Smartphones

Mobile phone upstart Apple burst out of the blocks with the release of the iPhone, and then sped ahead in a race most competitors didn’t even realise existed. There have been more than 800m downloads of applications for the iPhone from the tech group’s App Store, as independent developers rush to design and sell games and other software for the handset. Following in its footsteps, BlackBerry maker Research In Motion has launched its own app store, while Nokia intends to add applications to its Ovi platform for music, maps and services.

Meanwhile telecoms operators, unwilling to be left behind as mere suppliers of the piping, are getting in on the game too. Verizon this week agreed to join Vodafone, Softbank and China Mobile in a project to develop software-based services for handsets for their combined 800m customers.

Investors should care less about picking a smartphone winner and worry about the increasing number of companies that are jumping in. The more competition, the lower the profits from incremental software revenues are likely to be. This effect is already becoming clear on the hardware side. RIM margins continued to be squeezed in the fourth quarter – it reported on Thursday – even though revenues almost doubled. And pressure on prices and profitability seems set to intensify. The hotly anticipated Palm Pre is just one of a range of handsets due for release this year, and Palm is is not the only struggling manufacturer requiring smartphone success

There is also an elephant in the room. Consumers are embracing mobile internet, and the phones that make the most of it, in part because 3G access is cheap. Eventually though, telecoms operators will run into capacity constraints and require network upgrades that may entail higher charges for data. The smartphone market will struggle to maintain its initial sprint.

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