Apple and Google sending competition straight to voicemail

Charles Curran Technology Investor
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There are two reasons why Apple and Google are decimating Nokia, BlackBerry, Microsoft and Palm in the mobile business: price and applications.

I forecast that by 2013, Apple’s iPhone and Google’s Android will have 90 percent combined USA market share for smart phone operating systems. According to comScore, as of February 2010, they have a combined 34 percent—with 25 percent for Apple and 9 percent for Google. Google’s share has tripled in three months and may pass Apple’s in a few years due to its lower price and more open approach to application developers. There will be pain, suffering and perhaps death for the mobile phone divisions of giants such as Microsoft, Nokia and RIM (the company behind the BlackBerry device). On April 22, Nokia’s stock fell over 10 percent due to a poor earnings report driven by loss of market share to iPhone.

A typical mobile startup today builds its iPhone app first, its Android app second and nothing else third. Going forward, users will buy only devices with rich app offerings. Only two companies have demonstrated an ability to corral a large community of mobile app developers: Apple and Google. According to research firm Broadpoint AmTech, BlackBerry App World has 6,000 apps versus Apple at 185,000-plus and Android at 38,000-plus. The mobile innovation community has completely written off Blackberry, Nokia, Microsoft and Palm. In a few years, we will remember the Blackberry fondly, as an antique.

Google’s Android operating system is free for handset makers, so Motorola, Samsung et al, are in the process of consolidating all smart phone development around Android. The mobile device world is segmenting into two classes: premium Apple-based and cheap Android-based.

Why would a handset maker ever pay Microsoft a fee to build a smart-phone when it could build a better device on Android and pay Google nothing? Answer: they shouldn’t, and increasingly they aren’t.

Why are applications so important? For the same reason Willie Sutton robbed banks: That is where the money is. The locus of mobile has moved from voice calling, to text messaging and e-mail, to Web surfing, to applications.

Hundreds of billions of annual revenue from mobile device sales and voice-and-data packages are moving to those vendors whose phones have world-class applications. This is why Apple’s stock price is outperforming Nokia’s, RIM’s and Palm’s.

As we all know, people are using mobile devices for news, photos, movies, and music. We manage our bank balances and increasingly our 401(k)s on mobile. And applications downloaded from iPhone or Android “app stores” are the best way to run these programs. Increasingly, mobile executives are betting there will be big revenue in from sales of premium applications and especially from advertising on free applications.

Betting on this trend, in late 2009, Google and Apple agreed to pay over $1 billion combined to acquire two mobile advertising network startups, AdMob and Quattro. (Conflict alert: As a General Partner in venture capital firm Valhalla Partners, I am a major investor in a tier-1 mobile advertising network named JumpTap.)

Applications deliver better performance because the content is loaded onto the device. When reading the New York Times on your iPhone, there is no delay as you move from story to story. One day in the future, the mobile web will be so fast you won’t need an application to read the New York Times in real time, but we are not there yet.

People still like the Blackberry keyboard. But, a keyboard can be replicated. A rich application developer and advertising ecosystem cannot. Today, many businesses buy Blackberries for their employees to enable mobile e-mail. In the future, businesses will buy iPhones or cheaper Android-based devices for their employees which not only manage e-mail but offer rich business applications.

Why will there be only two mobile phone giants? The market wants a high and a low end phone/application business. End users, handset makers, carriers, and handset makers don’t want a monopolist to achieve control over both.

Why not more than two given that Microsoft, RIM and Nokia badly want robust app stores? The application developer ecosystems around iPhone and Android are so deep that it is futile for rivals to enter. As an analogy, remember the failure of Amazon to offer a rival auction ecosystem to eBay. A marketplace of buyers, sellers and inventory, whether for mobile games or Pez dispensers, is very hard to replicate. We should all thank Google for building Android and offering billions of dollars of subsidies to the handset makers to create a second tier-1 mobile application store. Or else, there might have been only one. I love Apple, but not that much.

Charles Curran is a General Partner with Valhalla Partners, a $440 million venture capital firm based in Northern Virginia.