Apple

Apple and Research In Motion bring in big bucks from their smartphones, thanks in large part to heavy subsidies from the cellphone carriers, says a report in Monday's Wall Street Journal.

Last year Apple and RIM made up only 3 percent of global cellphone sales, but took in 35 percent of operating profits for the market, according to Deutsche Bank analyst Brian Modoff. This year Modoff expects the cellphone market for the two firms to grow to 5 percent, and winning 58 percent of total operating profits, according to the Journal (subscription required).

The high subsidies charged by major players like Apple and RIM mean that consumers can pay as little as $100 for a smartphone. The iPhone brings Apple the biggest subsidy check at around $400 a phone, estimates Modoff. RIM's BlackBerrys earn the company around a $200 subsidy. In contrast, basic cellphones get a $100 subsidy.

The cellphone carriers pass on the subsidies to consumers in the form of higher prices for monthly plans, especially for smartphones that can browse the Internet and collect e-mail.

The market gains by Apple reflect a shift toward smartphones that are feature rich and easy to use, says the Journal. Smartphones make up only around 13 percent of global cellphone sales, but the market is growing. Between them, Apple and RIM scored around 32 percent of the smartphone market in the first quarter.

The windfall among Apple and RIM comes at the expense of other players, says the Journal. Nokia, once the top smartphone maker, has been hit with a declining market share and lower profits. Sony Ericsson also is hurting, reporting a loss for its fourth quarter. Companies like Palm, Acer, and Dell also face an uphill battle breaking into a smartphone market dominated by Apple and RIM.

AT&T may slash the price of its iPhone service plan by $10 when a new version of the touchscreen smartphone is launched this summer, according to a story on TheStreet.com.

The article cited analyst Michael Cote of Cote Collaborative saying that there is a "strong possibility" that AT&T will drop the entry-level price of its service plan to $59 from $69. Apple is expected to unveil the latest iPhone on June 8 during the company's World Wide Developers Conference in San Francisco.

AT&T declined to comment for this story, and Michael Cote did not respond to an e-mail request for an interview.

The price cut would likely help make the iPhone, which now retails for $200 with a two-year service plan with AT&T, more appealing to more mainstream customers. I've been saying for quite some time that the biggest hurdle to widescale adoption of the iPhone or any other smartphone in the mainstream market is the high price tag of the service contracts.

Consumers have shown that they are willing to pay anywhere between $100 and $200 for a sophisticated smartphone device. But the monthly service charge, which starts at $69 for the iPhone, is much harder to swallow.

It puts the real cost of the iPhone 3G over the life of the two-year contract at a whopping $1,856, which includes the price of the 8GB phone and 24 months of the most basic iPhone voice and data plan. It doesn't include the activation fee or taxes and other fees associated with the account. For subscribers who need more voice minutes or unlimited texting, the price tag is even higher.

Still, a $240 reduction in the overall cost of the phone over the life of the contract could entice some cost-conscious consumers.

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Market research firm iSuppli has taken apart the BlackBerry Storm and discovered that the sum of its parts is worth more than those of Apple's iPhone 3G.

Components used to build new Research In Motion smartphone cost about $203, according to iSuppli. Verizon Wireless, the exclusive carrier of the Storm, sells the device for $199 after rebates and with a two-year service contract. Meanwhile, the total cost of components in Apple's 8-gigabyte iPhone 3G, which was introduced last summer, is $174. AT&T, the iPhone's exclusive carrier, sells the 8GB device for $199 with a two-year service contract.

These total device prices don't include the cost of software, licensing of patents, or distribution, but rather just the cost of the actual physical components. While the roughly $29 difference may not seem like much, it certainly adds up after millions of phones are sold.

Neither Verizon nor RIM has disclosed how many BlackBerry Storms have been sold, but published reports suggest that RIM sold about 500,000 of the devices during the first month the phone was on sale. Apple sold 1.1 million units of the first-generation iPhone, by comparison, in the first two months it was on the market. And sales after that quickly ramped up.

So why are Storm's components more expensive than those of the iPhone?

There are a likely several reasons. For one, the iPhone 3G is a second-generation product, and Apple may be getting better component prices from suppliers. But iSuppli also notes that the Storm is a more complicated device that requires more components. According to the research firm, the Storm's total component count is 1,177, of which 151 are mechanical in nature. The iPhone 3G includes 1,116 components.

The Storm also packs in more wireless technologies than the iPhone. For example, it offers the EV-DO air standard, along with CDMA 2000, GSM, WCDMA, and HSDPA. This allows the device to roam around the world on different carrier networks.

Another reason the Storm may be more expensive is because it's using an expensive chip from Qualcomm. The Qualcomm MSM7600 baseband processor costs about $35 and accounts for 17.2 percent of the Storm's total component cost.

The Storm is also more expensive than other RIM devices, such as the BlackBerry Bold, which costs about $177 to build. The Bold uses Marvell Technology Group's PXA9xx Integrated Baseband processor, which is less expensive than the Qualcomm chip. But iSuppli says the cost differential can mainly be attributed to the Storm's touchscreen and its supporting electronics.

The Storm, RIM's first touch-screen device, was supposed to be Verizon's iPhone killer. But customers who bought the device are complaining of buggy software and hardware glitches. A Wall Street Journal article published earlier this week suggests that Verizon and RIM rushed the device to market, perhaps before it was really ready. The newspaper notes that Jim Balsillie, RIM's co-CEO, said the companies reached the Black Friday deadline "by the skin of their teeth," after they had missed a planned October debut.

Apple has captivated the general public with the iPhone, but has it convinced the business world to take the plunge?

Even after the March preview of the "business-friendly" iPhone 2.0 software for the iPhone released in July, it seems that most iPhones are being purchased by individuals rather than corporations, who still look first at Research In Motion's BlackBerry when it comes to equipping their workers with mobile computers.

But the iPhone is making a guerrilla attack on the business world, brought into the corporate world by influential executives, CIOs rethinking their approach to deploying technology, and younger workers who move seamlessly between their personal and business lives.

There are several high-profile businesses, such as Genentech and Disney (both with strong ties to Apple CEO Steve Jobs, of course), that have declared their intentions to work with Apple on deploying iPhones inside their corporations. That seems to be having the effect of increasing the overall number of business smartphone users, however, rather than turning the iPhone into any kind of "BlackBerry killer."

At Apple's Worldwide Developers Conference in June, Jobs said 33 percent of the Fortune 500 had participated in Apple's beta program for the iPhone 2.0 software. But RIM still dominates the market for mobile devices used for business purposes.

According to data from J. Gold Associates released in September, 65.5 percent of North American businesses that deploy mobile computers say they actively support the BlackBerry, compared with 22 percent that support Windows Mobile devices and just over 10 percent that support the iPhone.

There is some overlap in those numbers, represented by companies such as Chicago law firm Sonnenschein Nath & Rosenthal, a participant in Apple's beta program.

About half of CIO Andy Jurcyzk's 1,800 employees worldwide use some kind of mobile device, and at the moment, 200 of those people are using the iPhone 3G. Sonnenschein's employees who are deemed worthy of mobile computers can get the company to buy them a new mobile device every 24 months--provided that AT&T carries that device.

"My philosophy is that devices are personal, and it's difficult for organizations to standardize on a single device" given the wide range of preferences people have with mobile computers, Jurczyk said.

Not all organizations feel the same way, and have built up years of expertise managing the BlackBerry inside their walls. Frank Gillman, the CTO for Los Angeles law firm Allen Matkins, says there has been some interest in the iPhone among his constituents but he finds it more cost-effective to stay a BlackBerry shop.

"Our reasons for not doing so have more to do with the age-old issue of having a finite number of internal resources to support our firm's technology. Given our already significant investment in BlackBerry, we cannot make a strong business case for adopting yet another platform."

That's just part of the uphill battle the iPhone faces in the enterprise. For one thing, Apple's dependence on a single carrier is a nonstarter for some companies that have long existing relationships with a different carrier, and enjoy the discounts that come along with that partnership.

And while Apple's 2.0 software update brought along several business-friendly features that improved the security and manageability of the device, some analyst firms that advise CIOs on how to spend their technology dollars still feel the iPhone's security isn't quite where it should be compared with other options in the market. Gartner, the 800-pound gorilla of IT consulting, gave the iPhone a thumbs-up in July after the release of the 2.0 software but noted that iPhone security isn't strong enough yet when it comes to custom applications on the device.

Jurcyzk is following the recommendations of J. Gold Associates by having his employees access secure corporate data through the iPhone's Safari browser backed by the firm's own security certificate. That way, no sensitive data actually resides on the device, but users can still open documents and view them with "full fidelity," which is a huge plus for traveling lawyers who need to review documents with clients anywhere and everywhere, he said.

There's also the issue that corporations will have to install iTunes on every iPhone user's computer, which might not be part of the standard application list employed by big conservative corporations that grudgingly allow their employees to check baseball scores on ESPN.com from their PCs. And some IT managers also like to lock down a specific collection of software on the mobile device itself, but have no real way of preventing an employee from going home and adding Asphalt 4: Elite Racing to their iPhone.

But small businesses don't have the same strict security and manageability requirements as larger enterprises, allowing them to move forward with iPhones more quickly than the big guys. Independent observers of that market are seeing more and more demand for iPhones among those types of customers, who fly under the radar individually but could add up to serious revenue for Apple.

And there's a sense inside some corporations that times are changing as mobile phones become computers that aren't just for business, and aren't just for fun. Executives and salespeople--the primary users of mobile computers in the enterprise--are constantly on the go, and an executive waiting for an airplane who pauses an episode of Mad Men to answer an e-mail from a client is a productive, accessible, and satisfied employee.

"Other devices are just hardcore e-mail devices, and even at that they don't render the messages well," Sonnenschein's Jurcyzk said. "I travel a lot and it's nice to have a personal aspect to my life, to look at photos of the family, to listen to music, or watch a movie. It's nice to have that other stuff."

Apple's not the only company adapting to that shift in how we use mobile computers. "The new BlackBerry Storm that is coming out this month from RIM/Verizon brings a lot of the iPhone design and features to the BlackBerry platform. Assuming the device works as advertised, we'll likely offer that as an option for our folks who want those types of features," Gillman said. Microsoft CEO Steve Ballmer has also said similar things about the need for future versions of Windows Mobile to cater to both personal and business tasks.

Before too long, businesses might decide that certain trade-offs regarding the manageability of their smartphones are worth making, so long as their concerns over security are met. Analysts expect Apple to improve the native security of the iPhone over the next several years, and it's also possible that a major third-party enterprise software vendor such as SAP will step forward with a product that does it for them.

Well over 200 business-related applications are available on the App Store that help make the iPhone easier to use in a corporate setting. If Apple finds a way to improve the security profile of the iPhone to allow organizations to develop custom applications that store sensitive data on the device, it will have another feather in its cap.

Still, J. Gold Associates predicts just 16 percent of U.S. corporations to have an active interest in the iPhone in three years. The iPhone isn't going to put RIM out of business just yet. But it is challenging the other company in its backyard, just as RIM doubles down with its efforts to make the BlackBerry more consumer-friendly with models like the Storm and the Bold. And it's making everyone more aware of the trade-offs and needs of mobile computer users in the enterprise, which will make everyone's product better in the long run.

And if Apple proves itself as an enterprise-friendly company with the iPhone, those famously stodgy CIOs might be tempted to take a second look at the Mac.

Apple's blowout quarter for iPhone 3G sales lifted it into second place among all smartphone vendors worldwide.

Canalys released market share stats on Thursday showing strong growth for the smartphone market even as the worldwide economic situation takes a turn for the worse. A total of 39.9 million smartphones were shipped during the third calendar quarter of the year, a 28 percent increase over last year's totals.

Nokia is still the leading vendor by a comfortable margin, holding 38.9 percent of the market. But shipments declined slightly, and market share fell 12.5 percent, compared to last year, as Nokia goes through a transition from older models to newer devices that are just getting out into the market, according to Canalys.

Apple was the big story in the smartphone market during the quarter, vaulting over Research In Motion to take second place, with 6.9 million shipments, or 17.3 percent of the market. And RIM had an excellent quarter, increasing BlackBerry shipments by 83 percent and picking up five points of market share.

Canalys thinks that RIM is in good shape to regain the second-place spot with the pending release of several new BlackBerry models, including the Bold, Storm, and clamshell Pearl. It's unclear whether Apple will be able to sustain that level of iPhone 3G shipments during the fourth quarter, given how new the company is to this market.

When the numbers were sorted by operating system, a similar picture emerged. Symbian is the market leader, due to its close association with Nokia, but Apple and RIM are the second- and third-place vendors, respectively. Symbian lost market share during the quarter that was snapped up by Apple, RIM, and Microsoft.

Despite the Apple juggernaut, Microsoft also posted solid gains during the quarter, increasing the number of Windows Mobile handsets shipped by 42 percent. However, Apple shipped more iPhones during the quarter than all the Windows Mobile devices shipped worldwide by Microsoft's partners, according to Canalys.

Apple experienced a bit of a setback in the U.S. smartphone market during the first quarter after coming out of nowhere last year to rank among the top companies.

According to data compiled by IDC, Apple's still the second-leading smartphone maker in the U.S. behind Research in Motion and the BlackBerry franchise. But it lost market share going from the fourth quarter to the first at the expense of RIM and Palm, according to the figures provided by IDC analyst Ramon Llamas.

RIM's market share went from 35.1 percent in the fourth quarter to 44.5 percent in the first, while Apple's dropped from 26.7 percent in the fourth quarter to 19.2 percent in the first. Palm's Centro lifted that company's market share to 13.4 percent in the first quarter, up from 7.9 percent in the fourth. Samsung and HTC ranked fourth and fifth in the U.S. market with 8.6 percent and 4.1 percent of the market, respectively.

During its most recent earnings call, Apple revealed that it sold 1.7 million iPhones, which was down from the 2.3 million units it sold during the fourth-quarter holiday shopping season. Both RIM and Palm grew their shipments on a quarter-by-quarter basis over roughly the same time period, although the dates don't match up precisely with Apple because RIM and Palm are on slightly different fiscal calendars.

It's not exactly clear what might have led to the decline. Both RIM and Palm have intensified their pursuit of consumer smartphone users, RIM from the high end with devices like the Curve and Pearl and Palm from the low end with the $99 Centro.

Given the iPhone shortages that have been going on for several weeks ahead of iPhone 2.0's expected debut next Monday, Apple might have also lost share this quarter. But the company has consistently reiterated its intention to ship 10 million units in 2008, the first full calendar year the iPhone has been on sale. RIM sold 14 million BlackBerrys during its 2008 fiscal year, which ended on March 1.

IBM and Research in Motion are expanding the reach of IBM's Lotus software onto BlackBerry handsets.

BlackBerry users in companies committed to IBM's Lotus suite of software can now access the Lotus Connections software from their handhelds, the companies plan to announce Wednesday at the Wireless Enterprise Symposium in Orlando, Fla. Lotus-equipped companies have long been able to deliver e-mail, contacts, and calendar appointments to BlackBerry users, but companies can now allow their workers to get Web 2.0-ified in a safe, staid manner formally approved by the IT department.

Lotus Connections lets you pick the brains of experts inside your organization through their internal blogs or documents, said Bob Picciano, general manager of IBM's Lotus Software. "You don't want people putting (sensitive) documents on LinkedIn," he said, explaining the need for secure social networking.

RIM has been expanding its attempts to reach consumers with devices like the BlackBerry Curve, but its bread-and-butter is still the corporation. The Connections software is supposed to be immediately available for Lotus users to download.

Research in Motion will hold its own conference for smartphone developers later this year, as interest in mobile development continues to grow.

Electronista spotted a Web page advertising the BlackBerry Developer Conference, scheduled for the week of October 20 in Santa Clara, Calif. The two-and-a-half day conference will feature the usual keynote speeches and technical sessions, but RIM doesn't seem to have settled on an agenda just yet.

Smartphone application development appears to be the next frontier for software developers. Such applications have already been in development for years for operating systems like Symbian and Windows Mobile, but the swell of interest in Apple's iPhone and Google's Android operating systems is generating new demand for third-party software that knows how to play well within the constraints of a phone.

The BlackBerry is the leading smartphone in North America, and is No. 2 on a worldwide basis. RIM just launched the newest version, the BlackBerry Bold, this week.

Update 2:15 p.m. PST: No sooner do I post this than RIM goes and issues an explanation for the outage. Read on for the details...

In the immortal words of Cinderella's Tom Kiefer, you don't know what you got, till it's gone.

Monday's widespread BlackBerry outage--the second major one in the past 12 months--left Research In Motion customers stranded and cut off from the rest of the world, sort of like what happened to the '80s glam metal band after Long Cold Winter. The Internet's equivalent of a snow day left reams of e-mail messages undelivered for about three hours Monday, according to RIM, which either still hasn't figured out exactly what caused the problem, or isn't willing to disclose the cause just yet.

Representatives for AT&T and Verizon told several media outlets Monday that from what they understood, all wireless carriers in North America that work with RIM were affected. The last time an outage of this magnitude occurred, in April, RIM blamed a database problem that snowballed when the backup "failover" process didn't work as planned.

It's amazing how dependent people have become on their mobile devices. CrackBerry addiction is an old story, but it keeps surfacing every time people are forced to go more than 10 minutes without access to their e-mail. Local television stations in San Francisco all teased the BlackBerry outage on their 11 p.m. newscasts as a near-disaster, since we don't have weather events out here to keep people watching the local news.

While coverage of the outage just goes to show how mobile devices like the BlackBerry really are becoming the next wave of personal computing, it also points out that the entire system has a single point of failure: RIM itself.

All e-mail messages sent to or from a BlackBerry in North America must at some point in their journey travel through RIM's network operations center (NOC) in Canada. The company tried to use that to its advantage in its patent dispute with NTP, noting that since such a critical part of the service lies in Canada, RIM should be exempt from U.S. patent claims. That didn't take.

The Wall Street Journal reported Tuesday that expansion efforts at RIM's NOC may have been to blame for the outage. The problem isn't that the servers are in Canada; they could be anywhere. It's just that everything has to go through the one location. In theory, as long as you have enough redundant backup systems and plans, that shouldn't be a problem. But every now and then, it is.

Frank Gilman, the chief technology officer for Los Angeles law firm Allen Matkins, was forced to deal with the outage Monday afternoon. "What surprised me was the apparent lack of a solid business continuity plan on RIM's part to ensure reasonable connectivity," he said via e-mail, of course. "A company that is marketing devices that increase the mobility of professionals should have systems and contingencies in effect to avoid an outage of that size and duration."

I'm sure that far more BlackBerry-related disasters are averted that never come to light. But RIM has an advantage over other service providers in that few people sign service-level agreements (SLAs) with RIM for the BlackBerry service. SLAs are basically promises from hosted service providers to maintain a certain level of uptime, which is usually 99.999 percent or so.

Those promises are usually only worth the paper they're printed on, however, as the process of actually accounting for and proving damages as a result of an outage can be extremely difficult. Given the degree to which many large businesses--not to mention U.S. government staffers--rely on the BlackBerry service, perhaps RIM's larger customers will start thinking about negotiating such an agreement when it comes time to renew the service.

As frustrating as the outage may have been, it's not like the U.S. economy ground to a halt Monday afternoon as millions of e-mails about sales presentations and reminding the people on the fourth floor to empty the refrigerator on alternate Fridays went undelivered.

Still, RIM still needs to come clean about what caused the problem if it wants to keep people hooked on its service. I've seen the thumb wheel and the damage done.

Update 2:15 p.m. PST: RIM sent out a statement after waiting for me to post this blog, just to make sure we could test our own update procedures.

The company is blaming "a problem with an internal data routing system within the BlackBerry service infrastructure that had been recently upgraded," according to the statement. RIM has been upgrading its capacity as demand for the BlackBerry continues to grow, and usually there isn't much of a problem during one of those upgrades. This time, something apparently went wrong.

"Once again, RIM apologizes to its customers for any inconvenience." The company said it would share further details once a more in-depth investigation is completed.