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The coming mobile battle between Android and Windows Phone 7

Pyramid Research's claim that Windows Phone 7 will be the dominant mobile OS by the end of 2013 was greeted at best with polite skepticism, and more often with ridicule and vilification. But many of the responses ignore the grounds for the claim, especially that the smartphone market is a global one still in its infancy.

BACKGROUND: Both Nokia, Microsoft have much to gain, and lose, in mobile deal

The controversy was sparked by the last line of a one-page report on global handset sales, projecting that Android will grow from 28% of the global smartphone market in 2011 to just over 45% in 2015. The last line reads: "However, we project that by 2015, Windows Phone will establish itself as the leader in the smartphone OS space."

Pyramid forecasts a steep growth rate for Windows Phone 7 starting in 2011 through mid 2012, when it slows down. Much of that increase is expected to be fueled by a new generation of Nokia phones running the Microsoft mobile OS. By the start of 2013, Windows Phone 7 will overtake Android's market share and stay slightly ahead of it thereafter.

Pyramid senior analyst Stella Bokun, practice leader for mobile devices, followed up with a blogpost that described Pyramid's research methodology but was short on explaining the reasons for the conventional-wisdom-defying forecast. In a phone interview with Network World, she expanded on the reasons for her optimism regarding Microsoft's reborn mobile OS, on which Nokia recently staked its smartphone future

Her basic points:

* in the global phone market, Nokia remains a highly-regarded brand among consumers;

* it retains close, strong relationships with wireless carriers, who make the decision of what phone brands to offer and promote;

* Nokia has a proven ability to deliver low-cost, attractive phones;

* smartphone sales are just now ramping up, in huge new markets;

* Nokia's position in North America is much weaker compared to most other markets.

In Pyramid's analysis, these realities will create a rising tide that will carry Windows Phone 7 into a dominant position.

Importantly, Bokun emphasizes that Android will continue its growth, almost neck and neck with Windows Phone 7. Both will gain market share over the next several years, with Android's rate of growth slowing, and Windows Phone 7's growth rate increasing especially in 2012 and 2013. Bokun's argument is that the market dynamics will give Windows Phone a slight edge. RIM and Apple will lose share over the next five years, even though they'll continue to sell lots of phones.

Earlier this year, IDC reported that Nokia was the worldwide top seller of all mobile phones in the fourth quarter of 2010. It actually increased its market share slightly for all of 2010, by shipping 453 million phones, up from 431.8 million in 2009. Overall the fourth quarter shipments dipped 2.4% compared to a year ago due to "intense competition" and a shortage of components. Yet Nokia smartphone shipments leaped 38% in the same quarter, compared to a year ago.

The conclusions sketched out in Bokun's blogpost are an outgrowth of Pyramid's research methodology, which is based on local analyst interviews with carriers and handset makers in 51 markets around the globe. The analysts then derive local market projections, which then are rolled up into a global summary.

The basic market dynamics are revealed in the Asian numbers. In Asia overall, Pyramid projects that 3.6 billion smartphones will be sold there from the start of 2010 to the start of 2015. China alone will account for 620 million in the same period (India for about 300 million). In China, Nokia has been the dominant phone seller, based on its Symbian OS, though recently its smartphone sales dropped 10% from its peak. But even with the drop, Nokia sold two of every three smartphones (63%) bought in China. And its Ovi online application store was the most successful in terms of total apps downloaded, according to Bokun.

"Our assumption in China is that, yes, Nokia will decline slightly in 2011," Bokun says. "But overall, if everything Microsoft and Nokia talked about will play out, then the Chinese won't care or know that Nokia phones will run Windows Phone 7 instead of Symbian."

That is, clearly, a big "if." Microsoft will have to sustain software innovation for Windows Phone 7, and avoid the public embarrassments of its glitchy first OS update. [See "Microsoft says it learned key lessons from Windows Phone update fiasco".] Nokia will have to deliver attention-getting handsets with the OS as soon as possible, perhaps by year-end; leverage its manufacturing scale to drive down handset costs; and apply its marketing wizardry to spark and sustain consumer demand.

The main driver for growth in China and other markets in Africa, the Middle East, and Latin America, will be consumers buying their first smartphone. Even with the challenge of China-based handset makers, such as Huawei and ZTE, offering low-cost, Android phones, Pyramid sees Nokia's position in China growing again in 2012, based on the expected new generation of handsets running Windows Phone 7.

Bokun sees the same essential dynamic in Africa and the Middle East: very few smartphones have been sold so far, in big markets where Nokia remains the clear leader in sales, with very strong relationships with the local wireless carriers. And where Android's presence is "still in its infancy."

"For Microsoft, Nokia is bringing on board [to Windows Phone 7] the carriers," Bokun says.

Smartphones are more prevalent in Western Europe than in emerging markets. Currently, in the five biggest countries, 40% of consumers with smartphones have Nokia phones, according to Bokun. She expects a 10% decline in Nokia's share of this market in 2011. "But it will be compensated for in 2012," she says. "Nokia has traditionally been an extremely favored brand in Europe....Based on our talks with [mobile] operators, and past history, Nokia phones are almost idealized."

In Latin America, according to Bokun, mobile operators are mainly concerned with handset price. "What our analyst was told is expect to see very aggressive Microsoft-Nokia products in terms of price," Bokun says. "If operators are telling this to us, then it's probable they have already talked about it with Microsoft and Nokia."

The one market where these advantages are missing for Nokia and Microsoft is North America. The compound annual growth rate from 2010 to 1015 for smartphones is slower here, at 17%, than for other markets (35% for Latin America). But in that period, Pyramid forecasts 750 million smartphones will be bought.

In 2010, the smartphone leaders in North America were RIM at 33% and Apple at 20%, according to Pyramid. But RIM is declining while Apple is growing strongly, according to Bokun. Nokia's share of the smartphone market was about 2% to 3%, and Bokun expects it will be about the same going forward (though she thinks Microsoft's acquisition of Skype, if the VoIP software is integrated as part of the Windows Phone OS, could add 2%-3% more in North America).

"There's no miracle [for Nokia-Microsoft] in the North American market," Bokun says.

John Cox covers wireless networking and mobile computing for Network World.

Twitter: http://twitter.com/johnwcoxnww

Blog RSS feed: http://www.networkworld.com/community/blog/2989/feed

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