It's the software, stupid!

In less than two years, Apple has gone from no cellphone to having a single phone model that accounts for a 8.2% of the 2008 smartphone market (10.7% in Q4) and 0.9% of the overall 2008 market. The secrets have been its pre-existing industry ties (including its brand, desktop software and iTunes Music Store), its skills as a systems integrator, and their ingenious strategy for creating a new ecosystem.

However, at its core Apple has succeeded because it’s a great software company. They have been a software company since their founding — when Steve Wozniak wrote software to control Apple’s first floppy disk drive. Apple has changed what consumers (and the industry) expects from a smartphone through their software.

Of the major players in the industry, only one or two have the prospect of also being great software companies. The rest should admit that they’re a failure and outsource software to outsiders, shifting from vertically integrated R&D to open innovation. This reminds me of my post-doc, when I studied how Apple dumped its below-average manufacturing capabilities and from then on used outsourcing.

Clearly Research in Motion (16.6% of smartphones, 1.9% overall) is a great software company. There are aspects of the BlackBerry software that I don’t care for, such as the browser. However, there is no question that they have both created a compelling user client and built a tremendously successful, rapidly growing business around systems integration with their industry-leading backend.

The market leader Nokia is the other possibility. From what I’ve seen, they’ve succeeded despite rather than because of their software. They have volume, market share (38.6%by Gartner’s 2008 estimate) , branding and solid hardware, but no one (other than the most hardened Nokia bigot) would say that their software interfaces are compelling or lead the industry in ease of use. It has been steadily losing smartphone market share to the BlackBerry and now iPhone.

The wild card is Symbian, the longtime OS supplier for its high-end S60 phones. Nokia spent €264 million (more than $400 million) to buy that portion of Symbian it didn’t own already, with the deal closing last November. With the entire solution in house, will the Nokia team respond effectively to the iPhone challenge by hiring outside usability experts? Or will they continue to do more of the same, with hardware and software features substituting for a compelling user experience?

There are promising signs. Even before Nokia began to shift from handsets to services, it spent heavily on software. It has a more coherent platform strategy than any of the other top five vendors, limiting itself to S40 and S60. It also was an early adopter of WebKit — Apple’s modernization of KDE’s HTML libraries — and thus have a browser experience that approaches Apple’s and Google’s.

For the rest of the industry, the only hope is outsourcing software. Without the sin of pride and “not invented here,” Taiwan’s HTC has been gaining market share rapidly (from a low base) by using operating systems from Microsoft and Android. The enterprise-centric Windows Mobile doesn’t have a compelling user experience, and Android is a long way from being the ne plus ultra of cellphone experience, but they are both better options than what HTC could have done on its own.

Sony Ericsson (7.6% in 2008) is hardly sinless here: with parents like Sony and Ericsson it would be impossible. However, their falling market share appears to have woken them up. They have been a longtime member of the Symbian alliance, they’ve added Windows Mobile to their portfolio, and they have announced plans to ship an Android phone.

Motorola seems like it is also admitting their software weaknesses and moving towards open innovation. Software has been Motorola’s downfall as they missed the shift from component-based functionality to software-based functionality and thus have been a non-entity in smartphones,.

However, things seem to be changing in the face of unrelenting bad news: the longtime #2 vendor has fallen to 5th place (below 7%) in the Q4 estimates. Led by a new outside co-CEO with no allegiance to the old way of doing things., they seem to realize they have to do something new. Two of their three platforms are now outside platforms: WIndows Mobile and Android, and if Android proliferates to the low-end (as predicted), they can probably drop their legacy P2K low-end platform.

This leaves the two big Korean players, Samsung and LG, who were #2 and #3 in global sales in the 4th quarter and accounted for 16.3% and 8.4% for the entire year. Even more so than Nokia, they have succeeded despite their software.

Samsung has an incoherent smartphone strategy that surpasses even Motorola, with shallow experiments in just about everything. They shipped the best Palm OS phone ever, my longtime favorite the i500. They have been a Symbian member but done little with it. The closest thing they’ve had to a smartphone hit has been the BlackJack, which feels like a surfboard to me but has won some praise. They were an early member of the Embedded Linux Consortium and has long shipped Linux smartphones to China. Meanwhile, they are a founding member of both the LiMo and Android consortia, and claim they’ll ship examples of each this year.

At this point, Samsung seems committed to using open innovation for their high-end phones, but they still use their own OS for the bulk of their phones. Will they see software as essential to the usability of their products or just a cost to be minimized in their low end phones?

Historically, in electronics LG has copied its larger longtime rival. LG has done Windows Mobile and Symbian phones, and someday will do Android too. Still, LG seems even less committed to first-class software for its phones, and thus unique devices (like the LG Lotus) languish for lack of connectivity with applications and other devices.

I have long been skeptical of the prediction that the fragmentation of cellphone operating systems must inevitably end — a prediction that most recently I heard in December at a Symbian event and yesterday at an Android event. I think a bigger impact on fragmentation — and industry usability — would be to end the “not invented here” mentality and mediocre in-house software solutions, switching to one of the major shared platforms like Symbian, Android, or even Windows Mobile.