Android for Investors

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Android for Investors

June 28, 2010

Jamie Townsend, TownHall 516
-
922
-
2870

Caroline Gabriel, Rethink Research


It is better to know what a firm’s customers are
doing than what its management was saying




Why pay attention to Android


Investors need to understand Android and pay attention to its evolution because it is
changing smartphone and personal device economics.
The
Android
Market
already
measures its applications by the
tens

of thousands. This is
many
times that available for
Palm or RIM devices
. It is also the
first technology
that
seriously
challenge
s

Apple
, which
measures its applications in the millions. Android is a competi
tive catalyst to the handset
and personal device industry. We believe
Android is the fulcrum for Google’s mobile
strategy.

It is also likely the
largest

o
bstacle to Nokia’s smartphone progress.




Android is an open source (free) software platform targeted primarily at smartphones, but
also at a wide range of like featurephones, media players, set
-
t
op boxes and in
-
car systems.

Google’s objective in creating Android was/is to create a common software base spanning any
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21
2
20
13
38
6
Android
Symbian
iPhone
Windows
RIM
Other
US smartphone OS market share June 2010
Source: Rethink Research
We believe
the


primary motivation
behind
Google’s
Android is to
guarantee an open
mobile environment
where it can
dominate
advertising and
search.



TownHall Investment Research

679 West Littleton Boulevard, Suite 201, Littleton, CO 80120

303
-
954
-
4207

Page
2

Motorola and HTC are the flagship Android handset supporters. China Mobile, refers to its
Android
-
based standard platform as the ‘O Phone.”

As a result
,

ma
ny Chinese su
ppliers like
ZTE and Lenov
o

support Android architectures. The US and China have been the most
enthusiastic adopters but Android is gaining a global base.


Its low cost of entry and
potentially vast developer base provide an attractive option for new smar
tphone entrants,
including PC makers like Dell and Acer, or
low
-
end

phone

makers.


The increasing apps base
and brand awareness is also tempting big name vendors, notably Samsung, LG and Sony
Ericsson.

The obvious exceptions are Nokia and the proprietary
smartphone players, Apple
and RIM.


Smartphone
definition


The widely accepted definition of a smartphone is any handset that is web enabled, and has
an OS supported by third party tools and apps.

It does not relate to the hardware
specifications of the device, although a certain
degree of processing power and memory is
required to drive an open OS and apps. Some closed handsets, notably from Samsung and
LG, have more powerful hardware than most smartphones, e.g. 12
-
mp cameras.


Phones that
combine smartph
one OS/web capabilities a
nd top
-
end hardware are often called super
phones, like HTC Desire or Evo.


A rising proportion of smartphones have touchscreens, but these are not essential.

The
major trend of 2010 is the ‘mass market smartphone’


open web and apps capabilities
incorpo
rated in midrange models and price tags, suited to the prepaid market and emerging
economies.

Some vendors target this profile specifically, but most suppliers now produce

a
cutdown version of their top
-
end models for the mass market,
e.g.

Sony Ericsson X
peria X10
Mini.


Android state of the m
arket June 2010


Almost two years since the first Android smartphone shipped, the platform has made
significant progress.

This has been driven by the US but is now on a global basis. We expect
that in 2010 Android w
ill overtake iPhone in the US to become the second largest OS after
RIM, up from just 8% share in 2009.

Worldwide
,

it will grow rapidly too, though it will remain
in fourth place most likely until 2011.


At the most recent Google I/O developer event in J
une 2010, the firm said there were now:



65,000 apps in Android Market



51 device models commercially available (plus 13 tablets/netbooks and 3
e
readers)



Vendors with commercial models: Acer, Bluelans, Dell, Garmin, General Mobile,
Highscreen, HKC, HTC, Huaw
ei, Lenovo, LG, Motorola, Pantech, Qigi, Samsung, Sony
Ericsson, Tiger, ZTE



Additional vendors la
unching this year: INQ, Kyocera



There are also models appearing from ODMs and white label manufacturers for
branding by operators, notably Vodafone,

China Mobi
le, Orange, T
-
Mobile



T
h
is definition makes
Nokia appear to be
disproportionately
large as its Symbian
operating system is
used on a wide array
of feature phones.
We continue to
expect Nokia will
lose
smart and
feature phone
share.




TownHall Investment Research

679 West Littleton Boulevard, Suite 201, Littleton, CO 80120

303
-
954
-
4207

Page
3

Handset OS
lineup


Handset operating systems have varying levels of support. The following is an attempt to
simplify the various operating systems by type


Open or Closed


by vendor support


Many
or one. We’ve added color to pro
vide a sense of current perception and outlook.
Green (the
color of money) is for success, red indicates expected declines, and dark red identifies OS’s
that do not have critical mass and that are not likely future competitors.



Mobile OS Line up

Open
Software Multiple Vendors



Android

Motorola, HTC, Sony Ericsson, Samsung,
LG, Dell, Acer, ZTE, Toshiba, many ODMs


Symbian

Nokia, Sony Ericsson, Samsung


LiMO

Samsung, operators

Closed Software Multiple Vendors



Windows Mobile

HTC, LG, Dell, Acer,
HP, Toshiba


Web/OS

HP?

Closed Software, Single Vendor



iPhone

Apple


BlackBerry

Research In Motion

Source: TownHall and Rethink Research


Operating System
Market share:


In the smartphone sector, Android has made steady gains, and in May 2010, US sales
overtook those of the iPhone for the first time (though that should reverse, temporarily, with
the shipment of iPhone 4).

Outside the US,
there is

a different competitive l
andscape
because of the massive installed base of Symbian, not a significant factor in north America.






10
40
12
13
15
9
Android
Symbian
iPhone
Windows
RIM
Other
World smartphone OS market share June 2010
Source: Rethink Research


TownHall Investment Research

679 West Littleton Boulevard, Suite 201, Littleton, CO 80120

303
-
954
-
4207

Page
4

Android

technology


Android supports several software layers from a Linux
-
based operating system to a user
interface, software developers’ kit (SDK) and applications store, seeking to create an end
-
to
-
end environment.

However, because it is open source, there is a high degre
e of flexibility for
different companies to adapt the system or add their own layers.

This has led to fears of
incompatible variations and fragmentation, and Android has already been removed from the
main Linux tree.


Google’s interests and those of its
licensees sometimes diverge.

The search giant aims to
achieve a unified user experience to drive its own services and also its vision of a mobile web
that is largely seen through the browser rather than local apps.


Key partners, by contrast,
want to diff
erentiate themselves with their own branding, user interfaces and app stores.
Important examples are Motorola with its Motoblur overlay and brand; HTC with HTC Sense;
Samsung with Galaxy TouchWiz; and some operators (China Mobile’s oPhone
implementation of

Android has its own store, as does Vodafone’s Android/360).


As Android becomes a widely accepted brand we believe early entrants like Motorola and
HTC will succeed with their
differentiation. For example, current versions of Android need a
better user i
nterface and Motorola’s Blur and HTC’s various “sense” overlays add value. Over
the long
-
term
,

Android handsets hold the potential to commoditize like PC hardware. While
we currently believe commoditization will
not
impact Motorola or HTC
much before 201
2
,

we
are monitoring Android
software advances
carefully.

Android vs iPhone



Source: IDG and Rethink Research






TownHall Investment Research

679 West Littleton Boulevard, Suite 201, Littleton, CO 80120

303
-
954
-
4207

Page
5

Android Development Time Line


Date

Event

Nov
-
07

Android launched by Google


Open Handset Alliance formed with 34 members including Motorola, LG,
Samsung, HTC,
and
7 major operators

Jun
-
08

Android in beta release


Nokia
buys Symbian and puts it into open source

Sep
-
08

Android Market launched


First Android handset, HTC/T
-
Mobile

G1, launches

Oct
-
08

Motorola announces Android
-
only strategy for smartphones

Dec
-
08

China Mobile previews Android oPhone


Sony Ericsson and Vodafone

commit to Android

Apr
-
09

Samsung launches first Android phone
, Galaxy


HTC launches second phone,
Magic

Sep
-
09

Motorola launches
its
first Android handset, Droid

Oct
-
09

Android 2.0 (Éclair) released, OS ‘grows up’

Nov
-
09

Sony Ericsson unveils first Android model

Jan
-
10

Google launches own
-
brand Nexus One

Mar
-
10

Apple sues HTC, Microsoft claims
patents in Linux/Androi
d


HTC announces Desire superphone

May
-
10

Android 2.2 (Froyo) SDK released


Android sales surpassed iPhone’s in US for first time

Jun
-
10

Motorola Droid X, Samsung Galaxy S, Dell Streak


market gets crowded


TownHall

and Rethink Research set the world straight on Android potential and
those likely to win and lose.

Source :

TownHall and Rethink Research





TownHall Investment
Research

679 West Littleton Boulevard, Suite 201, Littleton, CO 80120

303
-
954
-
4207


TownHall
Investment Research


Jamie Townsend


Ted Banzhaf

Strategist & Marketing

516
-
922
-
2870

jamie@townhallresearch.com

AIM ~ jamie@jrpg.com

Skype ~ jamie.townsend1


Research Sales

203
-
202
-
3439

ted@townhallresearch.com

Skype ~ teddyb411




Gerard Hallaren, CFA


Peter White

Director of Research

303
-
954
-
4207

gerard@townhallresearch.com

AIM & Skype ~
gerard6656


Analyst, Research Principal

303
-
954
-
4207

peter@townhallresearch.com




Caroline Gabriel



Analyst, Research Principal

303
-
954
-
4207

caroline@townhallresearch.com









Analyst/Expert
Network


TownHall Investment Research maintains an active and diverse network of experts who specialize in industry specific verticles
.
These providers are available to TownHall clients. Should there be a specific topic related to the wireless, cellular or med
ia
industry, please inquire and THR will make these experts available for its client's benefit.
For further information, please contact
Ted Banzhaf, Jamie Townsend or any TownHall representative.







All of our opinions are for a 12 to 18 month time horizo
n.

BUY ~
Company is well positioned in a high growth market or gaining share and no discernable threats to current
fundamental momentum. Stock is expected to meaningfully outperform its peers and the market averages

AVOID ~

Conflicting fundamental cross currents make a compelling long or short recommendation unclear.

SELL ~
Company’s markets are shrinking or it is losing share and/or we anticipate fundamental deterioration. Stock is
expected to meaningfully underperform its
peers and market averages.


Disclaimers should be reviewed at:
www.townhallresearch.com


Copyright © 2010 TownHall Investment Research As always, we caution readers that many factors influence stock prices. Valuati
on,
market conditions, accounting, financi
al condition, earnings, and investor expectations are just a few elements into which we have not
deeply delved in this analysis. The information in this publication is assembled from sources believed to be reliable but suc
h reliability
cannot be guaranteed
. This research should not be solely relied upon in any investment decision process. Our opinions relate to what
we see in the long term in contrast to our perceptions of securities market expectations. These opinions generally relate mor
e to
business fund
amental than to a host of other factors, some of which are mentioned in the first sentence of this paragraph.. All opinions
expressed are in the context of those portions of the companies we cover. Those portions may or may not be large enough to
materiall
y impact a company’s financial results or securities valuation. The authors do not receive fees or any other form of
compensation in connection with this report or the analysis contained herein. However, the author and firm do provide researc
h
services for

a fee. Members of TownHall staff may or may not hold positions in securities mentioned.