Nokia announced today that it will adopt Microsoft's Windows Phone as its main strategy for smartphones, embracing Microsoft's developer ecosystem to drive its future smartphone growth. This is a significant announcement that changes the market dynamics dramatically and accelerates the horizontalisation in the mobile software platforms. Google's Android significantly contributed to the horizontalisation and now Nokia's partnership with Microsoft creates another credible choice. We have assessed Microsoft's mobile strategy back in March 2010 and it still holds true. We mentioned this Nokia partnership possibility in that report!

However, several questions remain like how Nokia will monetise its investments in MeeGo, Qt, Symbian, Ovi and Web Runtime and the availability of first Nokia Windows Phones. As for chipset vendors, last week we wrote that Qualcomm could be a prime beneficiary from this deal. We believe Nokia will add Qualcomm, Broadcom, ST-Ericsson, Renesas and Intel to its Windows Phone supplier list. We will know more on these questions as it unfolds today.

Microsoft announced at CES-2011 that its next generation Windows PC platform will run on ARM architectures. NVIDIA, Qualcomm and Texas Instruments were named as key ARM silicon partners. We think this is good news for stand-alone ARM applications processor vendors such as Texas Instruments (TI) and throws the company a lifeline at a time when the market is moving towards integrated solutions.

By our estimates, the market for stand-alone applications processors in smartphones contracted from 70 percent in 2007 to just under 30 percent in 2009. Vendors such as Qualcomm are driving the baseband-integrated applications processor market and these integrated processors are increasingly gaining acceptance in the smartphone market. The integrated approach is currently popular in the low-to-mid range smartphones but is gaining traction in the high-end as well lately.

Microsoft's decision to port the Windows PC platform to ARM architectures changes the market dynamics dramatically. However, it's too early to tell what impact it will have on Intel as Microsoft hasn't revealed any timeline for these new products. ARM hasn't yet revealed its 64-bit architecture and current generation ARM processors also cannot support graphics computing APIs such as OpenCL. It will take at least another 18-24 months for Microsoft to reengineer its platform for ARM architectures and to build a software ecosystem around it. This should give enough time for Intel to bring power-efficient processors to the market. Intel is expected to feature in Nokia's MeeGo smartphones and tablets in 2012 which we think would be a great psychological boost to counter ARM-based processor vendors.

The likely specs for Windows on ARM architectures are:

• CPU: Dual-core / Quad-core ARM Cortex-A9; GPU: ARM Mali-400 / Third-party GPU

• CPU: Multi-core ARM Cortex-A15; GPU: ARM Mali T-604 / Third-party GPU (Most likely configuration and leading chip vendors such as TI, NVIDIA and Samsung were already announced as licensees of Cortex-A15 cores)

• Custom ARM processor designed by Microsoft and its hardware partners

This move is a good news for NVIDIA, Qualcomm and TI as it opens up new opportunities. Qualcomm already has customer relationships with top PC vendors and is expected to leverage them to expand into the Windows PC ecosystem. This move equally helps the stand-alone applications processor vendors to revitalize their businesses and to compete for higher volume. Broadcom, ST-Ericsson, Samsung, Renesas, Marvell and Freescale could also potentially feature as future Microsoft's partners.

We believe diversified device and OS landscape favors chip vendors as they can avoid the risk of being sidelined by powerful vendors. With Microsoft's support, ARM chipset vendors can now look forward to new markets that were unavailable to them previously.

It's hard not to see that mobile software platform players are positioning themselves as a one-stop shop to offer an integrated experience to their target customers. What this means is that more and more 3rd party functionality and apps are now built right into the core of the platform. This kind of software verticalization is good only as long as the core platform functionality outclasses the stand-alone 3rd party functionality. But the problem starts when a platform vendor packs an inferior solution into the core of the platform and limits platform flexibility. This could threaten that platform's long-term credibility too. For example, if a mobile software platform player is bundling their own browser, media player, and internet services with the core platform they should make sure that these applications and functionality are comparable to other best-in-class solutions.

There are couple of ways a mobile software platform player can avoid inferior solutions into its software stack:

• By acquiring 3rd party companies that provide superior functionality over the platform's core functionality

• By ensuring that their platform is flexible enough to accommodate 3rd party functionality integration

Now let's get back to some real world examples. Android has so far proven flexible enough to accommodate 3rd party innovations that are superior to Android's built-in functionality. For example, some OEMs replaced the built-in onscreen keyboard with SWYPE; other OEMs replaced built-in multimedia functionality with their own stacks; and some OEMs even replaced Google's built-in internet services. This is one of the advantages with open source platforms. However, the down side of this flexibility is that the platform's consistency is compromised resulting in delayed updates to consumers. If Google stops OEMs from customizing Android then the platform could potentially suffer from a lack of innovation as Google becomes the single source of innovation. Now let's take a contrasting case: Microsoft's Windows Phone 7 (WP 7). With WP7 Microsoft appears to be taking control of the platform experience by limiting 3rd party apps to replace core platform experience. It seems that Microsoft is building much of the 3rd party functionality into the platform itself which could limit 3rd party innovation. The downside of this approach is that Microsoft needs to be at its best to make sure that the platform's core functionality is superior to 3rd party functionality. Failing to do so could result in losing share to more flexible open source ecosystems.

This is definitely an interesting dynamic to keep an eye on as mobile software platform players increasingly try to integrate 3rd party functionality into the core of their platforms. Winners will be those who strike a balance between consistency and flexibility. There seems no clear winner in this aspect for now as many players are still in the process of building integrated mobile software platforms.

MediaTek today signed an agreement with NTT docomo to license the latter’s LTE IP. MediaTek is a significant player in the WiMax baseband market but currently lacks an LTE roadmap. The company clearly has challenges in addressing the higher-end market, but in the last year alone it has made three important moves to strengthen its position: Firstly, the company licensed W-CDMA IP from Qualcomm in 2009; secondly, the company joined the Symbian Foundation, Open Handset Alliance and also partnered with Microsoft to improve its smartphone position; and thirdly, the company is now making a move to secure its position in the LTE chipset market. We expect the LTE terminal chipset market to be highly competitive with incumbents and startups all fighting for share.

MediaTek is currently second only to Qualcomm in the cellular baseband processor market but the company could easily cede its position without significant improvements in the 3G / 4G, smartphones, tier-1 vendors and tablet areas. As we noted in a previous report, MediaTek clearly has to develop products to address tier-1 handset OEMs, smartphones, and UMTS phones. Based on our estimates, MediaTek had less than 1% share in smartphones for its integrated processors in 2009. The company currently lacks stand-alone application processor products and its current line up of integrated processors is only good enough to address entry-level smartphones. We believe that MediaTek may have to go for an acquisition to strengthen its 3G / 4G modem IP and CPU design expertise to attack the high-end smartphone and tablet markets. Without design-wins at tier-1 handset vendors it would prove difficult for MediaTek to grow its market share in these segments.

Today’s announcement is further indication that MediaTek is not prepared to rest on its strong position in the GSM/GPRS/EDGE baseband market, but is looking for long term (evolution) strategies to gain market share in future growth areas.

- Sravan Kundojjala

P.S. This announcement is in contrast to the Japanese chip vendor Renesas which partnered with Nokia to develop LTE IP recently. Previously, Renesas licensed W-CDMA IP from NTT docomo to design its basebands.

The number of mobile operating systems just keeps getting bigger and to our count close to ten platforms are now competing in this space. They include Symbian, Android, iPhone OS, BlackBerry OS, WebOS, MeeGo, bada, Windows Mobile, LiMo Foundation-compliant platforms, Brew Mobile Platform and Linux variants. The question that obviously comes to everyone's mind is who will win in this mobile software platform market.

There are some interesting angles to think about this.

• Can the smartphone market size accommodate this many platforms?

• Do consumers care about operating systems?

• Is it a zero-sum game or can there be a more than one winner?

• Everyone is talking about carriers becoming dumb pipes but what about handset OEMs? Will Google and Microsoft make handset OEMs as dumb pipes or add value?

• Should every handset vendor build their own OS? Can they cope with incremental mobile OS R&D costs?

• Can horizontal and vertical business models co-exist in the mobile industry?

• Is there enough developer support to address every OS?

• How many platforms operators can support?

We think R&D capabilities, scale, brand, and strong partner and developer ecosystem are necessary ingredients to sustain a long-term smartphone OS and only few of the above mentioned platforms check most of the boxes. Strategy Analytics estimates that smartphone OS vendors currently spend close to $100-$200 million on R&D on average and this is expected to grow incrementally.

Nokia (Symbian and MeeGo): 2010 will be remembered as a software transition year for Nokia and 2011 will see a settled software platform strategy with both Symbian and MeeGo (Maemo) getting much waited Qt UI and app frameworks. Nokia has a unique software strategy and is the only vertical vendor who is open sourcing its proprietary platforms. Nokia already has scale, brand, and R&D capabilities and if the company can excite the developer community and consumers with Qt then it should keep its smartphone lead for a long time to come. Nokia is well positioned to democratize the iPhone and BlackBerry experience to the masses. Nokia's software transition will be watched closely as competitors becoming stronger.

Microsoft: We believe Microsoft can not afford to lose in the mobile platform market given its synergistic importance to its other businesses and Windows Phone 7 Series (WP7 Series) announcement just reiterates that. It remains to be seen how WP7 Series platform will fare in terms of price points, hardware requirements, OEM support, developer and consumer reaction which can decide whether Microsoft can get the scale that is required to sustain a long-term smartphone OS. Microsoft will face a strong challenge from Google as both companies are targeting the same OEMs. Microsoft may position older Windows Mobile versions for low-end smartphone market but it remains to be seen how OEMs will react given more appealing nature of WP7 Series platform.

Android: Google and its partners executed very well so far and 2010 could be the Year of Android. Unlike Microsoft's WP7 Series platform, Android can also run on low-end chipsets which can increase its addressable market. Android and Symbian are the only mobile OSs that are targeting mass-market smartphone segment currently. This gives edge to Android to gain scale as handset OEMs push Android to feature phones. However some key risks like fragmentation and future Google moves that may cause friction to OEMs and operators will be watched closely. We also believe that the expanding size of the smartphone market should create enough opportunity for horizontal software platform players as Google and Microsoft currently lack high volume handset customers.

BlackBerry OS: RIM continued to gain with its market leading "Push" technology and security features. However, its web browsing and touch screen experience needs to be addressed. RIM already trying to fix the web browsing problem with new WebKit-based browser but touchscreens remain a challenge.

iPhone OS: Apple continues to win mindshare from developers and consumers alike and is well positioned to be a long-term player in the smartphone OS market. Apple's web browser is equally capable even if the trend shifts to web applications in the future. Apple may come under pressure from Android and resurgent Microsoft in the future but the growing size of the smartphone market should give enough room for iPhone OS to grow.

LiMo Foundation: Being a middleware platform and because of its governance structure, the LiMo Foundation currently lacks a direct relation with the developer community and currently depends on its operator partners for ecosystem. 52 LiMo-compliant handsets have been announced so far and 24 major global carriers are members of the Foundation. We believe that the LiMo Foundation's middleware platform is technically closer to Nokia's MeeGo and it remains to be seen how the Foundation will pursue its strategy given global OEMs are currently choosing Android.

Palm's WebOS: Despite seeming to have one of the best mobile platforms, Palm's limited geographical reach, and limited R&D budget could prevent the company from scaling as much as its competitors Nokia and Apple. Palm's lack of brand-awareness outside North America is not helping the matters. We believe Palm's lack of scale could hurt it in the future as its competitors become even stronger.

Samsung bada: Samsung bada's definition and market positioning remains still subjective given its kernel-configurable nature. It remains to be seen how Samsung's bada will keep pace with Android, iPhone OS, Symbian and others. Like Android and Symbian Samsung's bada also expected to target mass-market smartphones.

Qualcomm BREW Mobile Platform (BMP): We believe Qualcomm is positioning BREW as a low-end smartphone platform but it will face a stiff challenge from Android and Symbian as they are also trying to address the feature phone market. Qualcomm's BMP is also not supported by other chipset vendors but Qualcomm is expected to leverage its existing relations with operators and handset OEMs.

Despite the desire of OEMs to control their platforms, we continue to believe that the growing R&D costs to develop a smartphone OS and ecosystem around it could potentially force them to consolidate their efforts around licensable operating systems while also building OS-agnostic differentiating layers on top of that. Examples include Nokia (Qt / OVI), Motorola (Moto Blur), Sony Ericsson (UX), HTC (Sense UI), Samsung (TouchWiz) and LG (S-Class).