Smartphones - Beyond Voice to Information and Entertainment

Smartphones are poised to become the information center and entertainment device of choice. Increasing adoption and usage of smartphones bodes well not only for smartphone makers but also for the wireless industry as a whole.

Investments in shares of wireless technology companies & wireless service providers have been particularly profitable in the post-dot com era. For example, from June 30, 2003 to December 31, 2004, the AlphaProfit Core™ and Focus™ model portfolios handsomely benefited from the 87% gain in Fidelity Select Wireless that concentrates its investments in the wireless group.

The wireless industry is in a sweet spot of the technology space. Bountiful business opportunities exist as wireless usage increases in both developed and emerging markets. And driving this usage higher are new products such as smartphones whose capabilities are being augmented by the deployment of third generation (3G) wireless networks.

Feature-Rich Smartphones.

Smartphones are more than mobile phones. A smartphone is a mobile phone with built-in functions of a personal digital assistant. Smartphones pack a diverse range of features and functionalities into the handset that makes them a mobile information center and entertainment device for the user.

Smartphones commonly include features such as web browsing, e-mail, and multimedia capabilities. Certain models have enough horse power to run complex software applications such as enterprise customer relationship software and car navigation programs.

A full-featured QWERTY-type keyboard, MP3 player, and Geo Positioning Systems capability are becoming common among higher-end smartphones. Instant messaging is a cool feature making its way into the mainstream.

Smartphones, A Growing Segment of the Handset Market.

Smartphones represent a small, yet rapidly growing, segment of the handset market. According to Strategy Analytics, smartphone sales at 17.5 million units in 2004 accounted for 3% of the worldwide sales of 684 million handsets. However, this represents a significant jump from the 8.2 million units sold in 2003.

The demand for smartphones is projected to grow in the coming years. By 2009, smartphone sales are estimated to reach 125 million units or 16% of total handset sales worldwide. This implies a 48% compound annual growth rate in smartphone unit shipments over the 2004-2009 period.

Smartphone Early Adoption Led by Asia and Europe.

Adoption of smartphones has been particularly rapid in Asia and Europe. The aggressive deployment of advanced wireless networks in these regions has encouraged early adoption of smartphones.

The Asia Pacific region currently accounts for about 37% of global smartphone sales with South Korea and Japan being leaders in smartphone usage. The European market accounts for 27% of global smartphone sales. Analysts expect smartphone sales in Europe to exceed sales in the Asian market in the coming years. North America's market share in smartphone sales was expected to reach 25% by the end of 2004.

Nokia, the 800 lb. Gorilla of Smartphones.

Nokia (NYSE: NOK) is by far the dominant global smartphone manufacturer. The Finnish company is currently estimated to command half to two-thirds share of the global smartphone market.

Nokia recently introduced its feature-rich Nokia 7710 smartphone in Europe and Africa. The wide-screen Nokia 7710 smartphone includes a full Internet browser, an integrated music player, a camera with 2x digital zoom, and a FM radio. One of the nifty features of the Nokia 7710 smartphone is its ability to make weblogging mobile. Users can post pictures and text from the Nokia 7710 smartphone directly to the web through the 'moblog' client.

Nokia is also expected to introduce the Nokia 3230 smartphone in the first quarter of 2005. The Nokia 3230 smartphone features a video recorder and 'Movie Director' that will allow 1 hour of video to be captured.

Nokia is now increasingly looking at software licensing deals to help differentiate itself from its competitors. Nokia has recently signed licensing deals with Macromedia and RealNetworks. Nokia is also said to be working on handsets that will receive wireless television feeds.

Smartphone Investment Implications.

The increasing adoption of smartphones augurs well not only for Nokia but also for other smartphone manufacturers like palmOne (Nasdaq: PLMO) and Research In Motion (Nasdaq: RIMM). palmOne recently introduced the GSM edition of its Treo 650 smartphone. Research in Motion recently released the latest model in its BlackBerry 7100 series, the 7100g.

The incorporation of additional features and functionalities that make the smartphones the portable information center and entertainment device of choice has bullish implications beyond just manufacturers of smartphones.

Wireless service providers like Vodafone (NYSE: VOD) should see their average revenue per user being buffeted with increasing use of value-added services that smartphones enable.

Then too, the increasing adoption and usage of smartphones will require the rollout of 3G wireless networks in earnest, translating into business opportunities for wireless network equipment providers such as Ericsson (Nasdaq: ERICY).

Sam Subramanian
AlphaProfit Investments, LLC
February 14, 2005

Sam Subramanian, PhD, MBA is Managing Principal of AlphaProfit Investments, LLC. Sam developed the ValuM™ Investment Process for managing investments. He edits the AlphaProfit Sector Investors' Newsletter™, a publication that discusses investments using Fidelity funds. For the 5 year period ending December 31, 2004, during which the Dow Jones Wilshire 5000 Total Market Index declined 6.9%, the AlphaProfit model portfolios increased by up to 186.2%, a compound average annual return of 23.4%.

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