Modular Phones: The Best Tech Enabler Yet?

The real winners in Project Ara are the suppliers it will energize.

May 5, 2014 at 10:00PM

Project Ara, the Motorola design adopted by Google (NASDAQ:GOOG) (NASDAQ:GOOGL) (before it sold off the bulk of Motorola assets), recently received a developer's kit announcement and a slew of new photos showing the modular phone in action. The latest out of Google research and partners like 3D Systems (NYSE:DDD) promises plenty, but the biggest benefactors may be the newer ventures looking to hitch a ride. Meanwhile, competitors like Apple have shown no move toward modular design.

As Ara is such a long-term project, Google's stock has been more affected by the recent stock split and its first-quarter earnings report, which showed a 9% drop in payments from marketers on a per-ad basis. Google stock dropped to around $505, and the company quickly announced its intentions to increase mobile revenue in the future.

However, the hardware side of its mobile division could prove the real attention grabber. Project Ara has the makings of true disruptive innovation. It has been noted that a successful product release may prove as revolutionary as Apple's first iPhone, but developer response to the device is also worth watching. Widespread adoption could fuel the growth of the latest generation of tech innovators and related manufacturers.

Ara basics
The core of Project Ara is a set of replaceable components. Features like processers, Wi-Fi capabilities, power, screens, and batteries can be switched out (thanks to magnet connectors) and replaced with other modules that offer different specifications. Google plans to offer phones beginning at six modules, the number increasing with more advanced models.

Key points about the innovation were swiftly noted among tech analysts: First, it unchains upgrades from the phone itself, potentially allowing customers to upgrade an individual piece -- such as the screen -- without buying an entirely new phone. Second, this offers a whole new revenue model that would stem from selling components unlinked to contracts. It also allows the phone to appeal to a wide number of market levels, depending on how much money consumers want to spend for the fanciest features. The base model, without modules, costs around $50 to make, so there is plenty of room to target pricing toward lower-income brackets.

Welcoming the crowd
The first Ara-based phones are due out early next year, but this isn't the only modular phone experiment hitting the market. Phonebloks, from Dutch entrepreneur Dave Hakkens, is a similar concept. ZTE is working on a like-minded phone called Eco-Mobius, with four separate modules. If the modular trend stirs up the market, it will make room for a host of designers, 3D printers, and module-based companies eager for growth.

Ara alone has led to partnerships with companies like NK Labs, responsible for Ara engineering, New Deal Design, responsible for the product design aspects, and 3D Systems, which assisted in module development. 3D Systems showcases the potential benefit of modular growth.

Its stock price has jumped by more than 80% from 2013. Currently, deals like a Robotec division acquisition, a 3-D printer deal with Staples, and increased interest in Project Ara have kept the shares at about $50, and 3D Systems could see further growth if it becomes a key provider for future modular efforts.

A dearth of major competitors
Few other major brands are committing to the modular phone sector at this time. The last major physical alteration in the iPhone, for example, was the addition of Touch ID for the iPhone 5s. Apple, which saw an 8% rise in share price to around $590 after showing a 14% jump in iPhone sales, appears content with its compact device model. Samsung also has shown no sign of investing in modular innovations. Note, however, that first-quarter 2014 reports have also shown that the combined global smartphone market share of Apple and Samsung as fallen 3% to 47%, indicating the presence of more international competitors .

Final thoughts
These companies are just a taste of how enterprises on the edges of the market could benefit from a modular revolution. For example, security services could profit from modules with built-in security features, interchangeable gaming modules with their own hard drive space, sensor modules for specific health care jobs, high-quality cameras for artistic consumers...the list goes on. Ara will be an enabler, a catalyst for the growth of a new sector. If it succeeds, look for high growth rates in interesting places.

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Tyler Lacoma has no position in any stocks mentioned. The Motley Fool recommends 3D Systems, Apple, and Google (C shares). The Motley Fool owns shares of 3D Systems, Apple, and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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