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Most of the pundits arguing about the future of the smartphone market seem to think of it as one giant pie for the likes of Apple (Nasdaq: AAPL ) , Google (Nasdaq: GOOG ) , Nokia (NYSE: NOK ) , and Research in Motion (Nasdaq: RIMM ) to fight over. But in the aftermath of RIM's earnings report last week, it looks more like a layer cake to me. And for now, Google's Android stands the best chance of getting a big piece of both layers.
What RIM tells us
RIM's numbers didn't set too well with Mr. Market, as revenues and unit shipments both came in slightly below analyst estimates, and the average selling price (ASP) for the company's phones continued to drop. But it would be a mistake to assume that RIM's weakness was spread out over all of its key geographic regions and product lines. Instead, the weakness was centered around the U.S. market, and especially RIM's high-end Storm2 phone, which has had an underwhelming debut with Verizon (NYSE: VZ ) -- I'm sure that Palm (Nasdaq: PALM ) sent its condolences.
On the other hand, RIM's international sales appeared very healthy -- a report from T.D. Newcrest analyst Chris Umiastowski estimated that while revenues from North America declined 15% sequentially, sales to other markets were up 36%. Furthermore, all signs pointed to strong shipments of RIM's mid-range Curve smartphones.
A market split
Combine RIM's results with Nokia's Q4 numbers, which also saw a combination of lukewarm high-end smartphone sales and stronger demand for cheaper models, an image appears of a smartphone market that's split into two segments.
On one side, you have platforms who are generating most of their sales from costlier devices featuring large touchscreens and powerful processors, and whose users are prone to downloading apps by the dozen. The iPhone is obviously the king of the hill here, but Google's Android is quickly gaining share. Sales of these phones are heavily tilted toward wealthier markets such as the U.S., Western Europe, and Japan, where consumers can either afford to buy the phones outright, or can afford the costly service plans needed to buy one at a heavily subsidized price.
On the other side, you have platforms whose most popular hardware tends to be cheaper devices that often lack touchscreens, and whose users tend to care less about downloading apps than about having the phone do a couple of things well, such as handle email or play music. RIM's Blackberries and Nokia's Symbian phones are the biggest players here, and compared with the high-end segment, there's a greater balance in this space between sales to developed and developing markets.
Why Android benefits
So how does Google gain from this market split? It's simple: While RIM and Nokia haven't yet shown that they can hold their own against Apple and Google in the high-end touchscreen space, and while Apple seems disinterested in putting its brand and $620 ASP at risk by offering a low-cost iPhone model, there are signs that the open-source Android can bridge the gulf between the high-end and low-end spheres.
Though high-end Android phones such as Motorola's (NYSE: MOT ) Droid and Google's Nexus One have grabbed most of the headlines, cheaper hardware has also been released, such as HTC's Click and Samsung's Galaxy Lite. And in China, we've seen Android launches not just from the likes of Motorola, Samsung, and Dell, but also from "grey market" manufacturers targeting price-conscious consumers both inside China and overseas. A quick Google Shopping search turned up several Android phones from Chinese manufacturers selling for less than $200 without a contract. And from the looks of things, the Chinese government's fight with Google isn't going to affect Android's availability within the country.
Meanwhile, if the tech sector's history teaches us anything, it's that hardware gets cheaper over time. As prices for displays, processors, flash memory, and touchscreen modules gradually decline, Android phones should get cheaper still. And as the platform further penetrates the low-end, it should stand alone in giving developers a chance to sell apps both to smartphone enthusiasts looking for a device filled with bells and whistles, and to the less affluent users around the world trying to get a touchscreen smartphone at a reasonable price. That, in turn, should boost Android's ability to eat into the iPhone's current app lead.
None of this is to say that Google is going to eat everyone's lunch. Apple, RIM, and Nokia's current strengths go without saying, and the global smartphone market is too big and diverse for one platform to easily tower over it. But it would be a huge mistake to underestimate what Google's accomplishing right now with its open-source approach to Android, and the huge and growing lineup of hardware partners that this approach has produced. Right now, Android phones can be used by American carriers in marketing campaigns bashing the iPhone, and they can be offered in third-world bazaars as an alternative to Nokia's low-cost Symbian gear.
Until a competitor proves that it can do the same, this kind of versatility is going to pay off very well for Google.
Have any thoughts on the smartphone market fracturing into a top and low end market? Share your thoughts in the comments area below.