iterate through failure to success, agility to adapt to changing markets, coupled with their unique skills (crave, simplicity) to execute and deliver their technology, design, marketing and distribution of the new products.

Software, Hardware, Design: An ‘Art’; While hardware and design is the beauty, the body and the brain of a smartphone, it’s the software that is the personality and the soul. While seemingly easy, making craved smartphones is in fact an unique art, requiring the combination of cutting-edge and unique software, wireless hardware and design skills. What makes great hardware with software is not the latest technology, but the difficult decisions and process of resolving many possible features down to those essential features that make the hardware and software simple and intuitive yet powerful and discoverable – and then designing those selected features to work together elegantly and intuitively so that the experiences are addictive. Apple, RIM, Google and Palm have prior advantages in this area, having developed their smartphone software and operating systems independently and from the ground up. • Apple’s iPhone OS uses the software kernel (core code) from its Mac OS X (desktop OS).

Apple leveraged its prior experience and success, tightly integrating software and hardware on the Mac, to create the iconic iPhone user experience, including its innovative user interface, mobile browsing, application store, SDK, etc.

• RIM’s BlackBerry OS, software and NOC technology were developed by RIM and are tightly integrated to deliver its legendary ‘Crackberry’ always-on instantaneous messaging experience, along with robust security, high battery life, and network bandwidth efficiency. Competitors have attempted to emulate RIM’s continuous push email experience, but with inferior battery life and bandwidth efficiency.

• Palm developed its WebOS from the ground up, leveraging its “PIM-centric” legacy into its WebOS smartphone platform, incorporating innovations like Synergy user data unification, universal search and multi-tasking. Some of Palm’s management (including CEO Rubenstein, ex-Apple) have prior experience in tightly integrating software and hardware to create unique computing user experiences.


Mike Abramsky 41

Some horizontally integrated vendors may yet succeed. HTC has built promising software capabilities, developing innovative and unique UI layers on top of third-party operating systems, like Android, to enhance the user experience. Despite skill disadvantages in software, some incumbent vendors may successfully upgrade their software skills to become smartphone leaders.

Smartphone Vendor Hardware Skills. Challengers have developed wireless hardware technology skills unique to smartphones and data, such as power management, miniaturization, processing power, antenna design, multimodal wireless technologies (EDGE, EV-DO, HSDPA, Wi-Fi, Bluetooth, 4G, etc.), data network coverage/spectrum constraints and wireless security. Leading smartphone vendors become adept at engineering “converged” portable computing devices, with high-resolution, interactive displays, faster processors, greater storage, media features (higher quality cameras, speakers, music players, etc.) and other capabilities (GPS, accelerometers, etc.). For example, competitors have tried but have been unable to reliably engineer and optimize their smartphones to provide similar battery life to the BlackBerry. In addition, smartphone vendors must master the technical complexities of integrating new hardware, applications, OS support, and wireless protocols and standards. Small details that perfect the data experience become prized skills; the BlackBerry keyboard, for example, went through many iterations to make it usable and compact, including key position and shape, track wheel for one-handed navigation and data retrieval, and integrated shortcuts via software. iPhone’s soft keyboard utilizes its breakthrough multi-touchscreen and predictive algorithms to correct typing errors to deliver a “good enough” experience for its media-centric users who are willing to trade off a tactile QWERTY keyboard for a larger screen.

Developers! Developers! Developers! A Thriving Developer Ecosystem Matters. Microsoft dominated the PC platform, partially because of a thriving software application and developer ecosystem atop Windows, along with iconic Windows-based applications (spreadsheet, word processing) that popularized the PC platform. Similarly, leading smartphone platforms will develop a sustainable ecosystem of mobile applications and developer ecosystems atop popular Mobile Operating Systems. Apple’s App Store and Apps can be viewed as a by-product of a thriving developer ecosystem. Because software and application developers – particularly consumer developers – can’t afford the cost and effort to develop (and sustain development and support for) multiple smartphone OSs and platforms, they often make choices regarding which platforms they will develop applications for. These choices can make or break the success of an OS and a developer, particularly at the early stage of evolution of a new computing platform. Winning developers to a smartphone OS means offering: • Greatest # of "eyeballs" or addressable market; favoring first-mover platforms with a

critical mass of users that can support sufficient application sales (e.g., iPhone/iPod Touch have 45 million users double the install base of Sony PS3); maximum developer profitability, including revenue share and costs to develop and support (standard revenue share is now 70-80%; before iPhone’s App store, revenue share was only 50%);

• Broad distribution through app stores to reach entire install base (as opposed to fragmented through third parties);

• Ease of app development (e.g., standard programming languages, access to APIs, developer tools and resources, etc.);

• Visibility to consumers amidst other applications (a drawback of Apple’s App Store given large number of apps); marketing support;

• Consumer engagement on the platform (e.g., legacy Palm OS, or iTunes/media/content).

Great Smartphone Software = A Great SDK. History has shown that developers care less about standards and more about which platform has the easiest, most cost-effective and powerful development tools. A good example is Adobe Flash, which has a strong, powerful SDK with good tools and thus is a favorite of developers everywhere on the Web, despite its proprietary format. Successful smartphone challengers offer powerful, developer-friendly and supported SDKs that make development easy and cost-effective on their platform. A strong developer SDK includes such capabilities as:


42 Mike Abramsky

• Ability for developers to leverage existing software skills to develop and migrate apps; • Tools and widgets that are “drag and drop” easy to use and test; • That help developers utilize hardware capabilities, storage, GPS, cache, etc., in an easy and

optimized manner; • Clear “rules” assuring applications don’t inappropriately use off-limit phone functions, tax

battery life, consume bandwidth, processor cycles – or access inappropriate functions; • Easily allow development on UIs that run uniformly across multiple devices and platforms

offered by the smartphone vendor – without having to redevelop the application for each device;

• Web standards such as Flash, JavaScript, etc. are utilized where reasonable; • That are WSYWYG (what you see is what you get) via emulators, tools, etc. to make it easy to

develop compelling and elegantly formatted applications, and make quality control easy.

Mastering The Carriers Carrier Focus on Data. With the saturation of voice subscribers in many markets globally, and commoditization of voice revenues, new carrier growth and profitability now must, in part, come from attracting competitor data subscribers, or selling new data services which are highly profitable. While it would seem logical that carriers and leading smartphone vendors would thus be strong allies in pursing data opportunities, leading smartphone vendors face special challenges when working with wireless carriers, as carrier business models – historically successful with high-end feature phones – sometimes raise challenges when selling smartphones in large volumes to the mass market.

Convince or Coerce. Leading smartphone vendors must master the ability to convince (or coerce) wireless carriers to adopt their vision of future smartphone experiences (software, hardware features, applications, pricing, sales, support, etc.) – to “create the crave”. This may mean convincing carriers to evolve – even abandon – time-tested product, pricing and marketing strategies in order to successfully sell smartphones to the mass market. This includes innovating unique approaches to sales and support to provide more hand-holding for complex smartphones, and develop a less intimidating sales/support process.

Data is Hard. Many carriers who successfully defined and sold tens of millions of voice/SMS phones, like the Motorola RAZR, have only sold a limited number of their designed and branded smartphones (e.g., carrier-branded devices like the T-Mobile MDA, Vodafone VDA, Orange SPV, AT&T Tilt, Verizon XV6700, and Sprint PPC-6800 which in total sold an estimated 2.5 million units in calendar 2008). Pre-iPhone and BlackBerry, smartphones had never sold more than 10 million units per a single new model (e.g., Motorola Q, etc.). We believe this is because wireless carriers – accustomed to specifying features, pricing, and timing of voice/SMS handsets – face skill gaps in their abilities to similarly define and differentiate “hit” iconic data-centric smartphone user experiences (software, hardware, content, applications, pricing, sales, support) like the iPhone and BlackBerry. Some long-standing wireless carrier strategies, which face challenges adapting to smartphones, may include: • Carriers historically made final decisions on features, branding, software, pricing for handsets

and plans, basing decisions off previously successful handset strategies, often using marketing analysis and ROI – prioritizing new features, handsets, services to maximize near-term growth and profitability;

• Data plans have, in many cases, been initially priced for profitability versus for optimal smartphone user data experiences (e.g., data caps and MB overages versus “unleashed” data experiences) and often designed to avoid hitting network bandwidth constraints (prior to the iPhone, data plans were approximately $60/month and often involved data caps and overage charges);

• Handset subsidies, which lower device pricing in a “razor/blade” fashion, have historically been structured to sell profitable service contracts and assumed handset upgrade cycles versus getting new users onto iconic handset platforms for life;


Mike Abramsky 43

• Carriers have long allocated “hero positions” – promotions, marketing and distribution shelf space – to those handset vendors which, in their view, offered maximum near-term growth and profitability;

• Carrier sales and support infrastructure – designed for feature phones – has not been well equipped to sell or support the elevated complexity of smartphones which involve software, hardware, network, and application issues.

Lacking Software Skills. Software (OS, UI, content, applications, etc.) is becoming increasingly key to the smartphone experience. However, many wireless carriers – used to specifying the latest “checklist” of hardware features in next generation handsets – in our opinion, are challenged in envisioning and specifying innovative, iconic smartphone experiences. Particularly, given that it is software that differentiates the less-compelling smartphones (those with less elegant and inconsistent UIs, and other subtle but critical usability deficiencies) from the “hit” mass-market successes like iPhone and BlackBerry. These carrier challenges also extend to selecting “hit” content and applications. Carriers – reluctant to open their networks to third-party applications/content – often prioritize their own content and app “storefronts”, favoring their application stores, apps and content partners, and thus end up limiting selection and distorting market-driven demand. This has resulted in some carriers launching poorly-designed storefronts or awkward apps/content stores, or instituting inappropriate app/content pricing, discouraging developers and limiting consumer uptake. Many carriers today continue to try to prioritize and update their own application/content stores; however – despite advantages such as integrating payment with their bills – we predict these will not be as well received by consumers as app/content stores directly offered by smartphone challengers and ultimately will cede to the smartphone vendors.

Apple Changed Everything. The launch of iPhone on AT&T in June 2007 forever altered carrier smartphone practices. Beyond the innovations, AT&T saw in the iPhone itself (UI, touchscreen, Wi-Fi, rich mobile browsing, iPod/iTunes, applications, app store, visual voicemail, etc.), Apple’s unmatched consumer computing brand, loyal customer base, etc., which convinced AT&T (and subsequently other carriers) to allow Apple unprecedented control over iPhone user experience, features, branding, marketing and pricing (hardware and unlimited data plans). AT&T also agreed to invest in updated iPhone marketing, inventory, activation, warranty, sales, service and support processes, and resources, as well as network upgrades (e.g., visual voicemail). Even with initially high, unsubsidized pricing ($499/$599), Apple’s strategy worked: AT&T sold over 5 million iPhones in the first year; subsequently over 80+ carriers sold another 21 million phones worldwide (with subsidized pricing). While Apple made some early missteps (e.g., pricing, exclusive distribution, slow distribution expansion), consumers worldwide overwhelmingly voted with their wallets for the iPhone and iPod Touch experience, making the iPhone the most successful smartphone launch in history with 21 million+ units shipped in first two years as well as matching or exceeding (despite narrower distribution) other iconic, historic consumer electronics launches.


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Exhibit 35: iPhone/iPod Touch Sales Momentum vs. Other Benchmark Consumer Product Launches

0

10

20

30

40

50

60

70

80

6 Mo 12 Mo 18 Mo 24 Mo

Months from Launch

Uni

ts (

MM

)

iPhone/iPod Touch Sony PSP Nintendo Wii

Sony Playstation 2 Motorola RAZR

Apple iPhone launch at

AT&T on June 29, 2007.

Source: RBC Capital Markets; Company reports

Opened Carrier Eyes re Smartphones. Following AT&T’s lead, carrier networks, particularly non-iPhone networks like Verizon and Vodafone (some of whom lost subscribers to iPhone carriers), began to allow smartphone vendors like RIM, Palm and Google more control over the user experience, allowing these vendors to, for example, offer vendor-managed application storefronts, user-craved features like Wi-Fi, unlimited data plans, and opened their platform to third-party developers.

Support Capabilities: Don’t Abandon Me! Leading smartphone vendors like RIM and Apple were also able to convince carriers to invest in an elevated level of sales and support infrastructure – including recruiting, training, compensation, and raising the knowledge level of smartphone sales and support staff. In many ways this was as important as their innovations in the smartphone itself, because when a smartphone owner has a problem, they don’t call the smartphone vendor or the software vendor – they call the carrier. Given the variation and elevated complexity in vendor smartphone hardware and software (both on the device, the server, the Web and the user’s PC) as well as applications, the smartphone support process needs to accommodate supporting all these complexities, at a single source, to assure a safe and satisfying ownership experience. Smartphone consumer buyers (beyond early adopters) are easily intimidated, especially if carriers who aren’t trained in diagnosing problems refer owners to someone else (e.g., “you should call Microsoft, call Google, etc.”), where the buyer now needs to contact a new party, wait, re-explain their problem to someone else – and sometimes get caught in the middle – as everyone (including the carrier) blames each other. In this scenario, the consumer ends up shouldering the burden of support, degrading their experience.

Data Consumption - Key Challenges Users Demand Data. Iconic smartphones like the iPhone, Palm Pre or Google Android devices with rich browsing experiences, streaming video, full attachment viewing and other large downloads/uploads are significant consumers of wireless network bandwidth. For example, smartphones generate 30x more wireless data traffic than voice/SMS phones. As shown in Exhibit 37, a May 2009 study by Alcatel-Lucent of North American wireless network usage shows web browsing consumes 32% of data-related airtime but 69% of bandwidth. With the rapid growth in smartphone and other mobile data users, the limited data capacity of 3G networks, especially in urban areas of the U.S. and certain European countries, is being overloaded, leading to dropped calls, slow data access or limited connectivity, resulting in degraded user experiences.


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Exhibit 36: Wireless Data Consumption Challenges • An average voice plan that includes 500 minutes of airtime uses about 45MB of capacity per user per

month.

• A user with an unlimited data plan who watches 15 minutes of video per day, reads at least three articles from a mobile Web site such as CNN.com, and checks email using his company’s virtual private network uses about 1.6GB worth of capacity per month. Translated into voice minutes, this amount of data usage would require roughly 20,000 minutes per month.

• You need 50x as much bandwidth (15MB/s) for video versus voice (4-7kb/sec), but under flat-rate pricing, carriers can’t charge 50x as much as voice for video.


Exhibit 37: Double Data Airtime devoted to different data applications vs. bandwidth

used during one random hour

Minutes

Bandwidth 69% 4% 16% 11%

32% 30% 14% 24%

Web browsing Email

Peer-to-peer Other

Source: Alcatel-Lucent

Data Consumption Remains a Key Challenge. Unlike wireline networks, network capacity in wireless is constrained, given the significant noise and interference that exists in the environment. Within this hostile environment, engineers have been able to expand wireless network capacity 1,000,000 times since 1957, due predominately to smaller cell sizes (1600x), as opposed to larger spectrum (25x) and spectrum efficiency improvements (25x). However, all three of these factors remain constrained and force tradeoffs to further improve network capacity. Within 3G networks, carriers have made expensive investments in additional network infrastructure to reduce cell sizes to expand network capacity, but the ability to do this remains limited given that the power needed to overcome increasing interference is nearing limits. Alternatively, some 3G carriers are looking to seamlessly offload capacity to Wi-Fi hotspots or users’ home wireline networks.

Data Pricing To Evolve To “Tiers”. As carrier networks become clogged with bandwidth-consumptive apps, caps on consumed data volumes tend to be typical carrier responses. However, these caps are challenging to implement in a competitive environment where carriers risk consumer frustration and confusion around overages and unexpectedly high data overage bills. Yet as smartphones grow market share, data service pricing is, in our view, highly likely to evolve away from “all-you-can-eat” plans towards data consumption “tiers” (perhaps similar to how cable Internet plans evolved) possibly with entry-level priced tiers (e.g., with unlimited email but limited browsing), which will appeal to price-sensitive mainstream voice/SMS users to entice them to shift from voice to data. These tiers as discussed may also include free Wi-Fi access to offload network loads while maintaining the smartphone user’s experience. For example, Orange UK launched prepaid BlackBerry data plans at £5/month in January 2009. Regardless, as the iPhone has already set the standard for unlimited browsing, carriers and smartphone vendors will face the challenge of structuring tiers to avoid user frustration when approaching data consumption limits (a challenge not faced by cable Internet tiers based on speed versus caps).

LTE May Take Time. 4G network technologies like LTE deliver higher capacity through higher spectrum efficiency (e.g., 2.1 bps/Hz for LTE versus 0.86 bps/Hz for HSPA) and greater spectrum


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allocation (20MHz versus 5MHz). While carriers like Verizon are planning on launching LTE networks in late 2010, early LTE devices are likely PC adapters, not handsets and it may be some time before LTE smartphones are affordably available. LTE requires complex antenna design (e.g., multi-band, MIMO) and faster processors to improve spectrum efficiency, which are challenging to deliver with satisfactory handset form factor and battery life and may be initially expensive. And early LTE smartphones may need to incorporate 2G, 3G, and 4G radios to assure continuous coverage as LTE rolls out, which could present power consumption, costs and other engineering challenges. For example, the first EV-DO BlackBerry with satisfactory battery life was released in November 2005, more than two years after Verizon commercially launched its EV-DO network. Similarly, the iPhone 3G and BlackBerry Bold were released in mid 2008, more than four years after AT&T launched its 3G (UMTS) network.

Favors BlackBerry Compression Advantages. The aforementioned bandwidth issues for carriers favors BlackBerry’s bandwidth-efficient smartphone model over Apple and competitors. BlackBerry’s end-to-end network model is more spectrum and bandwidth efficient than iPhone or other rich mobile web-browsing smartphones, making it a favorite of carriers. Data from most all of BlackBerry users – both consumers and businesses – on all its handsets are routed through BlackBerry’s NOC, which routes, compresses, and encrypts its data, reducing network loads. RIM’s NOC reduces data consumption through efficient wireless networking protocols, compressing and optimizing messages, attachments, web pages, app data, and delivering efficiency benefits from 3x to 20x competitive platforms. RIM’s platform also offers distinct advantages to the smartphone user experience (e.g., faster data downloads, superior battery life, lower wireless data costs (particularly while roaming), better connection stability and reliability) – along with enabling BlackBerry’s legendary and unique “Crackberry” experience, which many have tried and failed to duplicate. Lower network consumption increases carriers’ profitability, along with their capacity to handle more mobile data users and allow more measured investments in network infrastructure (as much as 5x lower, according to RIM).

Exhibit 38: BlackBerry Data Efficiency vs. Microsoft Direct Push as of Jan/08

4.0x

4.4x

14.4x

6.6x

18.6x

5.4x

0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x 18.0x 20.0x

Excel

PowerPoint

Word

PDF

JPG

Email

BlackBerry Data Efficiency vs. Microsoft Direct Push 'Data Efficiency' comparisons based on tests (conducted by RIM) on data transferred to send/receive identical files, documents, emails on either platform. Viewing attachments on Blackberry is via RIM"s attachment service. Comparison of data efficiency on BlackBerry 9000 versus Microsoft Direct Push running on iPhone. Source: Research In Motion

Other Leading Smartphone Vendor Advantages Engineering Talent. By offering opportunities to both work on leading technologies and products, smartphone leaders like RIM and Apple can amass the best industry talent, particularly engineers looking to develop the “next best thing” in mobile communications. RIM’s and Apple’s engineering teams are considered among the best in the world, and have already become leading


Mike Abramsky 47

centers of design and engineering talent in areas of expertise specifically associated with smartphones and data, including power management, miniaturization, processing power, antenna design, multimodal wireless technologies (EDGE, EVDO, HSDPA, Wi-Fi, Bluetooth, 4G, etc.) data network coverage/spectrum constraints, software, wireless security, etc.

Experience Curve Advantages. Smartphone leaders possess experience curve advantages over incumbent vendors across the spectrum of activities and technologies associated with data-centric smartphones. This includes being first to link up and then jointly innovate with key relationships (e.g., component suppliers, contract manufacturers, retail and enterprise sales distributors, etc.) as well as key partnerships (sales, vertical, technology, and marketing). Leading smartphone vendors also gain deep experience understanding smartphone users, including what works/doesn’t work in the marketplace – such as new technologies, features, pricing, form factors (e.g., OTA versus Wi-Fi downloads, which music/movie or TV shows/app/content/ecommerce experiences and business models work/don’t work), enabling them to continually offer the best data experiences. Other important experience curves include improvements to battery life, improved spectrum efficiency, improved graphics (gaming) and improved smartphone manufacturing capabilities. Smartphone leaders also improve their experience curves around the growing developer ecosystem, nurturing applications, and enabling carriers for data.

Marketing and Branding. Leading smartphone challengers develop marketing skills that are unmatched at “creating the crave” – selling their unique, iconic user experiences (particularly at Apple, where selling technology is an art), inspiring mass market buyers to desire their smartphones, and to upgrade from voice/SMS handsets. Leading smartphone vendors can outrace some incumbents (who spread their market focus over their legacy businesses) in building and maintaining leading smartphone brands, which may help smartphone challengers expand market share and sustain margins. Smartphone challengers can often leverage a high level of PR “buzz” around their product launches and innovations, which provides significant non-cash marketing value. Apple benefits by the equivalent of ~$400 million of advertising off its “PR buzz” around its major product launches.

Retail Skills. Leading challengers develop unique retail sales skills and innovations (Genius Bars, in-store specialists, enterprise sales specialists, etc.), and customer support innovations to reduce the smartphone “intimidation” factor, and successfully encourage users to switch from voice/SMS handsets/plans to smartphones and add data plans.

Organizational Advantages. Smartphone vendors are organized to optimize development of their premium smartphone user experiences. Within challenger organizations, smartphone priorities drive corporate agendas and initiatives. Software and hardware engineering organizations are egalitarian versus some incumbent organizations (where typically the traditional voice/SMS handset or PC hardware teams have more power, control budgets, determine product roadmaps, and priorities). By virtue of their focus, some challenger smartphone vendors are more agile and adaptive, can pursue new innovations or market shifts quickly, shifting budgets and resources around developing opportunities (like touchscreen technology, new software applications, etc.), new markets, changing customer requirements, competitive developments or new opportunities.

Manufacturing. Manufacturing smartphones demands a higher level of complexity, quality control and margin control than traditional high-end feature phones or regular PCs. Leading challengers have a competitive advantage in manufacturing innovations, including chipset design and packaging, compact battery engineering, touchscreen integration, keyboard design, and radio/antenna positioning. Extending its ownership of the supply chain: • Apple acquired chip manufacturer PA Semi for $278 million in April 2008, adding 150

engineers and related patents. Apple also recently increased its stake in UK-based Imagination Technologies, providing it more control over the development of its PowerVR graphics processor design already embedded in the iPhone 3GS.

• RIM’s radio modem and circuitry are integrated into single chips and circuit boards, which significantly cuts manufacturing costs and time.

Intellectual Property Advantages. Most leading smartphone vendors have accumulated strong intellectual property (IP) positions around multiple aspects of their smartphone technologies. RIM has more than 850 U.S. patents relating to wireless communications, handheld device UI,


48 Mike Abramsky

handheld device design, mobile data synchronization, push-based messaging, smartphone accessories, and other aspects of smartphone design and systems (RIM has licensed its keyboard and other patents to Palm, Nokia, Samsung and others). Apple has more than 2,500 U.S. patents on computer systems, handheld devices and related technologies. Within smartphones, Apple’s patents are concentrated on user interface, multimedia, multi-touch, and other areas. Palm has over 300 U.S. patents on smartphone software design, form factor, touchscreen, personal information management, and stylus input, along with other aspects of smartphone designs and systems. For leading smartphone challengers, the depth and breadth of patents can deter threats from competitors, incumbent vendors and patent trolls, reduce licensing costs, and aid in pursuing infringing competitors.

Investor Support. While still subject to the scrutiny of public markets, shareholders in smartphone leaders like RIM and Apple are more accustomed to these vendors’ risk-taking on new, unproven markets, often betting management will deliver above-average shareholder returns in the long run. For example, RIM moved outside of its traditional data-only, two-way paging business to target the cellphone market with the BlackBerry 5810. RIM also transitioned from its core enterprise business to the consumer segment with the BlackBerry 7100, and from keyboard to touchscreen with the BlackBerry Storm. Over this time frame, RIM’s stock rose 1545%.

Similarly, Apple released the entry-level iPod Mini, Nano and Shuffle, expanding its addressable market, but cannibalizing its classic larger iPods, and subsequently launched the iPhone that is now cannibalizing its traditional MP3 iPod franchise. Over this time frame, Apple’s stock rose 1343%.

Conversely, investor bases of incumbent vendors, like Motorola, Nokia and others, accustomed to recurring revenues and profits from legacy businesses may have less tolerance for volatility in quarter-over-quarter financial results or for failures related to new, unproven initiatives targeting uncertain markets. Incumbent vendors often focus their priorities and resources around prior successes (e.g., Nokia N91, N92, N93, N95, N96, N97; Motorola RAZR V3, V3i, V3m, V3xx, maxx, RAZR2 V8, RAZR2 V9, RAZR2 V9X) aimed at existing customers, versus making big bets on new, unproven markets until the markets have been established.


Mike Abramsky 49

Some Incumbents To Face Challenges Despite their goals for smartphone dominance, some cellphone/PC/consumer electronics incumbents (e.g., Nokia, Motorola, Dell, HP, Samsung, Sony, Sony Ericsson and LG) will face challenges competing with the new challengers in smartphones – held back by technological, organizational, customer and shareholder barriers as well as cannibalization. These incumbents have strong execution, intense customer focus, have built dominant brands and leading technology, and their managements are highly capable. However, in our opinion, some incumbents face challenges in their smartphone franchises because their voice/SMS cellphone or PC-oriented cultures and management skills may insufficiently adapt to the unique processes and skills required to produce iconic, sustainably selling smartphones to the mass market. While difficult, these challenges are not insurmountable; it is possible a few of the incumbent vendors may evolve and compete successfully with smartphone challengers.

Accordingly, we see some voice-centric phone vendors losing market share to leading smartphone challengers, from 96% of TAM in calendar 2008 to 84% in calendar 2012, as smartphones rise from 10% of TAM in calendar 2008 to 35% by calendar 2012 (41% CAGR) and smartphone challengers’ share of the smartphone market rises to 45% in calendar 2012 from 38% in 2008. We estimate each 25bps global handset share gain (based on an estimated 1.2 billion total units in calendar 2008) equates to an additional 3 million units, or an estimated $1 billion in incremental revenue (assuming an average selling price of $326).

Exhibit 39: Loss of Voice-Centric Vendor Shipments to Smartphones Challengers

96%

94%

91%

88%

84%

75%

80%

85%

90%

95%

100%

2008A 2009E 2010E 2011E 2012E

Incu

mbe

nts

% o

f G

loba

l Han

dset

Uni

ts


Historical Rise to Handset Dominance. Controlling over 96% of the global cellphone market today, incumbent handset vendors like Nokia, Motorola, Samsung, LG, and Sony Ericsson historically grew to dominance by helping develop standards like GSM, and innovating around mobile voice network technologies (particularly around digital-based 2G networks, including GSM, iDEN and CDMA). Early mobile phones were designed for functionality rather than form – such as the 10-lb 4500x and 4800x “transportable” phones from Motorola – which resembled a car battery with a phone handset strapped to the top.


50 Mike Abramsky

Exhibit 40: Early Mobile Phones Motorola 4500x/4800x

Motorola DynaTac 8000x

Source: Company reports

Dick Tracy and James T. Kirk. Nokia, Motorola, Ericsson, and Sony – in the early 1990s, it was these vendors who were viewed as the innovators, releasing iconic handsets that captured the hearts (and wallets) of consumers enamored with the latest technology. They rapidly launched new innovations in designs, voice quality, battery life, displays, size/weight, cost, and features (e.g., ring tones) that popularized cellphones to the mass market. Motorola continuously shrunk the phone form factor to the relatively diminutive DynaTAC 8000X in 1983 for $4,000, weighing 800g and delivering an hour of talk time and 30-number memory. The MicroTAC in 1989 created the “flipphone” form factor that weighed only 340g costing $2,500-3,500. Nokia released the Nokia 1010 in 1992, launching the lightweight “candybar” form factor.

Capitalizing on consumers’ thirst for new innovations in phone technologies and their willingness to pay a premium for new form factors, Motorola and others launched new designs reminiscent of Star Trek communicators and/or Dick Tracey’s Watch Phone. In 1996, Motorola introduced the StarTAC, which at 88g and 60 minutes of talk time (12 hours standby, with a second battery option to extend talk time), offered a flip communicator-like design (with vibrate function). Consumers lined up to pay its $1,500 hefty price tag (at 3.1 ounces, the StarTAC was more expensive to buy, by weight, than pure gold) despite a poorly-designed user interface and other drawbacks (the antenna was prone to damage). Form factors continued to shrink, with Nokia launching the sleek Nokia 8110 in 1998 at 152g, and Ericsson releasing the tiny T28 in 1999, weighting only 81g. Motorola launched the RAZR, the world’s thinnest handset (13mm) in late 2004, on GPRS networks, priced expensively (initially) at $600 (before rebate).

Exhibit 41: Iconic Mobile Phones Motorola StarTAC

Nokia 8110

Ericsson T28

Motorola RAZR

Source: Company reports


Mike Abramsky 51

“Packaging”. As innovations in voice/SMS phone design, form factors, and network technologies proliferated (and began to be copied), the aforementioned voice phone vendors sustained their leadership by becoming experts in “packaging” – producing variants in designs, features and form factors around core components to offer phones to multiple market segments and different price points. These vendors also started incorporating incremental innovations like PIM (personal information management functions like calendars, contacts, etc.) and other features like calculators and notepads – as well as PC connectivity. Data first came to mobile phones in 1996 when Nokia launched the PDA-like 9000 Communicator, and then the Nokia 7110 with WAP browser in 1999.

Successful “Playbook”. Beyond packaging, successful handset vendors quickly moved to develop and control distribution channels, supply chains, manufacturing, and marketing/branding – a form of horizontal integration. Their “playbook” was to develop a design for every attractive market segment and geography; reduce costs and size; be the first to provide popular wireless technologies; dominate supply chains and carrier shelf space; market their brands globally and aggressively; and push out competitors via scale and brand strength. Then they would repeat the process, packaging updates and variations of successful handsets to stimulate upgrade cycles. Nokia was particularly aggressive in gaining scale efficiencies, market share, and moving to dominate the supply chain, resulting in significantly higher profitability versus the rest of the industry relative to its market share in the late 1990s.

Past Successful Voice/SMS Practices Become Smartphone Challenges Incumbents Entered the Smartphone Market. As smartphones – largely from BlackBerry – started to become popular, incumbent vendors launched their smartphones (e.g., Samsung Blackjack and Instinct, Nokia E61, LG Voyager, Motorola Q, O2 XDA, etc.). While these sold well initially to early adopters, in an oft-repeated pattern, some smartphone sales subsequently stalled as mass market buyers never materialized.

Exhibit 42: Incumbent Smartphone Offerings Met with Limited Success

Some incumbent vendor smartphone offerings have to date met with mixed success; LG Prada and Voyager, HTC Diamond, and Samsung Instinct phones, for example, look “iPhone-like”, offering unique touchscreen interfaces with similar icon-based software with animations and fingertip control. The Samsung Blackjack, Motorola Q, Samsung Omnia have been heavily promoted by AT&T, Verizon Wireless and others, priced attractively at $49 to $99. And all offer email and browsing through Windows Mobile. New versions are constantly released with updated hardware specifications, yet post-launch sales momentum of some of these models has waned, with mixed product reviews. Return rates are often higher on some incumbent vendor smartphones (versus iPhone or BlackBerry, for example) because some users find them complex, unreliable or frustrating to use for email, browsing and other tasks.

Source: RBC Capital Markets Research

Past Successful Practices Became Challenges in Smartphones. Many of these time-proven strategies that made incumbents hugely successful in voice/SMS phones became challenges when competing with the smartphone challengers, along several dimensions: • Organizational – legacy (voice/SMS) organizations held all the power, determined priorities,

resources, and thus subordinated (even suppressed) smartphone initiatives; • Entrenched Processes – time-honed product development, supply chain, manufacturing, sales,

and distribution processes were not optimized for, and were slow to adapt to, the smartphone market;

• Technology skills and talent – traditional technology strengths (“packaging”, voice/SMS technologies, hardware, etc.) lagged RIM and Apple (e.g., software, wireless data) in developing iconic, craved, simple data-centric smartphone experiences;

• Channel/support – Traditional sales, distribution, and support processes faced challenges transitioning to the specialized sale & support demands of smartphones;

• Cannibalization – Threats of cannibalizing core voice/SMS business led to hesitation in prioritizing smartphones and innovative mobile data models to markets and customers; and,


52 Mike Abramsky

• Highly influenced by their customers – Carriers continued to strongly influence incumbent vendor product roadmaps, who in turn prioritized new handsets aligned to carrier priorities to target near-term visible market opportunities with defined ROI.

Data is Hard. Iconic data-centric smartphones are more difficult to design, engineer, manufacture, distribute, market, sell, and support than traditional voice/SMS cellphones or PCs. The constraints of mobile data-centric devices for data applications (involving unique issues like power consumption, software/hardware integration, network efficiency, data-centric UI designs, etc.) demand unique competitive advantages and skills at which, in our view, some incumbents lag relative to smartphone challengers. This includes areas such as power management, memory management, stack programming, ergonomics/UI (keyboards, touchscreen designed for the data user), data compression, security, and data modem (throughput, stability, flexibility/upgradability).

Complex vs. Simple, Powerful. Some smartphone offerings from Nokia, Motorola, LG, and Samsung, many powered by Microsoft or Symbian, sometimes pack more features, performance and the latest technologies than handsets from RIM or Apple. However, to date some incumbents’ smartphones have not sold as strongly or sustainably to mass market consumers. In our opinion, this is partially because of their complexity. Complex smartphones often include features that end up being rarely used, while also increasing the frustration and intimidation of the user data experience. This is particularly true for data-centric features like browsing, email and applications which are difficult to make simple. For example, virtually all incumbent smartphones have mobile web, yet consumers use some of them less than on Apple’s iPhone, sometimes because of complex, awkward browsers, complex connectivity configuration, non-intuitive software, and awkward UI. 85% of Apple iPhone owners use the mobile web, 1.5x the average smartphone (Windows, Symbian, RIM and Apple) and 6.5x voice/SMS phones, according to M:Metrics.

Exhibit 43: Complexity vs. Simplicity in Smartphone Design and User Experience

Nokia N97

iPhone

User Interface • S60 5th edition UI appears dated • Slow processor drag on usability • Multiple clicks

• Elegant, intuitive UI • Access to all apps and commonly used functions

with minimal “clicks”

Mobile Browsing • Acceptable experience but complex setup • Hindered by lack of multi-touch

• Rich, desktop-like mobile browsing experience

Email • Complex setup, slow “polling” experience • Easy to setup Apps and Developers

• Awkward Ovi Store experience – difficult to navigate, confusing mix of apps and “other stuff” like ringtones, wallpapers, etc.

• Easy to access and buy apps • iTunes PC jukebox huge advantage • Browse, download apps via iTunes or on device • Unmatched developer/app momentum

Multimedia • Standard S60 multimedia player • Difficult to sync with PC jukeboxes (e.g., iTunes) • Ovi multimedia store work-in-process; no video

content

• Simple and powerful “iPod” multimedia experience

• Huge library of music and video content available through iTunes


Horizontal Integration. In our view, a key characteristic of leading smartphone vendors is deep vertical integration: their control over all aspects of the value chain that produces their user experience: software, hardware and related services – and distribution, marketing, and support. Incumbents, by contrast, are largely horizontally integrated – focusing on design, marketing and R&D, but outsourcing manufacturing, software development, hardware, sharing common suppliers and components. The challenge of the horizontally integrated model is that it produces, in our view, less-than-optimal smartphone user experiences versus RIM, Apple and other challengers. “Data is hard”, demanding the tight integration of both software and hardware


Mike Abramsky 53

together which Apple and RIM use to create their distinctive delightful, addictive user experiences.

The Software Challenge Software Skill Challenges. As software (OS, UI, content, applications, etc.) becomes increasingly key to the smartphone experience, some incumbent vendors – used to designing the latest “checklist” of hardware features in next generation handsets – lag RIM and Apple’s skills in defining iconic software experiences that differentiate the less-compelling smartphones (those with less elegant and inconsistent UIs, and other subtle but critical usability deficiencies) from “hit” mass-market successes like iPhone or BlackBerry. The challenges for some hardware-centric incumbents is that the “crave” for smartphones is not about new “packaging” or including the latest wireless technologies, but is more about how software, hardware and content combine together to provide superior data user experiences (web browsing, email, apps, entertainment, productivity, etc.). These issues are not insurmountable: some incumbents may successfully address this software skill gap and remain competitive in smartphones.

Content and App Gap. These incumbent vendor challenges, in our opinion, extend to content and applications, where incumbent handset vendors face similar skill gaps in knowing what constitutes “hit” iconic mass-market application/content store software experiences. Some incumbent voice/SMS vendors have sometimes prioritized their own “storefronts” (e.g., Nokia Ovi Store, LG Application Store, Samsung Mobile Applications, Sony Ericsson PlayNow arena) or allowed their carrier customers to heavily influence specifications for their application stores, apps and content partners. As a result, some smartphones from incumbent vendors contain poorly-designed storefronts or awkward apps/content stores, or have inappropriate app/content pricing, discouraging developers and limiting consumer uptake. As well, some incumbent voice/SMS vendors have not yet shown their ability to develop and nurture a thriving developer ecosystem (e.g., Symbian only offers 1,000 apps, despite being in the market since 2001 and shipping more than 200 million units).

Why Google May Not Help All Incumbents Smartphone OEMs. Incumbent smartphone OEMs (Original Equipment Manufacturers) like Motorola, Samsung, LG, and HTC, challenged in software skills, utilize third-party software (largely operating systems, applications from Microsoft, Google, Symbian, Linux). While filling the gaps in their software capabilities, we believe some OEM smartphone vendors using third-party OS may continue to lag the iconic user experiences of the leading vertically integrated smartphone challengers like RIM and Apple – and thus may also lag these vendors in market share, pricing and margins. While the horizontally-integrated OEM model (OS, applications, hardware provided by different parties) worked in the PC sector, it presents more challenges in smartphones, where world-class performance, reliability and user experience are more difficult to achieve given the unique constraints of mobile (battery life, physical device limitations, limited resources (storage, processing, flash, etc.) unique UI issues, spectrum efficiency, etc.).

Google Android. Android, owned by Google and managed/developed by the Open Handset Alliance, is an open source mobile platform (see Vendor Share Outlook section) offered to mobile phone vendors for free. While it is possible some Android-powered smartphone vendors could become successful smartphone share leaders, we see few rivaling the success of iPhone or BlackBerry. Some of our reasons for this view include: • Many Functional, Few Iconic. Given smartphones are at the early stage of their cycle and

markets remain large, nascent and underpenetrated, we believe the best smartphone experience wins (garnering customer loyalty, market share, carriers’ hero positions and subsidies). While (with some unique exceptions), Android-powered phones are expected to offer satisfactory user experiences (email, browsing, applications, etc.), we believe vertically integrated smartphone vendors like RIM and Apple may continue to remain leaders through superior smartphone experiences. For example, reviews have suggested that Android’s UI is attractive and functional, but can be inconsistent at times, lacks polish (e.g., similar functions in different apps require different key strokes) and early devices (e.g., T-Mobile G1) had awkward form factors / keyboards and lacked full multi-touch (e.g., pinching, stretching). Although Android’s mobile web browsing is strong, its messaging and cloud experiences depend largely on OEM


54 Mike Abramsky

implementations. We believe most Android vendors are planning on developing UIs and apps on top of Android, which may lag RIM and Apple given many incumbents’ limited experience in software and services design and development and relationships with third parties. A few Android OEMs, however, may build strong software skills and successfully compete as smartphone leaders.

• Possible Fragmentation in Brand, User Experience. Customization of the Android experience appeals to the OEMs, for whom which differentiation is important. But customization may fragment the Android user experience across OEMs. Google may thus face challenges avoiding diluting the Android brand, as buyers perceive the device as a Motorola or HTC or Samsung smartphone as opposed to an Android smartphone. This contrasts with the strong global smartphone brand of RIM and Apple with their consistently applied, iconic smartphone user experiences across devices and carriers. For example, HTC has added support for Microsoft Exchange and Exchange ActiveSync on its non-Google branded devices, which isn’t available as part of the standard Android installation on competitor devices (or even HTC’s Google-branded devices). Motorola, Samsung, Sony Ericsson and others are planning to release Android devices with customized UIs and apps.

• Possibly Lag in Deploying Innovations. When launching or updating software with new innovations, Google may face rising complexity and delay of accommodating the impact of changes across its OEM partners, many of whom have customized Android independently and have a diversity of hardware platforms with different features and form factors (this is the same challenge faced by Microsoft). As the number of Android-powered OEM handsets increases on more carriers, updated versions of Android with new innovations may deploy inconsistently, as multiple OEMs test and update their various UIs and custom apps to ensure compatibility, and carriers certify and deploy the updates on their own timetable. Conversely, where an OEM updates their own customized implementations (or new innovations from RIM and Apple, or carriers move to update wireless technologies, etc.) in a manner that requires changes to Google’s underlying OS, tools, apps, etc, Google may face challenges in managing the rising complexity of accommodating these changes.

• Managing the complexity of supporting multiple OEMs. With the rise in multiple OEMs, Google may face an increasingly complex support structure across its multiple handset partners. This may lead to inconsistent support experiences (e.g., one carrier on an Android device offers different support benefits and restrictions versus another).

• Developer and App Scale. As the number of OEMs increases, the expanding variety of Android OEM device platforms, performance specs and implementations may lead to fragmentation of third-party applications. Despite its open source architecture, which theoretically is capable of supporting multiple hardware profiles and platforms, application developers may need to increasingly contend with a wide range of Android OEM hardware and software customizations in developing, updating and supporting Android applications. This may increase challenges and costs for some Android developers.

• Android Alone Insufficient. We do not believe that Android alone will be sufficient to overcome challenges for all incumbents in competing in smartphones against RIM and Apple and other pure-play vertically integrated leaders. To succeed competitively in smartphones, as previously discussed in this section, some incumbents may still need to overcome the challenges of adapting their existing voice/SMS or PC centric cultures, processes, etc. to the challenges of data. Where they exist, they will still need to fill these skill gaps (particularly in software and software/hardware integration) – things which Android cannot alone provide. Some of these incumbents may successfully overcome these challenges and become smartphone leaders.

Trapped by Their Carrier Customers Successful voice/SMS incumbents, like Nokia, Samsung, and LG, are aggressive, innovative and customer-focused. Many of their most successful handsets have been developed in partnership with their carrier customers. However, our view, is that successful smartphone vendors like RIM and Apple take a different path, creating new innovations not principally based on carrier or consumer feedback, but on their own predictions of future market need. The smartphone leaders’ innovations often target markets for which there currently exists little demand, are not necessarily


Mike Abramsky 55

what customers are asking for today, and for which there is little hard evidence of future growth. By contrast, some incumbent vendors are culturally oriented to collaborate with carriers, and often test consumer demand ("we are customer focused, why would we not involve our customers in product directions?") through research before finalizing new products. Yet as we have previously discussed, wireless carriers – culturally accustomed to specifying features, pricing, timing of voice/SMS handsets – in our opinion face challenges and skill gaps in defining “hit” data-centric smartphone user experiences (software, hardware, content, applications, pricing, sales, support) like the iPhone or BlackBerry. Many carriers tend to prioritize innovations that target proven markets and offer probable growth and improved profitability. This carrier input heavily influences many incumbent product roadmaps, budgeting and planning processes, and are oriented to maximizing next year’s growth and profitability. As a result, some incumbents prioritize incremental product innovations (faster, less cost, thinner, new designs, new form factors, latest “check list” of gadgets and features, etc.) over higher risk, speculative, transformational innovations that carriers might not be asking for (RIM’s BES, Apple’s application store, Palm’s Synergy). The historically successful mantra of “listening to our customers” may inhibit some incumbents from prioritizing risky initiatives that target unproven markets.

Other Challenges “Upending” Threat. Some incumbents, in our view, face challenges to “upending” their business model – strategy, product roadmap, products, budgets, channels, technologies, pricing, marketing, recruit/comp – to elevate and transition to smartphone-oriented business processes (e.g., elevating smartphone roadmaps over voice/SMS, reorganizing around software versus hardware, altering HR and budget allocation practices, etc.). Disrupting their organizations deeply may be difficult to justify, given low visibility to the scope and size of the smartphone market (currently only 10% of total handsets), and that smartphones have only nominal financial impact to incumbent sales versus the large revenue streams and cash flows from existing voice/SMS handset businesses. This hesitancy can stifle – even suppress – necessary changes to organizations, budgets, resources, power, decision-making and priorities to compete in smartphones and against pure-play challengers like RIM and Apple who are not constrained by legacy voice handset organizations and established hierarchies. Some incumbent managers in power and leadership (many of whom came up through the ranks by being successful in building incumbent businesses, who “own” the largest legacy businesses or biggest customers, and have the most pull in the organization) may strongly protest at any significant diversion of resources, funding, or organizational priority towards smaller speculative smartphone initiatives, which, they rightfully argue, their largest customers are not asking for. They argue instead these resources and priorities should be allocated towards more incremental initiatives they can sell today and customers want. Even the rank and file sometimes resists the disruption of market changes, resulting in stalled or slower decision-making.

Product Roadmap Challenges. Some incumbents’ business processes and product roadmap justifications have been established over many years, involving proven design/development processes, management approvals and highly ingrained ROI hurdles. Many incumbents have multi-year product roadmaps that are often segmented by technology (e.g., 2G to 3G to 4G, etc.) or pricing or geography or performance, and thus face challenges in modifying these quickly to adapt to emerging smartphone market segments, which may transcend legacy market segmentation.

NIH (Not Invented Here) Syndrome. We see similarities to the challenges faced by some incumbents from smartphones to those faced by once-dominant, incumbent technology leaders experiencing disruptive shifts in their end markets. Some of these dominant technology industry leaders (Xerox, Kodak, GM, IBM, Polaroid, Digital Equipment, Siebel, Sun, etc.) were similarly smart, customer-focused, and well-run, yet failed to adapt (sometimes even recognize) new trends that threatened their leadership until too late. Some of these similarities, in our view, include: • Often these leaders believed their companies’ dominance, incumbency, leading install base and

scale would prevail over new challengers. They failed to recognize fully or accept how dramatically different organization management, different technology skills, different business models, perspectives, relationships, fresh talent – were all needed to compete in the new, evolving technology arena.


56 Mike Abramsky

• Some of these former leaders could not justify the risk of cannibalizing or disrupting their existing businesses or ceding organizational power. They failed to fully nurture, elevate and fund highly transformational ideas from their own organizations.

• Some incumbent technology leaders tried to M&A their way into the new paradigm (e.g., acquiring an on-demand division, buying an Internet and software team, acquiring software vendors, etc.) – but those efforts didn’t pay off, because the acquired company cultures weren’t nurtured, prioritized and supported by the incumbent culture. Similarly, some incumbent smartphone vendors, in our view, can’t just “acquire” their way into smartphones, and hope they’ll then produce an iconic winning product that competes with RIM, Apple, and Palm.

HTC. Some incumbents may be able to adapt to compete successfully in their smartphone franchises. HTC, in our opinion, has been reinventing itself, and has a strong possibility of being a leading smartphone competitor. The company is leveraging its investment in software (HTC now has over 1,000 software engineers, out of 8,000+ total employees) and its strategy of transitioning away from the ODM model. Its Android initiatives appear compelling, such as the HTC Hero featuring HTC’s proprietary Sense UI, which incorporates an unique UI, user customizable widgets that display pushed content (twitter feeds, weather, email, calendar, world times) on the home screen, and integrates various communication channels (phone, email, text, social networking) into a single view. However, as discussed, we believe there is ample room in the market for four to five vendors to dominate, and thus HTC’s success is not necessarily a zero sum game for Apple, RIM and Palm.


Mike Abramsky 57

Vendor Share Outlook Smartphone Market Large Enough to Support Multiple Vendors. We believe the smartphone market is large enough to accommodate four to five smartphone vendor leaders. At 165 million users in calendar 2008 and projected to grow to 766 million by calendar 2012, we believe that the fast-growing global smartphone market can support both Apple and RIM.. In our view, “RIM versus Apple” misses the larger opportunity as both should be able take share from some incumbent voice/SMS, PC, and consumer electronics vendors.

Exhibit 44: Data-Centric Smartphone (Units) Vendor Share Outlook 2008A Data-Centric Smartphone Share (Units)

Other

27%

Palm

3%

Nokia

36%

Apple

11%

RIM

18%

HTC

5%

Samsung 3.7%

Motorola 2.0%

Sony Ericsson 1.5%

2012E Data-Centric Smartphone Share (Units)

RIM

18%

Nokia

26%

HTC

7%

Apple

16%

Palm

4%

Other

29%

Samsung 5.4%

Motorola 3.7%

Sony Ericsson 2.2%

2008A-2012E Data-Centric Smartphone Share (Units) Shifts

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008A 2009E 2010E 2011E 2012E

% o

f D

ata-

Cen

tric

Sm

artp

hone

Uni

ts Palm

Other

RIM

Apple

HTC

Nokia


Challenger Share Gains = 2-3x Growth Upside. Off share gains from incumbent vendors, we believe successful challengers may double or triple their revenue by 2012. Each 100bps global handset share gain from the incumbents (Nokia, Motorola, Samsung, LG, Sony Ericsson) equates to $4 billion in incremental revenue. With 1.8% of TAM in 2008, RIM needs to achieve 10% of TAM in order to triple current revenue; similarly, with 1.1% of TAM Apple needs to achieve 8.5% of TAM to triple its current smartphone revenue.


58 Mike Abramsky

Exhibit 45: Sensitivity Analysis of Market Share Gains

Conservative Base Bullish

Incremental Smartphone Share (%) 2.5% 7.5% 15.0%

# of Smartphone Units (MM) 31.0 93.0 186.0

Incremental Revenue Impact1 ($B) $10.5 $31.4 $62.7

% Impact to FTM Smartphone Revenue:

RIM2 60% 181% 363%

Apple3 69% 206% 412%

% Share Price Impact:

RIM4 60% 181% 361%

Apple5 23% 69% 138% 1. Based on smartphone industry average ASP of $337. 2. Based on RBC CM’s current $17.3B FTM revenue outlook. 3. Based on RBC CM’s $44.7B FTM non-GAAP revenue outlook. 4. Based on RBC CM’s 21% FTM EBIT margin outlook and 17x FTM P/E. 5. Based on RBC CM’s 24% FTM non-GAAP EBIT margin outlook and 19.5x FTM P/E. Source: RBC Capital Markets estimates

Apple Apple to Capture 5.7% Global Share by 2012. We view the iPhone as a 10-year platform, with significant growth and share gains yet ahead. Shipping 13.7 million handsets in calendar 2008, Apple holds an estimated 1.1% of TAM; we forecast Apple’s market share to grow to 5.7% of TAM by calendar 2012. Apple has already taken steps to accelerate iPhone momentum and share gains, moving to more attractive pricing (starting at $99), expanding in-carrier distribution in more countries by eliminating exclusivity and expanding third-party distribution channels, supporting pay as you go and other carrier sales models, and growing its lead in mobile applications. iPhone advantages include Apple’s 100 million+ iPod install base and 300 million + iTunes users globally. There is a huge upgrade opportunity, further assisted by the strength of its global brand and its Mac franchise. Despite the iPhone’s introduction more than two years ago, competitors continue to lag iPhone’s sleek touchscreen experience, robust third-party applications platform, and tight multimedia integration. Off the strength of its brand, innovation, and customer loyalty, Apple is expected to retain its premium carrier subsidy versus competitors, sustaining above-peer margins for its smartphones. We believe Apple will sustain its lead in content, games, and apps, which we expect to expand to include mobile commerce, user-generated content, advanced gaming, etc. Apple’s design strategy (for both iPhone and Touch) to maintain UI continuity across devices offers scale benefits for developers who with a single app version can address Apple’s install base. Our long-term outlook reflects upside from possible additional iPhone SKUs (including next-generation LTE iPhone, a possible entry-level, low-cost, <$99 subsidized, prepaid iPod/phone) and variations in iPhone form factors for certain markets such as China (e.g., no Wi-Fi). We also expect Apple will continue to surprise investors and consumers with iPhone-related innovations that further expand iPhone’s addressable market opportunities (media, computing, video, etc.).

Challenges. Apple’s greatest risk – and greatest asset – in our opinion remains its iconic CEO Steve Jobs. Innovation remains alive and well at Apple, driven by its unique talent pool, strong management team and multi-year product roadmap. While we believe Apple can continue to launch products, retain its competitive advantages and lead in its key markets without Steve, it may, however, be challenging to sustain the same unique level of significant, disruptive innovations (iPod, iPhone) if Steve Jobs were not involved with the company. This may affect Apple’s abilities to sustain its premium margins, slow its growth rate and increase its vulnerability to competition. However, we do not view this as a near-term risk for investors, just a dynamic of the stock that bears ongoing monitoring, should Steve depart and the pace of innovation slow.


Mike Abramsky 59

Exhibit 46: Apple as % of Forecast Market, 2008A-2012E

2008A 2009E 2010E 2011E 2012E

RBC Data-Centric Smartphone Units (MM) 126.8 164.9 250.4 376.5 503.9

Apple Units Forecast 13.7 22.8 35.7 54.7 82.1

% Data Centric Smartphone Units 10.8% 13.8% 14.2% 14.5% 16.3%

% TAM (units) 1.1% 2.0% 2.9% 4.1% 5.7%

RBC Data-Centric Smartphone Users (MM) 165.2 247.5 374.1 553.7 766.1

Apple User Forecast 16.6 33.5 56.0 91.4 130.8

% Data Centric Smartphone Users 10.1% 13.5% 15.0% 16.5% 17.1%


RIM RIM Forecast to Capture 6.5% TAM by Calendar 2012. Mobile email is expected to remain the smartphone “killer app” globally, with RIM as its undisputed king – both for consumers and businesses. Shipping 22.6 million handsets in calendar 2008, RIM holds an estimated 1.8% of TAM; we forecast RIM’s market share to grow to 6.5% of TAM by calendar 2012. RIM’s sustainable advantages, in our view, include the intuitive, powerful data experiences, reliability and battery life, and its NOC/software/hardware ownership creating its unique, craved push-based “Crackberry” messaging experience. RIM possesses both unique hardware and advanced “back end” software capabilities, having developed: its OS, email client, wireless stack, NOC, and BES/BIS server. While not always first to market, RIM has – at several times in its history – successfully reinvented itself, evolving core designs via new innovations into new, iconic smartphones, thus continuing to expand its addressable markets and outsell incumbents. Examples include evolving its BlackBerry pagers to voice/data devices, evolving its QWERTY smartphones to the successful Pearl with SureType, and expanding from business to consumer markets. RIM’s smartphone brand has grown in strength globally, and it is increasingly known for compelling handset styles and designs, not just for its email experience. Unlike Apple, RIM’s design strategy is to expand its trademark Crackberry experience to multiple form factors (flip, touchscreen) to penetrate additional compelling markets (e.g., North Americans like flip phones, Europeans like sliders) and we expect additional SKUs and innovations. A significant source of RIM’s competitive advantage continues to be its global carrier leverage; BlackBerry remains compelling for carriers, as it offers superior carrier profitability, achieved via its superior spectrum efficiency and other unique aspects of its platform. Enterprise as well should continue to be an area of BlackBerry domination, as we expect RIM will continue to innovate to improve ROI and productivity of its devices and solutions, while maintaining its superior security, reliability and manageability advantages prized by IT. Ahead, RIM’s market opportunity lies along four fronts: domestically, internationally, consumer and business – all of which remain underpenetrated for smartphones. Internationally, RIM is now on most carriers (over 500 worldwide) and so growth now comes from upgrades, new data subscribers, and increasing BlackBerry share and sales productivity across its carrier partners. RIM continues to address larger, price-sensitive consumer markets via its broad pricing ranges, benefiting from carrier promotions discounting older iconic handsets (like Curves, Pearls) which consumers, SMBs and enterprises continue to snap up – as well as launching entry-level devices like the BlackBerry 8500.

Challenges. One growing challenge RIM faces, in our view, is with “front end” software (browsing, UI, bundled and downloadable applications, SDK, etc.). In the rapidly expanding consumer smartphone market, there is a growing consumer demand – popularized by Apple, Palm, and Google – for rich mobile browsing, a thriving consumer application ecosystem, and intuitive, elegant smartphone UI. RIM’s UI and PIM, while reliable and functional, have remained essentially unchanged. To succeed in the consumer market, RIM may need to evolve its UI, browsing, application and mobile media experiences (both on devices and on the PC), to pace competitors and meet evolving consumer expectations. RIM may also need to improve its SDK to be more developer-friendly. We believe RIM is fully aware of these issues and is already moving to address them while retaining its trademark spectrum efficiency, battery life, reliability and


60 Mike Abramsky

carrier profitability. We note that RIM, while historically lagging competitors in rolling out software innovations (attachment viewing, OTA downloads, HTML email, the opening up of its platform to third-party developers, Application Store, etc.), subsequently recovered ground once launching its versions.

Exhibit 47: RIM as % of Forecast Market, 2008A-2012E

2008A 2009E 2010E 2011E 2012E


RIM Unit Forecast 22.6 34.1 49.5 65.5 92.8


% TAM (units) 1.8% 3.1% 4.1% 5.0% 6.5%


RIM Total Subscribers 21.0 37.1 57.7 83.5 115.5



Palm The New Palm. Following a period of decline and facing oblivion, we believe Palm has the potential for a remarkable smartphone turnaround. With its new strategy, WebOS product line and under the direction of a new management team headed by ex-Apple executive Jon Rubenstein, Palm (like RIM and Apple) is, in our opinion, well positioned for smartphone leadership. Our outlook calls for Palm to quickly recover, growing from an estimated 1.3% data-centric smartphone shipment market share (0.2% TAM) or 2.2 million units in calendar 2009 to 3.6% share (1.3% of TAM) or 18.2 million units in calendar 2012. Targeting the PIM-centric segment of the Palm legacy, Palm in our view faces near-term risks but has the “special sauce”: vertically integrated, controlling the end-to-end smartphone software and hardware platform, a ground-up developed smartphone OS platform with unique innovations like multitasking, Synergy (user data integration), developer-friendly SDK, and compelling and clever hardware/software designs – all combine to offer a unique, iconic smartphone experience, differentiated from incumbent vendors. While lacking the scale, brand and distribution of Apple and RIM, we believe Palm’s strong management team has the potential for superior execution, avoiding many of the historic, pre-Rubenstein execution and product stumbles that caused Palm to lose share leadership. The huge positive reception to the launch of Palm’s Pre, its first WebOS device – despite the already broad awareness of iPhone – illustrates pent-up demand for innovative, non-intimidating smartphone user experiences. The accolades for Pre – despite its early drawbacks (one carrier, limited applications) – also show Palm has the potential to provide that rare iconic smartphone experience, above competitors, some incumbents and in the company of RIM and Apple. We believe Palm’s WebOS is strategic to Palm’s potential success: incorporating integration with the cloud and Web services for consolidating multiple sources of personal data, utilizing WebKit-based mobile web browsing, integrating an intuitive UI and friendly notifications – and using popular Web development standards, targeting a broad addressable application developer community. We see WebOS as a platform, spawning a family of smartphones addressing a global market opportunity at multiple price points and form factors, including a $99 GSM version expected to launch first in the U.S. Palm, in the interim, may continue to offer Windows Mobile devices like the Treo for enterprises, though these could be phased out over time as WebOS gains enterprise features. We assume Palm continues its global carrier distribution expansion following Sprint, expanding to multiple carriers globally over the next two years, initially with Bell in Canada and O2/Telefonica in Europe, and subsequently with other North American and European carriers.

Challenges. As a turnaround, Palm faces near-term challenges, including: a) execution; b) product and distribution ramp; and, c) litigation/other. Palm does not benefit from strong brand tailwinds, scale, marketing budgets and balance sheets as do RIM and Apple, and thus may need to be more measured in its product and distribution roll out, matching it to its available resources, which could stretch out its product/carrier ramp. At this early turnaround phase, we also expect Palm may encounter execution “speed bumps” (quality, production, network, and others). As well, Palm


Mike Abramsky 61

must woo back disenfranchised users and carriers who lived through quality problems at the “old” Palm. The company may also encounter other roadblocks (like litigation from Apple). We do, however, expect these risks to diminish as Palm gains scale and momentum.

Exhibit 48: Palm as % of Forecast Market, 2008A-2012E

2008A 2009E 2010E 2011E 2012E


Palm Units Forecast 3.6 2.2 7.1 10.6 18.2


% TAM (units) 0.3% 0.2% 0.6% 0.8% 1.3%


Palm Shipments By OS Platform (MM)

Web OS 0.0 1.2 6.7 10.1 17.7

Microsoft Windows 0.8 0.4 0.4 0.5 0.5

Palm OS (Legacy) 2.8 0.6 0.0 0.0 0.0

Palm User Forecast 5.1 4.3 8.8 14.0 23.5



HTC Corporation Transforming from ODM to Smartphone Contender. Currently shipping ~7 million units per year, our forecast is for HTC to rise from 0.5% of TAM in calendar 2008 to 2.5% of TAM by calendar 2012. HTC has the potential, in our view, to also become a leading smartphone vendor. Taiwan-based HTC is the world’s largest smartphone ODM (manufacturing devices for OEMs and carriers) and the largest producer of Windows Mobile devices (>33% of total Windows Mobile (WinMo) shipments in calendar 2008). Recently, however, HTC has reinvented itself, moving away from the ODM model, increasing its mix of HTC-branded device launches, deepening its software capabilities (now has 1,000 software engineers of 8,000+ total employees), improving manufacturing quality, and increasingly utilizing Google’s Android OS. In December 2008, HTC acquired One & Company to transform external designs of HTC’s smartphones and develop HTC’s TouchFLO UI, used in the WinMo-powered Touch Diamond 2, Touch Cruise, and Touch HD. HTC has also developed its proprietary Sense UI user interface, offered on the Android-powered HTC Hero, which incorporates user customizable widgets that display pushed content (twitter feeds, weather, email, calendar, world times), and integrates various communication modes (phone, email, text, social networking) into a single view. HTC offers integration with Microsoft Exchange and ActiveSync on its branded devices. While not as vertically integrated as RIM and Apple (because HTC still relies on the Android), HTC’s move towards owning both software and hardware technology, coupled with its unique and innovative form factors, UIs and custom apps, may position it for smartphone leadership in some segments. However, as discussed, we believe there is ample room in the market for four to five vendors to dominate, and thus HTC’s success is not necessarily a zero sum game for Apple, RIM and Palm.

Challenges. While HTC has increased its investments in software, it faces challenges as it remains dependent on Microsoft and Google’s underlying applications, tools, architecture and their media, content and services strategies. Additionally, new innovations may be delayed, waiting for Microsoft or Google OS updates to support certain new hardware features (e.g., new sensors, new screen technology, etc.). For example, Windows Mobile has yet to support multi-touch, 2.5 years since Apple first demonstrated it. This may make it challenging for HTC to continue to fully differentiate itself to carriers from other Android and Windows Mobile vendors and match RIM, Apple, and Palm’s introduction of new innovations to the market.


62 Mike Abramsky

Exhibit 49: HTC as % of Forecast Market, 2008A-2012E

2008A 2009E 2010E 2011E 2012E


HTC Units Forecast 6.6 11.0 17.5 28.3 35.8


% TAM (units) 0.5% 1.0% 1.4% 2.1% 2.5%


HTC Shipments By OS Platform (MM)

Google Android 0.6 3.3 7.4 11.9 15.1


HTC User Forecast 8.1 15.1 25.1 40.1 54.8



Nokia Nokia: Defending Market Position. The global leader in handsets with 468 million units shipped in calendar 2008, Nokia, in our opinion, may continue to face challenges transitioning to smartphones, particularly with software, data and content. We expect Nokia to lose some smartphone share, dropping from 36.8% of smartphone units in calendar 2008 to 25.8% in calendar 2012 (Nokia’s overall share of TAM should still grow, from 3.8% TAM to 9.0% TAM in calendar 2012, given smartphone market growth). Nokia’s smartphones run Symbian OS, acquired by Nokia in 2008 (Nokia plans to make the platform available as open source to other manufacturers). While Nokia has led the market in delivering stylish, appealing-looking smartphones offering the latest hardware features (some superior to RIM and Apple like higher-res cameras, integrated flash memory size, wireless technology), its Symbian-powered user experiences lag the richer, intuitive smartphone data experiences of RIM and Apple’s OSs. Symbian-powered Nokia smartphones don’t offer multi-touch UIs (have resistive rather than capacitive touchscreens), rich mobile web browsing, application ecosystems, and innovative media players. Some of its smartphones have been criticized as being too complex for data-centric functionality like email and browsing, with some buyers using them as PIM organizers with voice/SMS only (no data plan). Mobile content as well has proved a challenge for Nokia: its Ovi mobile content service – offering content like music, gaming (N-Gage), sharing (user-generated photos, videos), app purchases, ringtones, downloads, and sync of calendars, contacts, files, etc. – has been to date disappointing (based on early reviews). This has not been through lack of trying: Nokia has spent more than $8.5 billion in software and data acquisitions (Intellisync, gate5, Loudeye, Twango, NAVTEQ, PLAZES, OZ Communications, bit-side, and others). However, out of 400 million phones, Nokia shipped only an estimated 47 million data-centric smartphones in calendar 2008 (this would exclude Nokia’s smartphones bought without full data plans). Nokia’s subscription “Comes with Music” service, which allows unlimited downloads of DRM-restricted music for two years, is only available on a select number of handsets (e.g., not yet available for N97, but available for Nokia 5800) and involves an ~$100 premium versus devices without “Comes with Music”. As shown by Microsoft’s Zune struggle against Apple, consumers have shown little interest in DRM-restricted music subscription services, since they are limited to playback on certain devices and for a limited time. Microsoft recently announced it is planning to bring Microsoft Office Mobile and other Microsoft software to Nokia’s Symbian devices. These issues are not insurmountable, Nokia may be able to address these challenges and successfully compete in the smartphone market.


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Exhibit 50: Nokia as % of Forecast Market, 2008A-2012E

2008A 2009E 2010E 2011E 2012E


Nokia Units Forecast 46.7 53.9 70.3 108.9 129.9


% TAM (units) 3.8% 4.8% 5.8% 8.2% 9.0%


Nokia User Forecast 56.1 82.0 111.3 161.6 206.4



Samsung Balancing Windows Mobile and Android. As the second largest mobile phone manufacturer shipping 200 million units annually, Samsung had only 0.4% TAM (5 million units) in smartphones in calendar 2008. We expect Samsung to grow its smartphone franchise from 0.4% TAM in calendar 2008 to 1.9% TAM in calendar 2012. Samsung’s expected Android smartphone launches in late 2009, and should improve sales of what has been to date limited smartphone success (Samsung sold only 4 million Windows Mobile powered devices in 2008 (e.g., Blackjack, Omnia)). Conversely, its overall voice/SMS handset market share will, in our opinion, face some losses to RIM, Apple and other smartphone leaders. Samsung lags RIM, Apple and Palm in software capabilities, and is horizontally integrated, lacking its own proprietary smartphone OS, utilizing Windows Mobile, Symbian and Android (over an estimated 80% of Samsung’s smartphones sold in calendar 2008 were running Windows Mobile). Samsung offers a variety of Windows Mobile smartphones, from the QWERTY keyboard Jack, Epix, Ace and Saga, to the Propel slider and the Omnia touchscreen. Samsung’s Omnia smartphone series incorporates Samsung’s TouchWiz UI for Windows Mobile. TouchWiz updates the standard Windows Mobile UI to handle finger touch inputs (as opposed to stylus) and features a customizable home screen with multiple “widgets” like clock, photo browser, music player, etc. (Similar to other UI layers on top of Windows, users are required to navigate between the TouchWiz UI and Windows, which some reviewers have disliked.) Samsung launched the i7500 Galaxy in 2009, its first Android-powered smartphone. We expect Samsung to differentiate its Android devices and offer a customized touchscreen UI with 3D animations and transitions, as well as integrate its Android devices with its “Samsung Mobile Applications” app store. Samsung may commission developers to release proprietary games and apps available only on its app store for its Android devices. We believe Samsung will focus on being first to market with innovative new hardware (like high resolution screens, and cameras) and packaging/form factors (e.g., “world’s thinnest Android smartphone”).

Exhibit 51: Samsung as % of Forecast Market, 2008A-2012E

2008A 2009E 2010E 2011E 2012E


Samsung Units Forecast 4.7 6.0 12.5 20.3 27.1


% TAM (units) 0.4% 0.5% 1.0% 1.5% 1.9%

Samsung Shipments By OS Platform (MM)

Google Android 0.0 0.8 5.3 9.1 12.1


Other 0.8 0.4 0.3 0.0 0.0


Samsung User Forecast 5.7 8.9 16.9 28.4 40.6




64 Mike Abramsky

Motorola "Hail Mary" Smartphone Play. To us, Motorola represents a “Hail Mary” play in smartphones, with its turnaround largely dependent on the sustained success of its pending Android-powered offerings. We expect Motorola to grow from 0.2% TAM in calendar 2008 to 1.3% by calendar 2012. Facing larger challenges with its global handset franchise, Motorola has faced losses in handset market share, customers, slowed product development, and departing key employees. Still the third largest mobile phone manufacturer, the company shipped 100 million units in calendar 2008, down 37% from 159 million units in calendar 2007. In smartphones, Motorola to date has had limited success (sold only <1 million WinMo-powered smartphones in 2008 (e.g., Motorola Q) along with another 1.5 million Linux-based Ming smartphone in Asia) but has moved to shift and prioritize its handset and smartphone offerings around Android (scaling back WinMo, Symbian and Linux). Pending Android smartphone launches in late 2009 and 2010 are expected to improve MOT’s smartphone momentum, while Motorola’s overall voice/SMS handset market share will continue, in our opinion, to face losses to RIM, Apple and other smartphone leaders. Motorola is planning to incorporate unique applications and user experiences into its Android-based devices – such as highly integrated social networking integration – not part of the standard Android OS. While the launch of these devices is likely a near-term positive for Motorola’s smartphone franchise, given its larger challenges, we remain cautious regarding how strong and sustainable its efforts may be to catch up to the user experiences and momentum of smartphone leaders RIM and Apple.

Exhibit 52: Motorola as % of Forecast Market, 2008A-2012E

2008A 2009E 2010E 2011E 2012E


Motorola Units Forecast 2.6 3.4 9.0 14.2 18.6


% TAM (units) 0.2% 0.3% 0.7% 1.1% 1.3%


Motorola Shipments By OS Platform (MM)

Google Android 0.0 0.8 5.3 9.1 12.1


Other 1.7 1.7 0.8 0.4 0.2

Motorola User Forecast 4.8 5.8 11.9 19.8 28.0



Sony Ericsson Juggling Three Smartphone Platforms. We expect Sony Ericsson’s share of the smartphone market to remain essentially static, at 0.8% share of TAM in calendar 2012 versus 0.2% in calendar 2008. Positioned as a premium feature phone vendor, but lacking its own smartphone OS, Sony Ericsson has lost market share through the market’s shift to smartphones, with its total handset share falling from 8.8% in calendar 2007 to 8.2% in calendar 2008. Sony Ericsson remains committed to three major smartphone platforms – Symbian, Windows Mobile, and Android – which increases support costs, user confusion and complexity as software and data become more important to the smartphone experience. Sony Ericsson’s strategy of differentiating its smartphone experiences atop these platforms through innovative UIs, widgets and mobile services has not yet been proven, as shown in its Xperia X1 smartphone, which features a unique “panel” UI on top of Windows Mobile. Some reviewers have disliked Xperia’s user experience (appears unpolished and inconsistent, requiring users to manually switch between the “panel” UI and Windows Mobile and offering weak integration with core phone functionality (e.g., call, SMS notifications)). The Xperia experience remains constrained by Windows Mobile limitations (e.g., lacks multi-touch). To differentiate its Android-based devices, we believe Sony Ericsson is developing an innovative UI atop Android, similar to its “panel” UI for Windows Mobile, likely to


Mike Abramsky 65

feature sleek 3D animations and transitions, value-add widgets, direct integration with social networking services and other custom apps. Over time, Sony Ericsson may leverage Sony’s Walkman, Playstation and/or Cybershot franchises and incorporate robust multimedia, gaming and/or camera capabilities into its Android handsets. Sony is likely to integrate its Android devices with its MyPlay online music store, which it has already launched for O2 UK.

Exhibit 53: Sony Ericsson as % of Forecast Market, 2008A-2012E

2008A 2009E 2010E 2011E 2012E


Sony Ericsson Units Forecast 1.9 1.6 4.3 7.8 11.0


% TAM (units) 0.2% 0.1% 0.4% 0.6% 0.8%


Sony Ericsson Shipments By OS Platform (MM)

Google Android 0.0 0.0 1.3 2.4 3.6


Other 1.8 1.0 1.3 2.1 2.7

Sony Ericsson User Forecast 3.4 3.3 6.0 10.6 16.0



Other Vendors (PC, Phone, etc.) We expect other vendors, including PC manufactures (Dell, HP, Acer, and Lenovo) as well as smaller phone manufacturers (LG, Sharp, Panasonic, NEC, and Fujitsu) to launch smartphones and connected mobile devices – particularly, the PC vendors, where the rise in netbooks and the commoditization of traditional PCs is forcing PC manufacturers to prioritize mobile devices and smartphones. However, we do not believe – given the aforementioned competitive advantages required to be successful in the smartphone market – that PC vendors nor smaller phone vendors will succeed in becoming smartphone leaders (although they may become smaller, niche smartphone players). They may survive by selling smartphone units bundled with their own offerings, or in certain niches, channels or customer bases where they are dominant. We see the aforementioned smaller mobile phone vendors losing share to smartphone challengers, with their shares declining from 19.6% of data-centric units in calendar 2008 to 17.5% in calendar 2012 (TAM rises from 2.0% in calendar 2008 to 6.1% in calendar 2012 on growth in the smartphone market).

Exhibit 54: Other Vendors as % of Forecast Market, 2008A-2012E

2008A 2009E 2010E 2011E 2012E


Other Units Forecast 24.8 30.2 44.6 66.3 88.4


% TAM (units) 2.0% 2.7% 3.7% 5.0% 6.1%


Other User Forecast 44.7 58.1 80.8 104.6 150.7




66 Mike Abramsky

Mobile OS Share Outlook OS/Platforms Becoming Standards. Similar to how iconic software applications popularized PCs (e.g., VisiCalc for Apple II and Lotus 1-2-3 for IBM PC), mobile applications are a critical catalyst for future growth of data-centric smartphones, data subscribers, and vendor dominance. Initially, mobile applications lagged the vibrant third-party applications marketplace associated with the PC or the PDA because of OS fragmentation, carrier reluctance to open their networks, and a lack of economic incentive (revenue, distribution, and scale), consumer convenience (App stores, app-centric OSs, easy payment, etc.) and a developer-friendly ecosystem (SDK, tools). With the iPhone and its App Store, iTunes, app-enabled OS software and SDK, Apple opened the floodgates to mobile application momentum. Along with subsequent application stores from Google (Android) and RIM, third-party apps for smartphones began to flourish, and a vibrant app ecosystem is fast becoming “table stakes” for smartphone differentiation and success.

Still Early, 3-4 OS. We believe it is very early in the evolution of the smartphone application/OS market. Although apps on the iPhone (now numbering 65k with 1.5B downloads to date) have seemingly exploded, this stage of app development is to us reminiscent of early websites (a time when, for example, newspaper and magazine websites were simple HTML versions of their print publications), which paled in richness to some of today’s interactive, multimedia website experiences as network speeds, tools and PC technologies developed. Given our thesis for early smartphone market segmentation (as described in the Smartphone Market Segmentation section), we see room in the market initially for perhaps three to four dominant smartphone operating systems (if that, and no more, given the challenges that wireless carriers face in supporting more than one or two smartphone platforms, along with content/app developers who also can only support two to three platforms). In time, smartphone operating systems may further consolidate to two or three, similar to consolidation in other consumer tech platforms like gaming consoles, PCs, Internet search, browsers, etc., with the survivors not necessarily first movers (recall Excite, @Home, Lycos, Hotbot, Ask Jeeves, AOL; or Mozilla, Netscape, etc.).

Apple, RIM, and Google Seen To Dominate Near Term. We see Apple, RIM, and Google initially dominating the smartphone OS market, with Apple in the lead due to its dominance of the media-centric segment, and RIM leading the productivity-centric smartphone segment. Google, in our view, is likely to lead near term given its near-term traction with OEM smartphone vendors but faces uncertain status longer term. Palm’s WebOS is expected to stake out a smaller but significant leadership position within the PIM-centric segment. Windows Mobile has lagged innovations from Apple, RIM, and Google and thus ceded market share; Microsoft is planning a significant release, Windows Mobile 7, in 2010 which may help it regain momentum. While this release may close innovation gaps, by the time it reaches the market it may face significant challenges regaining OEM market share versus Google (particularly if Microsoft sustains its software pricing model). Symbian will, in our opinion, face significant challenges, and is expected to lose share to OS from Apple, RIM, and Google.

Significant Smartphone Platform Share Shifts Expected. We forecast Apple OS to rise from an 11% share of total data-centric smartphone units in calendar 2008 to 16% in calendar 2012 on international momentum, further innovations and lower priced devices. RIM’s share is expected rise from 17.8% share of total data-centric smartphone units in calendar 2008 to 18.4% in calendar 2012 on international momentum and a move into late adopter buyers. Google Android is expected to quickly accelerate share gains, rising from a 0.5% share of total data-centric smartphone units in calendar 2008 to 12% calendar 2012, largely at the expense of Microsoft as a rising number of handset OEMs like Motorola, Samsung, LG and Sony Ericsson shift to Android from Windows, as well as OEMs using Android to replace RTOS (real-time operating systems) on high-end feature phones. With its compelling WebOS user experience and increasing carrier momentum, Palm is expected to increase its OS share from 1.1% of total data-centric smartphone units in calendar 2009 to 3.5% in calendar 2012. Our outlook on Palm is positive, but each has its own up/down scenarios dependent on overcoming challenges, building competitive advantages, and successful uptake of pending product cycles. Given its later re-entry into the consumer market (with WinMo 7) and assuming it sustains its current pricing structure, Microsoft is expected to cede some OS share to Android, declining from 13% of total data-centric smartphone units in calendar 2008 to 11.5% in calendar 2010; our outlook assumes Microsoft’s share modestly


Mike Abramsky 67

recovers to 12.5% in calendar 2012, which is contingent on Microsoft regaining OEM handset share following the release of WinMo 7. Symbian shows the most dramatic decline, from a 46% share of the data-centric smartphone market in calendar 2008 to 35% in calendar 2012. Other platforms (like Linux) are forecasted to decline from 9% in 2008 to 2% in 2012.

Exhibit 55: Data-Centric Smartphone (Units) Platform Share Outlook 2008A Data-Centric Smartphone Share (Units)

Palm

2.2%

Other

9.4%

Microsoft

13.0%

RIM

17.8%

Apple

10.8%

Google Android

0.5%

Symbian

46.3%

2012E Data-Centric Smartphone Share (Units) Other

2.0%Palm

3.5%

Symbian

35.3%

Apple

16.3%

Microsoft

12.5%Google Android

12.0%

RIM

18.4%

2008A-2012E Data-Centric Smartphone Share (Units) Shifts

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008A 2009E 2010E 2011E 2012E

% o

f D

ata-

Cen

tric

Sm

artp

hone

Uni

ts Google Android

Palm

Other

RIM

Apple

Microsoft

Symbian


Google Android Android, Google’s open-source mobile platform (unveiled in November 2007, along with the Open Handset Alliance, a group of 47 hardware, software and telecom partners that manage development) has recently had strong near-term momentum as an OEM smartphone OS. We expect Android’s share of data-centric handsets to steadily rise from 0.5% in calendar 2008 (0.1% TAM) to 12.0% in calendar 2012 (4.2% TAM). Android’s advantages include its: low/no cost to OEMs; high level of customizability; bundled Android UI and apps; browsing experience; tight integration with Google’s cloud services; and, vibrant developer and mobile app ecosystem. Thus, in our view, Android will see near-term traction with OEM smartphone vendors who prize the opportunity to leverage Google’s 100 million-plus online base. Android appears positioned to gain early momentum with a portion of the entry-level voice/SMS phone market moving to smartphones, particularly with RTOS voice/SMS phone vendor OEMs, with Google well suited for entry-level, price-sensitive former users of these phones upgrading to smartphones.


68 Mike Abramsky

OEM Value Proposition. Android continues to gain critical mass with handset OEMs, a large number of whom appear committed to launching Android devices, including HTC, Samsung, Motorola, LG, Sony Ericsson and others. Google’s pricing – free – may offer 5% cost advantages over a licensed OS like Microsoft, assuming Windows Mobile charges $10/unit for a smartphone with average $200 bill of materials (BOMs). Early OEM momentum has been uneven – with some OEMs having difficulty releasing devices on schedule due to engineering challenges. We expect OEMs to address the UI shortcomings as they come up the learning curve and begin to roll out proprietary UIs, though device development may remain challenging. The standard Android UI provides a modern smartphone experience, with a webkit-based mobile browser, touchscreen UI, app ecosystem (Android market), functional multimedia and mobile email (Gmail-centric). Android is available to OEMs under three models: 1) obligation free, giving OEMs liberty to customize and install on a variety of devices, but they may not use any Google apps (e.g., Gmail, calendar, etc.); 2) implementation “with strings”, where OEMs sign a distribution agreement with Google and may install Google apps; 3) “The Google Experience”, with Google branding on the handset, full installs of Google apps and unrestricted access to the Android market. We believe most vendors will adopt the implementation “with strings”, where they can develop their own UI and apps on top of the Android, yet still use Google apps. Google may over time grow new sources of mobile revenues, including advertising, carriage fees (broadcasting), in-store purchase transactions, and location-based marketing.

Exhibit 56: Profiles of Android OEMs

Est. Android

Launch Timing Shipments (MM) Share (%) Shipments (MM) Share (%) Smartphones (MM) Share (%)

HTC Fall 2008 0.0 0.0% 6.6 13.0% 5.9 4.7%

Samsung Fall 2009 196.6 15.9% 4.7 3.7% 3.9 3.1%

Motorola Fall 2009 100.1 8.1% 2.3 1.8% 0.9 0.7%

Sony Ericsson Fall 2009 96.6 7.8% 1.9 1.5% 0.2 0.1%

393.3 31.7% 15.5 20.0% 10.9 8.6%

2008 Voice/SMS Handset 2008 Smartphone 2008 Windows-Based

Equates to 66% of total Windows Mobile Smartphone shipments


Not iPhone Killers. While providing OEMs with satisfactory smartphone user experiences, with few exceptions (perhaps, for example, HTC) Android-powered smartphone vendors may face challenges becoming “iPhone killers”, given: • Despite customization, the smartphone experiences of horizontally integrated Android OEMs

are expected to lag user experiences from RIM, Apple, and Palm, who benefit from tighter integration of software/hardware via vertical integration. Also, sell-through of some early Android devices has been slower than expected given some of the roughness of the user experience (brought up in reviews).

• Customization by OEMs fragments the Android user experience, in contrast to the strong consistently applied, iconic smartphone user experiences of RIM and Apple. For example, HTC has added support for Microsoft Exchange and Exchange ActiveSync on its non-Google branded devices, which isn’t available as part of “The Google Experience” on competitor devices (or even HTC’s Google-branded devices).

• Android OS updates must accommodate customized implementations across multiple OEM partners, potentially creating delays in deploying new innovations. Conversely, OEM software/hardware updates may be delayed until Google makes necessary changes to Android.

• The rising number of OEMs may lead to inconsistent user support experiences across OEMs and carriers. Support is more critical and challenging in mobile (than on the Internet or PCs) where superior performance, reliability and user experience are more difficult to achieve given the unique constraints of mobile (battery life, physical device limitations, limited resources (storage, processing, flash, etc.) unique UI constraints, spectrum efficiency, etc.).


Mike Abramsky 69

• Despite its Open Source architecture, Android application developers may need to increasingly contend with the costs and complexity of developing and supporting a wide variety of OEM hardware and software customizations. Examples include various screen resolutions, QWERTY versus touchscreen keyboards, processor speeds, memory, sensors (e.g., GPS, accelerometer, etc.), and Wi-Fi support.

• Android alone may not elevate incumbent voice/SMS vendors to smartphone leadership. As discussed in the Some Incumbents To Face Challenges section, to become successful in smartphones, some voice/data incumbents may need to successfully upend legacy business processes, cultures, entrenched hierarchies, break carrier influences and recognize and fill skill gaps.

Exhibit 57: Google Android as % of Forecast Market, 2008A-2012E

2008A 2009E 2010E 2011E 2012E


Google Android Units Forecast 0.6 5.1 21.3 39.5 60.5


% TAM (units) 0.1% 0.5% 1.7% 3.0% 4.2%

Google Android Vendor Shipments (MM)

HTC 0.6 3.3 7.4 11.9 15.1

Motorola 0.0 0.8 5.3 9.1 12.1

Samsung 0.0 0.8 5.3 9.1 12.1

Sony Ericsson 0.0 0.0 1.3 2.4 3.6

Other 0.0 0.3 1.9 7.1 17.5


Google Android User Forecast 0.6 5.4 24.0 50.9 84.6



Microsoft Windows Mobile – Aiming To Regain Leadership. Having prioritized the enterprise and attempting to dislodge BlackBerry in this space over the past two years, Windows Mobile has lagged RIM, Apple and Google in consumer smartphone innovations (UI, hardware/software features, content, apps, developer tools, etc.) as well as continued to face some reliability and usability issues. As a result, Microsoft has ceded OEM, user and developer market share to RIM, Apple, and Google. WinMo’s share of data-centric handsets dropped from 18.4% in calendar 2007 (15.3 million units) to 13.0% in calendar 2008 (16.5 million units – an increase, however, slower than the rise in the market). Microsoft launched an interim WinMo release (6.5) this year offering improved UI with touch control, updated Internet Explorer and some integration with cloud services like “Windows Marketplace for Mobile” apps store and “MyPhone” for syncing text messages, photos, videos, and contacts to the Web. Given its 2010 re-entry in the market with Windows Mobile 7 (see below) and assuming it sustains its current pricing structure, Microsoft is expected to cede some OS share to Android in the near term, which we forecast will decline from 13% of total data-centric smartphone units in calendar 2008 to 11.5% in calendar 2010. Our outlook assumes Microsoft’s share modestly recovers to 12.5% in calendar 2012, which is contingent on Microsoft regaining OEM handset share following the release of WinMo 7.

Windows Mobile 7. Microsoft is planning a more significant release, Windows Mobile 7, in 2010. WinMo 7 is expected to deliver more complete consumer- and business-oriented, end-to-end experiences, deeper integration with its other platforms (Xbox, Web, Windows, Zune, Office, Exchange, etc.), along with structured tools, etc. which should improve OEM smartphone development. Microsoft believes WinMo 7 will help it regain mobile OS share momentum. The user experiences of the WinMo 7 release may well close prior innovation gaps with RIM and Apple, however, visibility to the competitiveness of these future offerings remains limited, given competitors will also continue to evolve their experiences. WinMo 7 is also expected to leverage


70 Mike Abramsky

Microsoft’s large Xbox install base (28 million users), PC install base (500 million “home” users), and hotmail (350 million users), possibly offering consumers management of and access to their personal data and content across platforms.

Uphill Battle. Regardless of its advantages, by the time Windows 7 reaches the market, competitors certainly won’t be standing still. Microsoft faces an uphill battle in regaining market share, including OEM share lost to Google, particularly if it sustains its existing software pricing model versus Google’s “free” offering without delivering a differentiated and superior user experience. However, if WinMo 7’s user experiences and possible innovations in OEM smartphone tools are strong, Microsoft could re-gain OEM handset share versus Android which could potentially shift market share back in Microsoft’s favor.

Horizontal Integration. As with Google, the horizontally integrated Microsoft OEM model, in our view, at this stage (6.5) faces inherent challenges to creating an “iPhone killer”. Per our thesis, at this stage of the smartphone market, unique, delightful, iconic smartphone user experiences are best provided via deep vertical integration, enabling superior, tight integration of software/hardware. Microsoft Windows Mobile 7 may, however, be planning to work closely with a select few OEMs to attempt to deliver a tightly integrated software/hardware user experience compelling enough to recover some market share.

Exhibit 58: Microsoft as % of Forecast Market, 2008A-2012E

2008A 2009E 2010E 2011E 2012E


Microsoft Units Forecast 16.5 20.2 28.8 46.8 62.7


% TAM (units) 1.3% 1.8% 2.4% 3.5% 4.4%

Microsoft Vendor Shipments (MM)

HTC 5.9 7.7 10.1 16.4 20.7

Samsung 3.9 4.8 6.9 11.2 15.1

Motorola 0.9 0.9 2.9 4.7 6.3

Palm 0.8 0.4 0.4 0.5 0.5

Others 4.9 6.4 8.5 14.1 20.2


Microsoft User Forecast 24.0 32.2 44.9 68.1 95.0



Symbian Transitioning to Open Source. With more than 200 million handsets shipped to date and a 52% share of the total smartphone OS market (all devices shipped, not just data-centric units), Symbian to date has been the world’s most popular OS. Going forward, however, our forecast for Symbian shows dramatic decline, from 46% share of the data-centric smartphone market in calendar 2008 to 35% in calendar 2012. A significant portion of Symbian users do not fall under our data-centric definition, i.e., aren’t utilizing full data (browsing, email, apps) and not taking full data plans. Now owned by Nokia (acquired in 2008), Nokia accounts for 85-90% of total Symbian shipments. Thus, Symbian may lose OEM share due to concerns in utilizing an OS offered by a competitor or if Nokia prioritizes Symbian development around its own handsets. As an example, Nokia has not yet (may not) open up its Ovi mobile services strategy to other Symbian partners.

Some Symbian-powered smartphone user experiences continue to lag the rich, intuitive smartphone data experiences of RIM and Apple’s OSs. Symbian-powered Nokia smartphones don’t offer multi-touch UIs, rich web browsing, a broad app ecosystem, and innovative multimedia. Often, some Symbian smartphones have been criticized as being too complex for data-centric functionalities like email and browsing versus competitors, with some buyers using them as PIM organizers with voice/SMS only (no data plan). Symbian’s user experience is also


Mike Abramsky 71

fragmented across multiple UIs (e.g., S60 for Nokia devices, UIQ for Sony Ericsson and Motorola, MOAP for NTT DoCoMo handsets from Fujitsu, Sony Ericsson, Mitsubishi, Sharp, others) designed for various markets/regions. An updated open source version of Symbian with consolidated UIs, expected in 2010, may close some of its usability gaps against competitors. In the mean time, Symbian is expected to continue to lose some traction with OEMs, who are prioritizing development of other platforms like Android (e.g., Motorola closed its Symbian development team late 2008).

Exhibit 59: Symbian as % of Forecast Market, 2008A-2012E

2008A 2009E 2010E 2011E 2012E


Symbian Units Forecast 58.7 65.0 86.8 141.4 177.9


% TAM (units) 4.7% 5.8% 7.1% 10.7% 12.4%

Symbian Vendor Shipments (MM)

Nokia 46.7 53.9 70.3 108.9 129.9

Others 9.4 9.7 14.9 30.4 45.4


Symbian User Forecast 76.0 103.0 140.3 204.9 272.0



Other Platforms Other Platforms (e.g., Linux) to Decline to <5%. Other mobile platforms include Linux and proprietary platforms like Sidekick. Linux is popular in Japan, where NEC and Panasonic offer FOMA smartphone devices for NTT DoCoMo (e.g., Panasonic P906i, and NEC N906i), and in some Asia-Pacific countries, where Motorola offers its MING smartphone. Our outlook calls for other mobile platforms to decline to a 2.0% share of data-centric smartphone users in calendar 2012 (10 million shipments), down from a 9.4% share in calendar 2008 (12 million shipments). We expect mobile Linux and proprietary platforms to grow slower than the smartphone market, given the maturity of Linux-based smartphones in Japan. Mobile Linux may remain popular as a low-cost smartphone platform for emerging markets, though no leading Linux implementation has emerged, and some vendors may increasingly adopt open or established platforms like Symbian, Android, or Windows, and no longer justify the cost of maintaining another platform.

Exhibit 60: Other Platforms as % of Forecast Market, 2008A-2012E

2008A 2009E 2010E 2011E 2012E


Other Units Forecast 12.0 15.9 21.7 18.4 10.2


% TAM (units) 1.0% 1.4% 1.8% 1.4% 0.7%


Other User Forecast 23.2 33.1 43.4 41.9 45.8




72 Mike Abramsky

Smartphone Market Profitability While gross margins (GMs) and average selling prices (ASPs) may further moderate (on product mix) in order to target the smartphone mass market, we foresee sustained earnings power for leading smartphone vendors like RIM and Apple in the foreseeable future.

Margin Focus. Apple and RIM have achieved above-average profitability (with the Apple iPhone at ~55% GMs and RIM at 40-45% versus the industry average of low 30% for voice/SMS handsets). Apple’s 55% GMs on the iPhone are due to its estimated $400 carrier subsidy (versus other smartphones at $200-250), given iPhone’s ability to drive mobile data subscribers. RIM is able to attain attractive 40-45% GMs despite offering a range of smartphones (from the high-end Bold to the entry-level Curve 8520) as a result of its high margin service business ($2-10/month/ subscriber), which reduces the carrier’s load on its network bandwidth. In our view, Nokia’s smartphone GMs (estimated at 35-40%) lag Apple and RIM, as it lacks Apple’s carrier subsidy and RIM’s service fees; HTC generates GMs of just 30-35% on its Windows Mobile and Android smartphones. Margins for RIM in late 2008 took a downshift from 50-55% to 40-45% as RIM shifted product mix to target the consumer and more costly touchscreen markets, raising investor uncertainty and valuation volatility; investors subsequently remain cautious over potential future margin declines for RIM and the sector.

Mix-Shift Ahead. Early-adopter uptake of iconic smartphones is currently driving significant smartphone growth for RIM and Apple. Future growth, in our view, will come from a higher mix of late adopters – a more price-sensitive, style-sensitive segment (particularly in international markets where ARPUs and ASPs are traditionally lower, handset subsidies are lower, prepay is higher, and voice/SMS feature phones’ share is higher). This is expected (already begun) to precipitate a product mix shift for RIM and Apple, etc. towards lower blended ASPs (i.e., a higher mix of $99 smartphones targeted to entry-level users, lower on carrier promotions), given that late-adopter buyers are more handset price sensitive. RBC/Changewave survey data (April 2007, 3,500 respondents) shows that lowering handset pricing can accelerate buying momentum 30-40%.

Exhibit 61: Market Expansion on Lower Smartphone ASPs

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2008A 2009E 2010E 2011E 2012E

Smar

tpho

ne U

nits

(M

M)

$0

$50

$100

$150

$200

$250

$300

$350

$400

Smar

tpho

ne A

SP (

$/de

vice

)

Smartphone Units Smartphone ASP Source: RBC Capital Markets estimates

As well, these late adopters may require a higher level of marketing investment to entice them to upgrade to smartphones and move to data plans. While still remaining healthy for iconic smartphones, carrier subsidies are also expected to moderate (on average) with a mix-shift to lower ASP smartphones to target the market, along with a shift to more attractive, “tiered” data plans designed to entice more price-sensitive late adopters.


Mike Abramsky 73

Healthy Profitability. Despite this expected ASP mix-shift, we see sustainable margins and healthy earnings power for leading smartphone vendors like RIM and Apple, given an expected increase in overall gross profit dollars. Drivers include: 1) consumers’ willingness to pay a premium for new smartphone innovations; 2) successful challengers offer superior smartphone experiences versus competitors and some incumbents; 3) continued healthy carrier subsidies for select leading smartphone vendors; 4) favorable industry structure; and, 5) possible margin benefits from new services.

Premium for Innovation. Millions of consumers remain eager to pay a premium for craved, iconic smartphone experiences and new innovations. Apple’s iPhone 3GS, offering much faster speeds and other updates, outsold the $99 iPhone 8GB 3G by a 2:1 margin (we estimate Apple sold 2.2 million iPhone 3GS versus 3.0 million iPhone 3G last quarter – but iPhone 3GS was only available for less than a month, which equates to 1.4 million/week versus 231,000/week) during a deep recession, selling 1 million units in the first weekend. This is, in our view, a sustainable dynamic for the next two to three years, as smartphones (and mobile web and applications) remain at the early stage of their innovation cycle. Leading smartphone vendors like RIM, Apple, and other potential leaders, are expected to continue to launch multiple new product cycles ahead, incorporating yet-unveiled, yet-to-be-craved smartphone innovations, stimulating upgrades and demand. The surprising and significant consumer reception to the launch of the Palm Pre on Sprint shows consumer appetite remains large for compelling smartphone innovations, i.e., there are still great launches (with line-ups) yet ahead. New iconic smartphones with craved innovations will continue to command higher ASPs, subsidies and margins, higher than older versions, less iconic/compelling competitive alternatives or entry-level smartphones. Recent smartphones like the BlackBerry Storm and Palm Pre have higher ASPs than previous generations (e.g., Curve, Treo/Centro).

Pricing Strategies. Given that significant, yet-unveiled smartphone innovations and new product cycles remain ahead, we anticipate two-tiered smartphone pricing strategies; attractively priced but higher (e.g., $199 MSRP, $400-600 ASP) for new smartphones offering latest innovations, and $99/lower MSRP (<$350 ASP) pricing, targeting the late-adopter price-sensitive segment –particularly, internationally. RIM and Apple’s current product mix already accommodates $99 and lower priced devices, although we expect their mix of entry-level devices priced at $99 or less to rise. These $99/lower smartphones, however, are likely to offer less powerful or advanced technologies (such as lower resolution cameras, lower res displays, less memory/processing power, wireless technologies, less gadgets, etc.) with lower BOM costs than the $199 smartphones, appealing to price-sensitive buyers looking for core smartphone functionality, while delivering satisfactory margins to vendors. And we expect RIM and Apple, etc. to continue to lower pricing on some of their older but still popular smartphone models which have already moved up the supply chain/manufacturing efficiency curves. At $99 and $199, smartphones undercut other devices in adjacent markets (like MP3 players, navigation devices, video gaming devices, TVs, PCs, etc.).

Carrier Subsidies. Given the relative similarity in BOMs between the leading vendors, carrier subsidies are a significant driver of smartphone vendor margins. Despite the expected rise in competitor smartphones entering the market – many initially powered by Android – our thesis remains that only a select group of leading smartphone vendors will offer the best, iconic, craved, non-intimidating user experience. These select smartphone vendors thus retain the power to justify a higher proportion of carrier subsidies, and promotions/shelf space because their craved distinct user experiences lead to superior data attach rates, new high-margin data subscribers, and higher data ARPU. In case of the 3G S iPhone a $400 average/unit, and $350-400 average/unit in case of RIM ($200-250 device subsidy plus RIM’s higher-margin redirector fees, which are estimated at $50-$250 over a two-year agreement) versus an average of $100-150/unit for high-end feature phones. Despite their cost to carriers, overall carrier subsidies on “hero” smartphones have increased, not declined, following the introduction of the iPhone 3G in 2008 as carriers seek to drive mobile data subscriber growth, reallocating subsidies away from high-end feature phones and less compelling smartphones that don’t sustainably sell to the mass market. For example, Verizon’s subsidy on the BlackBerry Storm is estimated at $300/unit, above RIM’s typical $200-250/unit device subsidy. We see higher subsidies as sustainable to the smartphone leaders, as long as smartphone penetration remains low and iconic smartphones continue to attract new or


74 Mike Abramsky

upgraded data subscribers. Within the enterprise and SMB market, which remains underpenetrated, carriers are also expected to continue to subsidize smartphones with superior security, manageability, reliability, and ROI.

Attractive Industry Structure. In our view, unique “gating factors” in the smartphone industry (different from the PC or feature cellphone or Internet industries which had weaker forces and thus underwent rapid commoditization) help resist commoditization and support healthy profitability. These “gating factors” limit smartphone vendor competition to a select few leading vendors, sustaining competitive barriers to most incumbents and new entrants. That only a few vendors will lead the market, helps support higher pricing and margin power over carriers, consumers, suppliers and competitors. These “gating factors” include: a) the complexity of making iconic smartphones; b) the fact that wireless carriers are unable to support or subsidize more than one or two smartphone OSs or iconic handsets each; c) iconic smartphone platforms are gaining a critical mass of developers and content, who also can only support two to three platforms; and, d) the size of the segment sufficient as to be commercially attractive to carriers, developers, smartphone vendors, and other stakeholders. This industry structure, in our opinion, establishes conditions for strong industry profitability. In other words, the best smartphone experience will continue to win at this stage of the cycle. We see these favorable conditions remaining in place until the gap between the iconic, craved user experiences and innovations of the select leading smartphone vendors begins to narrow against the user experiences of that of some incumbents or lower-cost competitors, at which point we would foresee greater threats to margins. However, we do not foresee this occurring for several years, by which time we expect Apple and RIM will have significantly greater share, scale, brand and market momentum than today.

Royalty Costs . Royalty costs remain a risk to smartphone margins. Smartphone manufacturers currently pay royalties of approximately 3-5% of the handset’s ASP to key 3G patent holders like Qualcomm, Nokia, Ericsson and others. Royalty costs for 4G network technologies like LTE may initially be higher than 3G – similar to the initial transition from 2G to 3G – and possibly impact initial 4G gross margins. These increases could be offset by higher pricing for the new technology, however, manufacturers may have difficultly fully passing along higher licensing costs to consumers. Nortel (large LTE patent holder) has suggested that a 1% royalty for its patents on all LTE handsets is reasonable, which would be in addition to royalties from other patent holders.

RBC CM Smartphone Margin Outlook Smartphone ASPs and GMs Outlook. Our outlook calls for smartphone ASPs to decline 6% per year from an average of $337 in calendar 2008 to $265 in calendar 2012 on a mix-shift to entry-level smartphones. We expect smartphone industry GMs to decline 590bps from 43% in calendar 2008 to 37% in calendar 2012, with the four times increase in market size, and still more attractive than the low 30% average voice/SMS handset GMs in calendar 2008. We expect entry-level smartphones, like the BlackBerry Pearl Flip or a possible iPhone “Nano”, to rise from 26% of total smartphone units in calendar 2008 to 48% in calendar 2012. For RIM, in our model this translates to a decline in GMs from 43.5% to 39.4% and ASPs from $345 to $287; and for Apple, blended iPhone non-GAAP GMs in our model drop from 55% to 45% and blended iPhone ASPs from $550 to $450.

Exhibit 62: Smartphone Margin Outlook 2008A 2009E 2010E 2011E 2012E

Mix of Entry-Leve Smartphones 26.4% 30.2% 36.9% 44.8% 47.7% Entry-Level Smartphone ASP ($/device) $229 $219 $209 $200 $191 Premium Smartphone ASP ($/device) $376 $365 $354 $343 $333

Blended Smartphone ASP ($/device) $337 $321 $300 $279 $265 Entry-Level Smartphone GMs 35.0% 33.6% 32.3% 31.0% 29.7% Premium Smartphone GMs 46.0% 45.3% 44.6% 44.0% 43.3%

Blended Smartphone GMs 43.0% 41.9% 40.4% 38.6% 37.1%



Mike Abramsky 75

For the smartphone challengers, we believe ASP/margin declines to penetrate the mass market are mitigated by the following factors: a) RIM and Apple’s current product mix, which already accommodates $99 and lower pricing (with subsidies); b) current pricing strategies – expected to continue – for RIM and Apple to introduce new products with the latest innovations at existing (e.g., $199) pricing to the early-adopter market, and offer less premium-featured or older handsets at entry-level (e.g., $99 or lower) pricing to late-adopter and international markets; c) continued reallocation of carrier subsidies to those challenger products uniquely able to sustainably attract new high-margin data subscribers over time.

RIM, Apple, and Palm Margin Factors. For “redirecting” the data through its NOC, carriers pay RIM a “redirector fee” of $2-10/month/subscriber, effectively an indirect subsidy which assists margins. RIM’s hardware margins are estimated at 33-36%, while overall blended GMs are 40-45% including high-margin redirector fees (at 13-15% of revenue) and an estimated 80% margin. We view these redirector fees as sustainable, given this service remains both difficult for competitors to replicate and attractive to carriers in a world of ever-increasing consumer demand for spectrum-consuming mobile data experiences. RIM is also mitigated by its efficiency and high profitability for carriers, which helps protect against subsidy declines. RIM’s business user segment (including its large portion of buyers/owners who prize BlackBerry for both personal and business use) also protects higher ASP (for security, manageability advantages) given its indirect user subsidy through corporate reimbursement. Apple’s margin declines are, in our view, offset by Apple’s power to leverage its unique position in the market via innovation, branding, iTunes/App store ecosystem, computing halo effect, and focus on premium buyers (even within the late majority segment, similar to iPods) allowing it to negotiate premium carrier subsidies versus competitors. We also expect Palm’s margins to be more resilient given its differentiated software platforms (WebOS for Palm, or UI layers on top of Android/Windows for others) which delivers a compelling user experience versus standard Android and Windows smartphones.


76 Mike Abramsky

Smartphone Market Scenario Analysis Product Cycles Versus Business Cycles. While the total global handset market remains vulnerable to global economic slowdown, and the data-centric smartphone market (particularly the consumer segment) remains at risk from economic headwinds, we see the data-enabled smartphone market as a “market within a market”, growing faster than the general handset market, for the following reasons: 1) new product cycles (handsets, applications, networks) and global transition from voice to smartphones help the smartphone sector outperform the slowing economic cycle; 2) smartphones appear less discretionary than other purchases; 3) the data-centric smartphone market is international, with growth in developing/emerging economies expanding rapidly, offsetting slower regions; 4) lower data pricing and handset pricing trends are improving smartphone affordability; 5) smartphones are just beginning to penetrate broader market segments like SMBs, students, vertical markets, which helps to offset weakness in traditional phone market segments; and, 6) ROI of mobile deployments. Affirming our view, recent RBC IQ / Changewave survey data (May 2009, 1,700 respondents) shows that despite tightening consumer wallets, consumers are unwilling to part with their cellphones. While many would part with TV service (44%), home phones (23%), or DVD/movie rentals (11%), only 3% of respondents would part with their cellphone service.

Smartphone Market Forecast Scenarios. Under three scenarios for economic growth/slowdown, our Scenario Analysis suggests 30% upside (Bull Case), 30% downside (Bear Case) to our data-centric global smartphone user/unit forecasts. The analysis shows smartphone market growth ranging from 24-52% CAGR and handsets from 300 to 675 million in calendar 2012. Our scenarios (see Exhibit 63 and 64) vary assumptions on GDP, total mobile phone penetration and growth, smartphone penetration and growth, and smartphone upgrade cycles. Our Bear Case assumes a global recession, contracting consumer and business spending, with intensive competition; our Bull Case assumes stronger-than-expected global consumer uptake, discounted data/handset pricing, high emerging market demand, and steady enterprise penetration.

Exhibit 63: Scenario Analysis 2012E Outlook 2008A Bear Case Base Case Bull Case Assumptions: CY10 GDP Growth (%) -1% 2% 4% Global Mobile Phone Users (B) (CAGR) 3.7 4.9 (7% CAGR) 5 (8% CAGR) 5.1 (8% CAGR) Global Mobile Phone Shipments (B) CAGR) 1.2 1.4 (3% CAGR) 1.4 (4% CAGR) 1.5 (5% CAGR) Smartphone Penetration (% of TAM) 4.4% 11.1% 15.4% 19.6% Smartphone Upgrade Cycle (Years) 1.6 2.4 1.9 1.8 Results: Data-Centric Smartphone Users (MM) (CAGR) 165 540 (34% CAGR) 766 (47% CAGR) 993 (57% CAGR)

Consumer 135 459 667 874 Business 30 81 100 119

Data-Centric Smartphone Handsets (MM) 127 300 (24% CAGR) 504 (41% CAGR) 675 (52% CAGR) Handsets % of TAM 10.2% 21.6% 35.1% 45.5%

Consumer 104 255 438 594 Business 23 45 66 81



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Exhibit 64: Scenarios for Global Smartphone Penetration

10243

540

412

316240

993

722

451

287

165

0

200

400

600

800

1,000

1,200

2006A 2007A 2008A 2009E 2010E 2011E 2012E

Dat

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entr

ic S

mar

tpho

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(M

M)

57% CAGR

34% CAGR

Base case: 2% CY10 GDP

Bull case: 4% CY10 GDP

Bear case: -1% CY10 GDP

8357

300

222

165141

675

524

318

202

127

0

100

200

300

400

500

600

700

800

2006A 2007A 2008A 2009E 2010E 2011E 2012E

Dat

a-C

entr

ic S

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tpho

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(M

M)

Base Case Bear Case Bull Case

52% CAGR

22% CAGR


1. Base Case (RBC CM Forecast): Resilient Smartphone Uptake Within a Sluggish Economy. In this case, the U.S. economy undergoes a sluggish U-shaped recession through calendars 2009/2010, with GDP growth slowing to -3% in calendar 2009 and subsequently recovering to 2% in calendar 2010. Rising debt loads, concerns about job security, and pessimism on home prices and stock markets restrain consumer spending. Adoption/replacement of mobile phones, and upgrades to smartphones and mobile devices remain resilient on compelling new devices, new services/applications, lower pricing, enterprise ROI, and international growth. In this scenario, data-centric smartphone users grow from 165 million in calendar 2008 to 766 million in calendar 2012, or 15% of total mobile phone users and a 47% CAGR. Data-centric smartphone handsets rise from 127 million in calendar 2008 to 504 million in calendar 2012, or 35% of TAM and a CAGR of 41%, with the replacement cycle easing modestly to 1.9 years (from 1.6 years). Consumer data-centric smartphone users rise from 135 million in calendar 2008 to 667 million in calendar 2012 (87% of total), a 49% CAGR; business users grow from 30 million in calendar 2008 to 100 million in calendar 2012 (13%), a 35% CAGR.

2. Bear Case: Global Recession and Competitive Headwinds Hurt Smartphones. With intensifying pressures from rising debt loads, tight credit, job losses and unemployment, and poor consumer confidence following collapses in home prices and stock markets, this scenario assumes a more protracted W-shaped or L-shaped recession, with -4% U.S. GDP growth in calendar 2009 and remaining weak in calendar 2010 at -1%, before slowly recovering in calendars 2011/2012. International economies also slow on recessionary pressures – although not as slow as in the U.S. and Western Europe. Discretionary consumer spending contracts, with adoption/replacement of smartphones, iPods, HDTVs, PC cards/modules, etc. visibly slowing. Despite early positive


78 Mike Abramsky

indications, mobile email takes off more slowly outside the U.S. than expected, offering a headwind to smartphone traction. In this scenario, data-centric smartphone users rise from 165 million in calendar 2008 to 540 million in calendar 2012, or 11% TAM, representing a CAGR of 34%. Data-centric smartphone handsets rise from 127 million in calendar 2008 to 300 million in calendar 2012, or 22% of TAM, for a 24% CAGR, with the replacement cycle slowing to 2.4 years (from 1.6 years) as businesses reign in spending and consumers reduce discretionary spending. With a pull-back in consumer spending, consumer data-centric smartphone users are expected to grow from 135 million in calendar 2008 to 459 million in calendar 2012 (85% of total), or at a CAGR of 36%; business users reach 81 million in calendar 2012 (15%), for a CAGR of 28%.

3. Bull Case: Smartphone Surprise. Although the U.S. and global economies still face pressures, it is only a short-lived V-shaped recession, with U.S. GDP growth only slowing to -2% in calendar 2009 (includes a strong second-half calendar 2009), and then recovering to over 4% growth in calendar 2010. Spending on smartphones and mobile devices remains resilient (market growth estimated at 50-60% CAGR), driven by iconic new handsets (like Storm 2, iPhone 3GS, and Palm Pre) and form factors, lower data pricing, global carrier data promotions, 3G, compelling applications and international smartphone acceleration, particularly in emerging economies. The resilience of global consumer discretionary spending on smartphones and wireless data surprises investors, with higher-than-expected global replacement of voice phones, along with upgrades from older 2G to newer, faster, more full-featured 3G models. The smartphone market globally also gets a boost via adoption of mobile email and mobile browsing, particularly among new market segments (younger buyers, students, small businesses, and vertical markets). Smartphone uptake also grows faster than expected within broader geographies (China, Russia, India, Western Europe, Latin America, etc.). Our Bull Case scenario calls for data-centric smartphone users to reach 993 million in calendar 2012, or 20% of total mobile phone users, representing a CAGR of 57%. Data-centric smartphone handsets rise at a CAGR of 52%, reaching 675 million in calendar 2012, or 46% of TAM, with the replacement cycle steady at 1.8 years on innovative devices and innovative service plans. On significant consumer uptake, consumer data-centric smartphone users jump to 874 million in calendar 2012 (88% of total), a 59% CAGR; enterprise users reach 119 million in calendar 2012 (12%), representing a 41% CAGR.

Raising Targets Raising Price Targets. The shift to the next wave of computing will likely develop over the next several years. In our opinion, the emerging leaders in the smartphone market such as Research in Motion Limited (NASDAQ: RIMM; $70.72; Outperform; Above Average Risk), Apple Inc. (NASDAQ: AAPL; $159.59; Outperform; Above Average Risk), and Palm, Inc. (NASDAQ: PALM; $13.23; Outperform; Speculative Risk) represent compelling investment opportunities which warrant investor attention. We are raising our price targets on RIM from $100 to $150, on Apple from $190 to $250, and on Palm from $18 to $25, justified by increased market shares which, as visibility improves to the huge smartphone opportunity, offer upside to financials and potential multiple expansion.

RIM: Raising Target to $150 RIM Positioned for Smartphone Leadership. RIM, in our view, is positioned for long-term smartphone leadership and we foresee significant additions and expansion of its product line (consumer, enterprise, CDMA, GSM, and form factors) to continue market penetration. We believe RIM will continue to possess sustainable advantages in intuitive, powerful data experiences, reliability and battery life, and its NOC/software/hardware ownership, along with its unique, craved push-based “Crackberry” messaging experience.

Raising Estimates. On stronger smartphone growth, our F2010 estimates become $16.0 billion (32% Y/Y) in revenue and EPS of $4.26 (prior $15.9 billion, $4.16) and F2011 estimates become $21.2 billion (32% Y/Y) in revenue and $5.43 EPS (prior $20.1 billion, $5.16). We are introducing our F2012 estimates of $25.8 billion (22% Y/Y) in revenues and $6.40 in EPS. Our Scenario Analysis shows F2011 revenues from $17.0-22.0 billion and EPS from $4.06-$5.82.

Forecast to Capture 6.5% TAM by 2012. With an estimated 1.8% TAM (18% smartphones) in 2008, RIM needs only to achieve 3.1% TAM in calendar 2009 and 4.1% TAM in calendar 2010 to


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exceed our revised growth expectations for the next two years. In our view, with strong fundamentals and products targeting multiple segments, RIM will deliver above-peer growth, profitability and valuation upside.

Challenges. While not insurmountable, RIM has lagged competitors in “front-end” software (browsing, UI, bundled and downloadable applications, SDK, etc.). We believe RIM is already moving to address these challenges, while retaining its trademark advantages. Additionally, RIM may face further margin/ASP downshifts, on mix, as it targets the mass smartphone market.

Exhibit 65: RIM Scenario Analysis

F2011E F2012E F2011E F2012E F2011E F2012E

Assumptions/Results:

Revenue (MM) $16,966 $19,032 $21,151 $25,768 $21,957 $26,656

Y/Y Growth 15% 12% 32% 22% 33% 21%

Shipments (MM) 41.2 48.8 53.8 70.0 56.0 72.5

Sub Adds (MM) 18.0 20.0 21.9 27.3 23.3 28.3

Total Subs (MM) 58.9 78.9 64.1 91.4 66.2 94.5

Y/Y Growth 44% 34% 52% 42% 54% 43%

Gross Margin (%) 40.1% 39.2% 41.5% 40.5% 42.2% 42.0%

EBIT Margin (%) 18.9% 18.4% 20.4% 19.6% 21.1% 21.2%

GAAP EPS (FD) $4.06 $4.46 $5.43 $6.40 $5.82 $7.13

Y/Y Growth 6% 10% 27% 18% 30% 23%

High CaseLow Case Base Case


Exhibit 66: RIM Estimates Revision

F2012E

Current Prior Current Prior New

Revenue (MM) $15,995 $15,910 $21,151 $20,088 $25,768

Y/Y Growth 45% 44% 32% 26% 22%

Shipments (MM) 38.1 37.8 53.8 50.5 70.0

Sub Adds (MM) 17.3 17.3 21.9 20.8 27.3

Total Subs (MM) 42.2 42.2 64.1 63.1 91.4

Y/Y Growth 70% 70% 52% 49% 42%

Gross Margin (%) 42.7% 42.2% 41.5% 41.5% 40.5%

EBIT Margin (%) 21.4% 21.0% 20.4% 20.4% 19.6%

GAAP EPS (FD) $4.26 $4.16 $5.43 $5.16 $6.40

Y/Y Growth 23% 20% 27% 24% 18%

F2010E F2011E


Reaffirming Outperform and Raising Target to $150 (from $100), based on 1) revised higher F10/F11 EPS outlook (see above), and 2) multiple re-rating to 34x FTM P/E from 23x on higher investor sentiment on the smartphone market opportunity and RIM’s leadership position. Our revised $150 target is DCF-based (10.5% WACC (prior 11.5%), 4.5% terminal rate, FTM cash $6.40/share).

Apple: Raising Target to $250 Apple Positioned for Smartphone Leadership. We view the iPhone as a 10-year platform, with significant growth and share gains ahead. Our outlook reflects continued share gains in domestic and international markets, driven by distribution expansion, innovations in user experience, and


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additional iPhone SKUs. Apple’s iTunes/iTunes Store/device ecosystem remains a significant source of competitive advantage.

Forecast to Reach 5.7% TAM by 2012. With an estimated 1.1% TAM (11% smartphones), Apple needs only to achieve 2.0% TAM in calendar 2009 and 2.9% TAM in calendar 2010 to exceed our revised outlook.

Raising Estimates. Our F2010 estimates become $42.8 billion revenue (19% Y/Y) and $7.23 in GAAP EPS (prior $42.6 billion, $7.00) on 31.4 million shipments (52% Y/Y). We are introducing F2011 estimates of $50.3 billion revenue (18% Y/Y) and $8.25 in GAAP EPS on 49.3 million iPhones (57% Y/Y). Our F2009 estimates remain $36.0 billion revenue (11% Y/Y) and $5.90 in GAAP EPS. Our Scenario Analysis shows F2011 revenues from $45.7-52.1 billion and EPS from $7.08-$8.94.

Challenges. Innovation remains alive and well at Apple; however, it may be challenging to sustain the same level of disruptive innovation if Steve Jobs were not involved with the company. However, near term we believe CEO Jobs’ return will accelerate Apple’s already strong product innovation. Apple may face margin/ASP downshifts, on mix, as it targets the mass smartphone market.

Exhibit 67: Apple Scenario Analysis

F2010E F2011E F2010E F2011E F2010E F2011E

Assumptions:

iPhone Units (MM) 25.4 30.4 31.4 49.3 33.5 55.9

Y/Y Growth (%) 24.6% 20.0% 52.3% 57.1% 62.3% 67.2%

Results:

Macintosh 13,955 15,062 13,955 15,062 13,955 15,062

Music (iPod, iTunes) 12,141 12,126 12,226 12,619 12,260 12,761

iPhone 12,208 14,682 12,975 18,795 13,284 20,425Other1

3,676 3,860 3,676 3,860 3,676 3,860

Total Revenue ($MM) $41,981 $45,730 $42,833 $50,336 $43,176 $52,108

Total Revenue Growth (%) 16.6% 8.9% 18.9% 17.5% 19.9% 20.7%

Gross Margin (%) 36.4% 33.9% 36.8% 35.3% 36.9% 36.2%

EBIT ($MM) 8,786 8,455 9,119 9,995 9,271 10,780

EBIT Margin (%) 20.9% 18.5% 21.3% 19.9% 21.5% 20.7%

Non-GAAP EPS2$7.08 $6.61 $8.91 $9.55 $9.46 $11.42

GAAP EPS $6.97 $7.08 $7.23 $8.25 $7.35 $8.94

Bull CaseBase CaseBear Case

1. Other includes Peripherals, software, service. 2. Adjusted for iPhone subscription accounting. Source: RBC Capital Markets estimates


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Exhibit 68: Apple Estimates Revision

F2011E

Current Prior Current Prior New

Revenue ($MM) $36,011 $36,004 $42,833 $42,637 $50,336

Growth (%) 10.9% 10.9% 18.9% 18.4% 17.5%

Macintosh 13,294 13,294 13,955 13,955 15,062

Music (iPod, iTunes) 12,068 12,071 12,226 12,196 12,619

iPhone 6,785 6,774 12,975 12,809 18,795Other1

3,865 3,865 3,676 3,676 3,860

Gross Margin (%) 35.8% 35.8% 36.8% 36.2% 35.3%

EBIT ($MM) 7,307 7,305 9,119 8,826 9,995

EBIT Margin (%) 20.3% 20.3% 21.3% 20.7% 19.9%

Non-GAAP EPS2$8.89 $8.84 $8.91 $8.28 $9.55

GAAP EPS $5.90 $5.90 $7.23 $7.00 $8.25

F2009E F2010E

1. Other includes Peripherals, software, service. 2. Adjusted for iPhone subscription accounting. Source: RBC Capital Markets estimates

Raising Target to $250 (from $190), based on: 1) revised higher F2010/F2011 EPS outlook (see above); and, 2) multiple re-rating to 29x F2010E P/E from 23x on higher investor sentiment on the smartphone market opportunity and Apple’s leadership position. Our revised target is DCF-based (10.0% WACC (prior 10.5%), 4.5% terminal rate, FTM cash $48.74/share).

Palm: Raising Target to $25 “The New Palm”. While facing near-term challenges, the “New Palm” in our view possesses the “special sauce” necessary for global smartphone leadership: This includes its management team, vertically integrated model, ground-up designed WebOS platform, and unique innovations.

Forecast to Reach 1.3% TAM by 2012. We foresee additional share gains. With an estimated 0.3% TAM (3% smartphones) in 2008, Palm needs only to achieve 0.2% TAM in calendar 2009 and 0.6% TAM in calendar 2010 to exceed our outlook.

Raising Estimates. Our F2010 estimates become $2.1 billion revenue (177% Y/Y) and $0.25 in non-GAAP EPS (prior $1.7 billion, $0.08). For F2011, we expect $3.2 billion (52% Y/Y) and $0.75 non-GAAP EPS ($2.5 billion, $0.42). Our Scenario Analysis shows F2011 revenue from $2.4-3.6 billion and EPS from $0.31-1.06.

Challenges. As a turnaround, Palm faces near-term challenges, including: a) execution; b) product and distribution ramp; and, c) litigation/other. Palm lacks the strong brand tailwinds, scale, marketing budgets and balance sheets of RIM and Apple, and thus may need to be more measured in its product and distribution roll out, matching it to its available resources. These challenges are expected to dissipate with growth and momentum; any related valuation volatility offers entry points.

Reiterate Our Outperform Thesis: 1) WebOS is a key asset and competitive advantage in user experience; 2) we expect multiple WebOS devices; 3) expansion in global distribution; and, 4) additional innovations increasing demand.


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Exhibit 69: Palm Scenario Analysis

Non-GAAP F10E F11E F10E F11E F10E F11E

Total Smartphone Units (000s) 3,937 6,099 5,086 8,243 5,387 9,399

webOS Units (000s) 3,225 5,600 4,374 7,744 4,675 8,900

Revenue ($MM) $1,625 $2,357 $2,115 $3,215 $2,240 $3,583

Y/Y Growth (%) 113.2% 45.0% 177.4% 52.0% 193.9% 59.9%

Pro Forma EBIT Margin (%) 2.6% 6.3% 5.4% 10.3% 5.7% 12.9%

Pro Forma EPS1 $0.00 $0.31 $0.25 $0.75 $0.30 $1.06

1. Adjusted for amortization of intangible assets, stock-based compensation, and restructuring charges.

Low Case Base Case High Case


Exhibit 70: Palm Estimates Revision

Non-GAAP Current Prior Current Prior

Total Smartphone Units (000s) 5,086 4,142 8,243 6,461

webOS Units (000s) 4,374 3,430 7,744 5,962

Treo/Centro Units (000s) 712 712 499 499

Revenue ($MM) $2,115 $1,718 $3,215 $2,519

Y/Y Growth (%) 177.4% 125.4% 52.0% 46.6%

Pro Forma EBIT Margin (%) 5.4% 3.9% 10.3% 7.7%

Pro Forma EPS1 $0.25 $0.08 $0.75 $0.42

F2010E F2011E

1. Adjusted for amortization of intangible assets, stock-based compensation, and restructuring charges. Source: RBC Capital Markets estimates

Raising Target to $25 (from $18), based on: 1) revised higher F2010/F2011 EPS outlook (see above); and, 2) multiple re-rating to 2.4x F2010 EV/non-GAAP sales from 2.0x on improving investor sentiment as Palm continues to successfully scale and gain market share. Our revised target is DCF-based (10.5% WACC (prior 11%), 2% terminal growth, and FTM net cash of $8.02/share).


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Derivative Smartphone-Related Markets Exhibit 71: Smartphone-Related Markets and Companies

End User Hardware: Content:

PCs Mobile Marketing & Advertising

Netbooks Mobile Media

Peripherals Content Aggregators

Smartphones Music, Movies, Books, etc. Content Providers

Data Providers (demographics, retail data, etc.)

Smartphone Supply Chain:

Semiconductors Applications:

Enabling Technologies Books & Reference

Components Business

Wireless Instructure Education

ODMs / Contract Manufacturers Enterprise Application

Distribution & Logistics Entertainment

Retail Finance

Games

Services: Lifestyle

Wireless Carriers Navigation

Towers News

IT Services / Outsourcing On-Demand

Mobile Device Mgmt & Field Services Productivity

Social Networking

Infrastructure Software & Services: Utilities

OS / Software Infrastructure

Software Applications

Mobile Content & Multimedia

Mobile Video Infrastructure

Hosting Services (Cloud)

Security

Billing Systems

Source: RBC Capital Markets; Company Reports


84 Mike Abramsky

Companies Mentioned Apple Inc. (NASDAQ: AAPL; $159.59; Outperform; Above Average Risk)

Google Inc. (NASDAQ: GOOG; $444.89; Outperform; Average Risk)*

HTC Corporation (Taipei: 2498; TWD 339; Not Rated)

Microsoft Corp (NASDAQ: MSFT; $23.25; Outperform; Average Risk)

Motorola (NYSE: MOT; $7.06; Not Rated)

Nokia Corp. (NYSE: NOK; $12.45; Outperform; Above Average Risk)**

Palm, Inc. (NASDAQ: PALM; $13.23; Outperform; Speculative Risk)

Research in Motion Limited (NASDAQ: RIMM; $70.72; Outperform; Above Average Risk)

Samsung (Korea: 005930; KRW 720616; Not Rated)

Sony Ericsson (Tokyo: 6758; JPY 2605; Not Rated) *Covered by Ross Sandler ** Covered by Mark Sue

Company Descriptions Apple Inc. (NASDAQ: AAPL). Apple, founded in 1976, is a California-based designer, manufacturer, and marketer of differentiated personal computers, software and services. Products include the Macintosh line of personal computers, Mac OS X operating system and related application software (iLife, iWork, etc.), services, and peripherals, the iPod line of portable digital media players, the iTunes online media store, and the iPhone smartphone. Apple is positioned in the high-end consumer sector, has a strong global brand and fiercely loyal customer base, and is supported by its retail store network. Apple has approximately 18,000 employees.

Microsoft Corporation (NASDAQ: MSFT). Microsoft Corporation develops software, as well as manufactures, licenses, and supports software products for various computing devices worldwide. The company has five divisions. Client division develops and sells the Windows operating systems for PCs. The Server and Tools division develops and maintains components of the Windows Server System, including SQL database server and ISA server. The Online Service Group includes MSN and Live.com domains, which consist of email and instant messaging services, and online search and premium content; it also provides Internet access, and Web and mobile services. The Business Division includes the Information Worker segment (Office Suite) and Business Solutions segment, which provide software to manage financial, customer relationship, and supply chain management functions. The Entertainment and Devices division is comprised of the Mobile and Embedded Devices segment, which offers mobile software platforms that reside on PDAs, smartphones, and other devices, and the Home and Entertainment segment, which offers the Xbox video game system.

Palm, Inc. (NASDAQ: PALM). CA-based Palm, Inc. is a developer and manufacturer of mobile devices and smartphones. The company’s products include Palm Treo, Pre and Centro phones, as well as software, services, and accessories. Palm products are sold through wireless carriers and third-party retailers throughout the world, and Palm’s online store.

Research in Motion (NASDAQ: RIMM; TSX: RIM). Research In Motion, established 1984, is a Waterloo-based developer, manufacturer, and marketer of wireless handheld devices, software, and messaging-based wireless services. Products include the BlackBerry wireless handhelds, OEM radio modems, BlackBerry Enterprise Server (BES) software, and the BlackBerry data service backed by RIM’s NOC (Network Operations Center) infrastructure. Revenues are generated from the sale of wireless devices, recurring service fees (“redirector fees”) for managing carrier messaging infrastructure, enterprise server software revenue, the sale of radio modems to OEM manufacturers, and nonrecurring engineering (NRE) revenues.


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Glossary 1G – First Generation wireless technology. Based on analog or AMPS technology, 1G wireless networks were designed to carry voice traffic only. 2G – Second Generation wireless technology. Based on digital technology, 2G wireless networks offer increased voice quality and capacity over 1G systems. 2G systems traditionally supported voice and circuit-switched data service. 2G systems are being replaced today by 2.5G and 3G networks. 2.5G – Based on digital technology, adding 2.5G wireless technology to a 2G network provides packet-data service and improved data rates. 2.5G technology has been implemented as GPRS. 3G – Third Generation wireless technology. Based on digital technology, 3G wireless networks offer increased voice capacity and provide higher data rates than 2G and 2.5G networks. As defined by the International Telecommunications Union (ITU), 3G technology has been or will be implemented as CDMA2000, CDMA2000 1xEV-DO, WCDMA/UMTS and HSDPA/HSUPA. 3DES – Triple Data Encryption Standard. A private key symmetric cryptographic algorithm, that protects computer data by encoding (converting) the data three times for greater security. 3DES was issued as a Federal Information Processing Standard and is an updated version of DES. 3GPP – Third Generation Partnership Project, the standards body that oversees WCDMA . 3GPP2 – Third Generation Partnership Project 2, the standards body that oversees CDMA2000. 802.11 – 802.11 refers to the body of standards issued by the IEEE (Institute of Electrical and Electronics Engineers) for WLANs (wireless local area networks). 802.11 technologies use an over-the-air interface to connect a device (for example, a Wi-Fi-enabled laptop) and an access point to another network. The 802.11 family of technologies includes 802.11a, 802.11b, 802.11g and 802.11n. Access Point – A network device, or communication hub, that connects wireless devices to a wired local area network (LAN). AES – Advanced Encryption Standard. A standard for encryption intended to replace the DES (Data Encryption Standard). AES supports key lengths ranging from 128 to 256 bits. A-GPS – Assisted-Global Positioning System. A technology used to determine an end-user’s position in urban areas or dense outdoor environments. Differs from traditional GPS by adding an assistance server, which shares tasks with the A-GPS receiver to expedite position location. AMPS – Advanced Mobile Phone Service. The first analog cellular phone system commercially deployed in the 1980s. Analog – In telecommunications, an early wireless network technology involving the modulation of radio signals, which transmit information as sound waves over radio signals allowing one call per channel. API – Application Programming Interface. A set of standard methods or functions that application programs can use to access a particular set of services or tools, such as network services and program-to-program commands. For example, BREW® provides a set of APIs for the development of applications for wireless devices. ARPU – Average Revenue Per User. The monthly revenue generated by a consumer’s wireless device usage. ARPU is commonly used by wireless network operators and telecommunications/wireless analysts to estimate ROI (return on investment) measures for investments in network infrastructure and end-user services. Bandwidth – In wireless communications, the width or capacity of a communications channel. Analog bandwidth is measured in hertz (Hz). Digital bandwidth is the volume of data that a channel can carry and is measured in bits per second (bps). BCMCS – Broadcast Multicast Service. A standard being developed for third-generation (3G) cellular networks. Provides transmission of multimedia data from a single source to all subscribers in a specific area. Examples of multicast content could include video and movie clips, news, sports or stock quotes. Bluetooth – A short-range wireless technology that interconnects devices such as phones, computers, keyboards, microphones and mice. Bluetooth supports both voice and data communications.


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Bps – Bits Per Second. The standard for measuring the smallest unit of information in digital communications and data processing. BREW – Binary Runtime Environment for Wireless. An open, extensible client platform developed by Qualcomm to support system and application software, including personalized and branded user interfaces. May be used with most wireless devices and networks. A component of the BREW System. Broadband – Generic term for high-speed digital Internet connections, such as wireline, DSL or cable modems and wireless third-generation technologies, such as WCDMA (UMTS ), CDMA2000 1xEV-DO and HSDPA . CDMA – Code Division Multiple Access. A digital wireless technology that works by converting analog information, such as speech, into digital information, which is then transmitted as a radio signal over a wireless network. CDMA uses spread-spectrum technology, decreasing potential interference while achieving privacy. CDMA technology is the basis for third-generation (3G) wireless technologies which offer increased voice capacity and provide higher data rates than 2G and 2.5G networks. CDMA2000 1X – A family of third-generation (3G) wireless standards that offers enhanced voice and data capacity and higher data rates than previous, second-generation wireless standards. The CDMA2000 family of standards includes CDMA2000 1X and CDMA2000 1xEV-DO. CDMA2000 1xEV-DO – CDMA2000 1X Evolution – Data Optimized. Third-generation wireless technology that offers broadband data speeds to support applications such as VPN access, video downloads and large file transfers. CDMA2000 1xEV-DO is a direct evolution of CDMA2000 1X. CDMA2000 1xEV-DV – CDMA2000 1X Evolution Data and Voice. Third-generation wireless technology that supports high-speed voice and data on the same channel. Enables Internet connectivity for cellular phones, PDAs and other mobile devices. cdmaOne – A brand name, trademarked and reserved for the exclusive use of the CDMA Development Group (CDG) member companies. cdmaOne was the coined term for Qualcomm’s original CDMA systems based on the IS-95A and IS-95B standards. CDPD – Cellular Digital Packet Data. An add-on technology that enables first-generation (1G) analog systems to provide packet data. Today, 2.5G and 3G systems are replacing CDPD. Cellular – Analog or digital communications that provide a consumer with a wireless connection from the mobile device to a relatively nearby transmitter (base station). The transmitter’s coverage area is called a cell. Channel – The amount of wireless spectrum occupied by a specific technology implementation. For cellular communications, there is a transmit side and a receive side. For example, a 5 MHz channel uses 5 MHz to transmit and 5 MHz to receive, using a total of 10 MHz of wireless spectrum. Circuit-Switched Network – Networks that temporarily establish a physical circuit “connection” and keep that circuit reserved for the user until a disconnect signal is received. A dial-up modem is an example of a circuit-switched connection. In contrast, a packed-switched network are connectionless or “always on,” eliminating the need to initiate a connection for data transfer. Digital – A form of transmission that transforms analog signals, such as voice, into a series of electrical or optical pulses that represent the binary digits 0 and 1. Digital networks offer superior Quality of Service (QoS), secure transmission and more bandwidth than analog lines. DRM – Digital Rights Management. Technology for copyright protection of digital media, including ringtones, music, graphics and video. Developed to prevent the illegal distribution of purchased content over the Internet. Dual Mode – Functionality that allows a mobile phone to operate in two different modes for greater roaming capabilities. For example, a mobile phone may be equipped to support both CDMA2000 and WCDMA standards to send and receive calls. DVB-H – Digital Video Broadcasting – Handhelds. A multicast technology standard specified by the DVB Project for the multicast delivery of TV-like programming to wireless devices. With DVB-H, one signal is sent from the base station and received by all subscribing devices within range.


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EDGE – Enhanced Data Rates for Global Evolution. A software/hardware enhancement for existing GSM networks designed to provide higher data rates to enhance the delivery of multimedia and other broadband applications for wireless devices. Encryption – In security, encryption is the ciphering of data by applying an algorithm to plain text. Types include Asymmetric, Symmetric and Public Key. Firewall – A combination of hardware and software that protects a computer or group of computers from an attack by an outside network or computer user. A firewall enforces a boundary between two or more networks. Flash Memory – A type of memory that can be erased and reprogrammed (rewritten). Commonly used in mobile phones, digital cameras, audio players and removable memory cards, such as Memory Sticks or Secure Digital (SD) Cards. FOMA – NTT DoCoMo’s WCDMA-compliant 3G network. Supports high-volume, high-speed wireless data transmission to enable multimedia services such as videophone and video mail. GPRS – General Packet Radio Service. A 2.5G technology standard that is an upgrade to a GSM network. Adds packet data to the existing voice network. GPS – Global Positioning System. A worldwide radio-navigation system developed by the U.S. Department of Defense to enable users to determine their exact location anywhere on the globe. GPS works via radio signals sent from orbiting satellites to receivers on the ground. GSM – Global System for Mobile Communications. A second-generation wireless telecommunications standard for digital cellular services first deployed in Europe. GSM is based on TDMA technology and provides circuit-switched data connections. H.263 – A video compression standard developed by the International Telecommunications Union (ITU) for transmitting video over limited bandwidth connections, such as mobile networks. Supports only the visual portion of the video stream; the audio portion is handled separately. H.264 (MPEG-4 AVC) – A high-compression, digital video standard that offers greater compression than previous standards. Considered an option for transmitting full-motion video over wireless and Internet connections. Jointly developed by the International Telecommunications Union (ITU) and the ISO Moving Picture Experts Group (MPEG). Hot Spot – A location, such as a coffee shop, airport or bookstore, where a consumer can establish a WLAN (wireless local area network) or Wi-Fi connection. Hot spots provide a wireless access point for the user and limited coverage (approximately 100 feet), depending on the location. HSDPA – High-Speed Downlink Packet Access. An enhancement to WCDMA networks that provides higher data speeds in the downlink to support applications such as VPN access, video downloads and large file transfers. HSUPA – High-Speed Uplink Packet Access. An enhancement to WCDMA networks that provides higher data speeds in the uplink to support applications such as VPN access and large file transfers. iDEN – Integrated Dispatch Enhance Network. A proprietary technology from Motorola based on the TDMA standard that allows users to access phone calls, two-way radio transmissions, paging and data from one wireless device. Nextel Communications® uses iDEN technology as the basis for its networks. i-mode – Internet Mode. A proprietary cellphone service based on cHTML technology developed by Japan’s NTT DoCoMo. i-mode supports Web content and services, such as mobile banking, email and news reporting for cellular phones. IMS – IP Multimedia Subsystem. An open industry standard for voice and multimedia communications over packet-based IP networks. Supports technologies such as IM (instant messaging), VoIP (voice over Internet protocol), push to talk (PTT) and video calling. IP Datacasting – Simultaneous transmission of content from a single source to a large number of wireless subscribers. Usually refers to the delivery of a wide variety of TV-like programming to wireless devices, and can also include IP-based content such as games or video and audio files. Java – A programming language developed by Sun Microsystems for creating and running software programs on a single computer and in networked environments, such as the Internet. Java programs are portable and can be run anywhere in a network that has a Java virtual machine (JVM).


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LBS – Location Based Services. Enables operators to offer personalized services based on the user’s location. Examples of LBS include regional map information for real estate agents and asset tracking solutions for service representatives at logistics and transportation companies. LTE -Long Term Evolution. A highly optimized mobile broadband OFDMA solution designed from the ground up to deliver high-speed broadband data, voice (VoIP), and Multimedia services. LTE complements existing 3G solutions by leveraging wider bandwidths (up to 20MHz), and advanced antenna techniques (MIMO, SDMA and Beam forming). Mbps – Megabits per second. Measured as one million bits per second. A measurement of the amount of data transferred in one second between two telecommunication points. MHz – Megahertz. One million hertz or cycles per second. A measurement often used to describe the speed of digital and analog signals. Microbrowser – A Web browser specialized for a wireless phone, smartphone or PDA optimized to run in the low-memory and small-screen environment of a handheld device. MMS – Multimedia Messaging Service. Allows wireless device users to send multimedia, such as video or digital photos, from one device to another. MPEG-3 (MP3) – Moving Picture Experts Group-3. A standard for compressing audio into a compact file without losing a significant amount of its quality. Used for the mobile transmission and storage of audio files. MPEG-4 (MP4) – Moving Picture Experts Group-4. A standard for compressing video into a compact file without losing a significant amount of its quality. Used for the transmission and storage of images and video clips. Multicast – Simultaneous transmission of content from a single source to large numbers of wireless subscribers. Usually refers to the delivery of a wide variety of TV-like programming to wireless devices. Packet-Switched Network – Networks that transfer digital packets of data. Packet-switched networks are connectionless or “always on,” eliminating the need to connect to a network to send or receive data. In contrast, circuit-switched networks require a dedicated circuit, or connection, for the duration of the data transmission. PC Card – A wireless modem that can be used in a laptop or other mobile computing device to connect to the Internet. Synonymous with PCMCIA card, WWAN (wireless wide area network) card and Aircard®. PCMCIA – Personal Computer Memory Card International Association. An international association that standardizes credit-card sized wireless modems which can be inserted into laptops or other mobile computing devices to connect to the Internet. A Type II PC card is the most common PCMCIA card. PCS – Personal Communications Services. Refers to the 1900 MHz cellular frequency band. More commonly used as a marketing term to describe digital wireless services in the Americas, regardless of the particular frequency band being used. PDC – Personal Digital Cellular. The second-generation TDMA-based wireless technology used in Japan. PDC is incompatible with other wireless networks. PDSN – Packet Data Serving Node. Refers to the routers used in CDMA2000 wireless networks that comprise the backbone of the network. PIM – Personalized Information Manager. Software for keeping track of contact addresses and phone numbers, appointments, project schedules and task lists. Sometimes called a contact manager. PSTN – Public Switched Telephone Network. Refers to the local, long-distance and international phone system. In the United States, PSTN refers to the entire collection of interconnected phone companies. PTT – Push-To-Talk®. In two-way radio communications, PTT is an instant connection made between two cellphones. PTT works like a “walkie-talkie” and requires transmitters to use the same frequency. The best known example in the United States is Nextel’s Direct Connect® service.


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Public Key Encryption – A method of securing data for transmission that equips each user with two keys, a private key and a public key. Each individual uses the other’s public key to encrypt the data that is sent and then each individual uses their own private key to decrypt the data received. A trusted third party often provides keys. RFID – Radio Frequency Identification. A method of remotely retrieving data from and storing data associated with animals, people, products or equipment. Requires an RFID tag which contains an antenna to enable the tag to send and receive queries from an RFID transceiver. SIM – Subscriber Identity Module. A removable card built into all GSM phones and other mobile devices. The SIM identifies the user’s subscriber information, such as handset number and wireless features, and can also store data, including telephone numbers and addresses. SIP – Session Initiation Protocol. A standard protocol defined by the Internet Engineering Task Force (IETF). Used to initiate an interactive multimedia user session such as chat, video, voice or gaming. SDK – Software Development Kit. A set of development tools that allows a software engineer to create applications for a certain software package, software framework, hardware platform, computer system, video game console, operating system, or similar platform. SMS – Short Messaging Service. A store-and-forward message service available on many second-generation and all third-generation wireless networks that allows users to send and receive short text messages over wireless devices. SSL – Secure Sockets Layer. A protocol for managing the security of message transmission on the Internet, for example, between a Web server and a Web browser. TD-SCDMA – Time Division-Synchronous Code Division Multiple Access. A third-generation, (3G) wireless standard that offers enhanced voice and data capacity and higher data rates than previous second generation wireless standards. One of the three international CDMA technology-based standards accepted by the ITU for third-generation wireless communications. TDMA – Time Division Multiple Access. A second-generation, digital wireless communication technology that increases the amount of data that can be delivered by dividing each cellular channel into time slots. Wireless standards that use TDMA technology include GSM, PDC and iDEN. Tri-Mode – Triple Mode. Functionality that allows a mobile phone to transmit in three modes for wider coverage area. For example, a mobile phone may be equipped to use analog, 800 MHz cellular and 1900 MHz PCS frequencies to make and receive calls. UI – User Interface. The means by which users interact with the operating system. UMTS/WCDMA – Universal Mobile Telecommunications System/Wideband CDMA. A third-generation (3G), CDMA-based wireless communication standard that offers enhanced voice and data capacity and higher data rates than previous, second generation wireless technologies. VoIP – Voice Over Internet Protocol. The routing of voice conversations, sent as digital packets of data, over the Internet or other IP network. VPN – Virtual Private Network. A network that is constructed using public wires to connect remote offices or individual users to their organizations’ network. VPNs use encryption and other security mechanisms to ensure network access to authorized users. VPNs are an essential component of secure wireless computing for the enterprise. WAN – Wide Area Network. A geographically dispersed telecommunications network. A WAN may be privately owned or rented, but the term usually refers to a public network. WAP – Wireless Application Protocol. A set of standards that enables a wireless device to browse content from specially coded Web pages over wireless devices such as mobile phones. Wi-Fi – Short for “Wireless Fidelity” and another name for WLAN (wireless local area network). Allows a mobile user to connect to a local area network (LAN) through a wireless connection. WiMAX – Wireless Interoperability for Microwave Access. A group of proposed wireless standards for high-throughput broadband connections over long distances. Applications include “last mile” broadband connections and hot spots. Trade name for a new family of IEEE 802.16 wireless standards. Source: Qualcomm


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Wireless Industry - The New World Order

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