Mobile OS Choices Multiply

North America United States
Company
TMT Wireless Equipment

FITT Research
11 April 2011
Fundamental, Industry, Thematic,

Mobile
Thought Leading
Deutsche Bank’s Company Research
Global Markets Research

Product Committee has deemed this
work F.I.T.T. for our clients seeking a

Operating
differentiated view on the smartphone
market. Our wireless technology team
looks at long-term trends shaping the
mobile operating system landscape
which is emerging as a key battleground

Systems for the future not only for mobile but for
all computing.

Fundamental: The landscape is changing

Choices are multiplying
rapidly, making a long term impact

Industry: Android has numerical
superiority but will not become
‘dominant’

Thematic: Developers matter most, and
Apple offers them the best returns

Thought-leading: The Web will win, and
the fight is on to shape HTML5

Jonathan Goldberg, CFA Brian Modoff Kip Clifton
Research Analyst Research Analyst Research Associate
(+1) 415 617-4259 (+1) 415 617-4237 (+1) 415 617-4247
jonathan.goldberg@db.com brian.modoff@db.com kip.clifton@db.com

Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 007/05/2010

North America United States
TMT Wireless Equipment

11 April 2011
FITT Research
Mobile Operating Systems
Choices are multiplying
Jonathan Goldberg, CFA Brian Modoff Kip Clifton
Research Analyst Research Analyst Research Associate
(+1) 415 617-4259 (+1) 415 617-4237 (+1) 415 617-4247
jonathan.goldberg@db.com brian.modoff@db.com kip.clifton@db.com

Fundamental, Industry, Thematic, Thought Leading
Deutsche Bank’s Company Research Product Committee has deemed this work
F.I.T.T. for our clients seeking a differentiated view on the smartphone market. Our
wireless technology team looks at long-term trends shaping the mobile operating
system landscape which is emerging as a key battleground for the future not only
for mobile but for all computing.
Fundamental:
impact
The landscape is changing rapidly, making a long term

We expect a continued pace of weekly changes in the state of the market this
year, but decisions being made today will eventually lock in future performance.
Smartphone growth is strong and we think it will accelerate even further as prices
for components fall. We forecast smartphone share into 2015.
I ndustry: Android has numerical superiority but will not become ‘dominant’
Android has taken the lead in shipments and could attain leadership in installed
base in a few years. Despite this numerical superiority, we think flaws in the
platform (like fragmentation) mean that Google will not become the dominant
vendor. The smartphone OS landscape will not resemble PC landscape. This
leaves open the door for other vendors to potentially carve out profitable or
strategic niches, which leaves room for Microsoft to pick up the pieces if Google
stumbles.
Thematic: Developers matter most, and Apple offers them the best returns
Hardware is a commodity, and the only way for phones to differentiate is through
software. This puts priority on building app developer ecosystem. Android’s
installed base still lags Apple’s. More importantly, by our math, the revenue
opportunity on Apple is an order of magnitude higher than on Android. We
calculate hypothetical returns and find the frictions in the Android Marketplace are
so high that monetizing apps is difficult. This is a major hurdle, and has opened the
door to others, like Amazon, which risks further fragmenting the developer base.
Thought-leading: The Web will win, and the fight is on to shape HTML5
Over the long term, we believe the only force that can bridge the splintered
landscape will be the Web itself. Most OS vendors seem to share this view. We
expect a new round of browser wars, but this time around the battle will take
place within the bodies that define web standards, particularly the nascent HTML5
standard. Obscure debates over topics like video codecs will play an important
role in shaping the future landscape. We also see a far-ranging change in the Web
itself and the way in which we interact with the Internet.
Investment options: Component vendors to prosper, giants are challenged
In our view the great irony of this rapidly growing market is that there is no easy
way to invest in a mobile operating system. Smartphones run either proprietary
OS, captive within larger companies or provided free by Google. Nonetheless,
smartphones are now computers in their own right, and consumers will continue
to find new ways to use them. We believe this will drive the need for more
advanced radios, basebands and processors. It will also likely boost demand for
cameras, speakers and sensors. We believe there are still many component
vendors who can benefit from this, a factor which may not yet be reflected in their
share prices.

Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 007/05/2010

11 April 2011 Wireless Equipment Mobile Operating Systems

Table of Contents

Executive summary ........................................................................... 4
Expectations ...................................................................................... 6
Developer math ................................................................................. 7
State of the mobile OS.................................................................... 10
Smartphone growth ........................................................................ 11
The nature of the Web ............................................................................................................ 15
Move toward the cloud........................................................................................................... 20

OS landscape ................................................................................... 23
Installed base .......................................................................................................................... 25
App Store update .................................................................................................................... 27
Security ................................................................................................................................... 29

Cheat sheet ...................................................................................... 30
How to challenge a giant ........................................................................................................ 30

Individual OS review ....................................................................... 31
Android............................................................................................. 32
Fragmentation......................................................................................................................... 34
Conclusion .............................................................................................................................. 35
Summary................................................................................................................................. 36

Android – Other than Google ......................................................... 37
These are not the Androids you were looking for ................................................................... 37

Symbian/MeeGo.............................................................................. 38
End of an era........................................................................................................................... 38

RIM.................................................................................................... 40
RIM is fragmenting itself......................................................................................................... 40

HP webOS ........................................................................................ 43
Surprise underdog or just an underachiever?.......................................................................... 43

Microsoft Windows Phone ............................................................. 45
The best defense is a good offense........................................................................................ 45

Apple................................................................................................. 49
It is good to be in the lead ...................................................................................................... 49

Adobe Flash ..................................................................................... 51
Beneficiaries..................................................................................... 52
Faster, higher, denser ............................................................................................................. 52
Components ........................................................................................................................... 55

Future features ................................................................................ 59
Feature phones ....................................................................................................................... 59
Mobile payments .................................................................................................................... 59
Augmented Reality.................................................................................................................. 60
M2M – Skynet’s First Steps.................................................................................................... 61
The nature of phones .............................................................................................................. 62

Appendix A: Cellular standards roadmap ..................................... 63

Page 2 Deutsche Bank Securities Inc.


Table of Figures
Figure 1: Smartphone landscape summary............................................................................... 4
Figure 2: Smartphone OS market share.................................................................................... 4
Figure 3: Hypothetical developer revenue ................................................................................ 8
Figure 4: Hypothetical app market sizing by platform ............................................................... 8
Figure 5: Android ecosystem sensitivity to conversation rates and installed base ................... 9
Figure 6: Android ecosystem sensitivity to app downloads and installed base ........................ 9
Figure 7: Windows ecosystem sensitivity to app downloads and installed base ..................... 9
Figure 8: Smartphone landscape summary............................................................................. 12
Figure 9: Smartphone OS Market Share ................................................................................. 23
Figure 10: Our view on future OS market share ..................................................................... 24
Figure 11: Our longer term view of smartphone market share ............................................... 24
Figure 12: Installed base by smartphone OS .......................................................................... 26
Figure 13: Installed base by smartphone OS .......................................................................... 26
Figure 14: Application Store – applications available as of latest date .................................... 27
Figure 15: App Store growth, from launch to one year, number of apps................................ 28
Figure 16: App Store growth, from launch to 2.5 years, number of apps............................... 28
Figure 17: Android installed base by OS version..................................................................... 34
Figure 18: Android versions by OS release ............................................................................. 35
Figure 19: Nokia’s mobile OS forecast.................................................................................... 38
Figure 20: webOS developer activity as measured by RSS feeds of the App Catalog ........... 44
Figure 21: Growth of all iOS apps ........................................................................................... 49
Figure 22: Number of iPad vs. iPhone apps, days after launch of App Store.......................... 50
Figure 23: Median mobile phone clock rate (MHz) ................................................................. 53
Figure 24: Median mobile phone ROM capacity (MB) ............................................................ 54
Figure 25: Median mobile phone RAM capacity (MB) ............................................................ 54
Figure 26: Cellular standards roadmap.................................................................................... 63

Deutsche Bank Securities Inc. Page 3


Executive summary
In this report we look at the developments in the mobile operating system (OS) landscape.
Many people believe the smartphone market would look like the PC market 30 years ago
with one OS eventually becoming dominant. In this comparison, they substitute Android for
Windows, and Apple for Apple. We believe this view is mistaken. Instead, we think the
landscape will remain fragmented for many years. The only platform which we think can unify
the landscape is HTML5 and web tools, and these are still several years from maturity.

Figure 1: Smartphone landscape summary
Vendor 2010E units (m) Installed base (m) App Store Apps New models shipped Tablet models in 2011?
in 2010
Symbian 100 ~300m 30,000 10 0
Windows Phone < 2m ~20m (incl. WM) 11,500 3 0
Android >50m ~50m >200,000 >100 >100
Limo/Lisp ~10m 100m ? ? 0
iOS ~100m ~100m >300,000 1 3?
RIM 50m 60m 10,000 5 2?
Palm <2m 5m 5,056 0 1
MeeGo 0 0 0 0 0
Bada <5 m <5m ? 3 0
Source: Deutsche Bank, company data

In this kind of fragmented landscape, many vendors will be able to carve out niches based
either on some specific demographic or along individual strategic lines. Android unit volumes
are already the leading smartphone OS, but we see no one who, as a result of this, wants to
short Apple. Instead, we think Apple will continue to grow its very profitable ‘niche’. Android
will grow faster, but the vendors making these devices will struggle with profitability levels
amid a sea of undifferentiated phones. RIM’s QNX, HP’s webOS and Microsoft’s Windows
Phone 7 all have the potential to build viable niches as well. Moreover, we think there will be
new entrants to the field as various market participants look to steal a march on future trends
and build HTML5-based alternatives or twist Android to their own ends.

Figure 2: Smartphone OS market share

Linux/Other 2008 Linux/Other
2010E
8%
5%
Android
1% PALM/webOS
RIMM 2% RIMM
15% 17% PALM/webOS
Android
1%
17%

Apple
Symbian & 19% Apple
Symbian &
MeeGo 27%
MeeGo
45%
33%
Windows Windows
Mobile Mobile
10% 0%
Source: Deutsche Bank and company data

A key component of this fight will be winning the loyalty of app developers which help each
platform differentiate. For developers, Apple’s iOS remains the focus. Android has become
the default second choice, but developers continue to struggle monetizing this platform. We
see two important elements to this analysis. The first is installed base. Despite the growing



market share of Android phones, the installed base of all iOS devices remains far larger.
Market share estimates tend to only look at smartphones, but we think it is important to
count iPod Touch and iPad units as these constitute a large part of the addressable market
for app makers. As such, we think the iOS installed base was about 121 million at end-2010,
while the Android installed base was around 50 million. The Symbian installed base is larger,
but has been rendered effectively zero by Nokia’s announced intention to move away from
that platform. We think the Android installed base will catch up with Apple this year.
However, our second tenet is that developers will still prefer iOS because making money on
Android is difficult for most developers. By our math, the revenue opportunity for developers
is an order of magnitude higher on iOS than on Android. We detail this math below.

One of the great difficulties in reviewing this space is the lack of suitable investment options
to tap into this growth. We think there is little correlation between Google’s or Microsoft’s
share price and the growth of Android or Windows Phone 7 this year. Aside from buying
Apple, there are a few direct investments in the growth of smartphones and the maturity of
mobile OS. However, we think there are several handset suppliers who stand to benefit.
Smartphones are becoming more powerful, and they are being used for a wider array of
tasks. This means handset vendors will need to cram more components and features into
their devices to tap into consumer demand. This should prove to be good news for a variety
of suppliers. We would include: the processor companies (QCOM, ARM, and CEVA); the
radio components (Skyworks, Avago); audio component vendors (AAC Acoustic, Wolfson,
etc); camera and video makers; touch screen controllers; connectivity vendors (e.g. BRCM,
NXPI); and arguably, memory vendors. In this note, we analyze trends around the growing
density of phones, which has nearly doubled in the past ten years. We expect this trend to
continue. We also discuss ancillary beneficiaries in areas like mobile payments, augmented
reality and M2M.



Expectations
Writing a report like this is something like running on a treadmill. In the time between pen-to-
paper and publishing a lot can change. We began this report in January 2011. In the interim,
we have had Nokia’s choice of Microsoft, HP’s re-launch of webOS, RIM’s Playbook launch,
several iterations of revisions to Android’s openness and any number of new product
launches.

Sometimes, this makes it hard to see the forest for the trees. To counter that minute-by-
minute view of the details of the landscape we want to present a few changes we expect to
see to the landscape this year. We see these as separate from our higher level investment
thesis on the subject which we outline in the reports. We offer these as tactical suggestions
for what we think may happen.

Firstly, Android is likely to continue to grow rapidly. Advances in silicon mean that price
points for sufficiently powerful smartphones are reaching mass market levels, and most of
these phones will run Android. We think every headline for some time from the Street – third
party data firms and the blogosphere– will point to some other way in which Android share is
advancing.

Secondly, we expect to hear more about legal issues relating to Android. Oracle is already
suing Google for Android patent issues. Many other members of the Android community are
also involved in similar litigation. While we have no idea how any of these law suits will turn
out or if others may emerge, we think this is a topic that a few people are discussing. Over
the next year, we think this reality will seep into the industry’s consciousness and gain
further attention.

Microsoft will remain persistent. We think sales of Windows Phone 7 will remain modest.
We estimate that a full slate of Nokia WP7 products will not be on the market for another
year, and the other WP7 vendors appear to be losing interest. Despite that, Microsoft has the
resources (both financial and energy) to stay in the game. We think they will continue to
aggressively market the OS and encourage carriers to support it.

Finally, we think several new operating systems will enter the market. Some of these will be
Android variants from other web properties. Others will be HTML5-based stepping stones
towards what we consider to be the future of mobile, web tools-based devices. Others will
not be truly new OS, but instead platforms for feature phones that emulate many of the key
features of smartphones such as social networking integration. The press has already
reported that Baidu, Facebook and Motorola are all working on variants of these. We think
these reports have some truth to them, and believe others will emerge with time.



Developer math
In this note we will tend to focus on each OS from the point of view of developers, and try to
gauge each OS’s appeal on that basis. While we cannot exactly quantify that appeal, we do
offer the formula below as the framework for our discussion. This will not provide a numeric
answer to the question, but we present it by way of introducing the assumptions on which
we base our analysis. Put simply, each OS holds appeal for developers as a function of:

Installed Base * Marketability * App Value-- Cost of Development

The installed base is the number of users who own a device that runs each OS. We
provide estimates of installed base for each platform.

Marketability – this is the number of users that could potentially end up buying an app.
This is a function of user behavior, how many people actually use apps on each platform.
It is also a function of the friction involved in making a transaction on each platform.
These are both highly qualitative assessment and impossible to calculate accurately.

App value – refers to either the price of a download or the lifetime value of having a user
with that app. This includes services subscriptions, ad revenues, premium upgrades and
other in-app purchases. This then needs to be adjusted for revenue share with each
platform provider. We do not have the data to calculate these numbers today, but
believe that with time we could eventually put some more solid math behind this
calculation.

Cost of development – this includes resources needed to write the app and is largely
measured in engineering person hours.
We explore each of these elements in general in the following sections then in detail in
section on each individual OS.

We think looking at it from this perspective adds an important dimension to the discussion of
OS. Today, most comparisons among OS look at the number of apps. We think this is
meaningless as not all apps are created equal. More important for developers is to calculate
how much money they can make off each platform. Dealing with Apple is not easy, but the
installed base is large, most users download apps and the App Store works very well. There
are also numerous ways to monetize each app. By contrast, Android has a rapidly growing
installed base and is easy to develop for, but suffers on the other two metrics. Emerging OS
like Windows Phone and webOS have a relatively low cost of development but are playing to
almost no installed base.

Let’s put some numbers behind this.

First, to be clear, there is no solid data on this topic. We have seen dozens of individual
developers’ blogs about the performance of their apps on various platforms. There are also
about a dozen analytics companies with published data on the topic. So far, we have seen
nothing truly comprehensive. Apple, Google and Microsoft have this data. We believe all
smartphones based on these operating systems regularly report back usage data to their
respective motherships. However, none of them have shared this data, in part, we believe
because they do not want to draw attention to this particular reporting feature.

For example, let’s say you are a developer. You have developed a game. On the desktop, you
would sell this game for anywhere between $20 and $40, but that still requires a publisher,
physical hardware and distribution costs associated with selling to Best Buy. Apps on the
Apple App store sell for a large array of prices. One of the top grossing, Zombies Versus



Plants, sells for between $0.99 and $4.99 on the iPhone and typically $9.99 on the iPad.
There is a significant body of bloggage about developers experimenting with prices,
promotional price cuts and freemium models. We think standard practice on the App Store is
to give away a ‘Lite’ or Trial version of the app for free or $0.99 and separately sell a $5 fully-
featured app that includes more gaming levels or additional characters. Microsoft has actually
built a Trial mode into the OS. The top grossing app recently is Angry Birds which is $0.99 on
iTunes and free on Android. For this example, let’s say the Lite version of the app sells for
$0.99, which is probably the median app price on iOS, and the full version of the app is $4.99

The next question is of downloads. A large problem on all these platforms is ‘discoverability’,
that is the ability to make consumers aware that an app exists. This is a thorny problem, with
many companies including Chomp emerging to address. Currently, the best way to gain
awareness is to be prominently featured on the Apps store. The process for achieving such
status is completely obscure, and we sense it is something that even Apple does not fully
manage. A top ten or even a top 50 apps, does significantly better than anything further
down. We refer to 2D Boy’s blog (2dboy.com) which provides us with some interesting
insights on the trends for one app. When they launched the iPad version of their app, they
were featured on the App Store and saw 125,000 downloads during the first month. Without
prominent featuring, downloads are at best half of that level.

The next question would be what percent of users upgrade to the premium version. Our
sense is that this rate is in the low single digits. We also think conversion is much higher on
iOS and Windows than it is on Android. We argue below that payment friction on Android is
very high due to a variety of factors. Based on these assumptions, developer revenue works
out to something like the data in Figure 3. This would seem to indicate that even without a
prominent App Store placement, the revenue opportunity is much higher on Apple. An
important difference is the fact that Android users are very reluctant to purchase apps on the
marketplace and as a result the majority of Android apps are free. If consumers were willing
to pay $0.99 for an app, the situation would be drastically different and the revenue would be
close to iOS. In the formula above, this is what we refer to as marketability, and it is an area
where Android struggles.

Figure 3: Hypothetical developer revenue
Downloads Lite Price Conversion Rate Full Price Total Revenue
iOS 50,000 $0.99 3% 4.99 $56,985
iOS Featured 100,000 $0.99 3% 4.99 $113,970
Android 50,000 $0.00 3% 4.99 $7,485
Windows Phone 1,000 $0.99 3% 4.99 $1,140
Source: Deutsche Bank

We also examined this from a top-down perspective wherein we look at the installed base
and the number of apps each user, on average, downloads per month. This gives us a rough
sense of the size of the whole market, but we emphasize that it is very rough because of the
assumptions around pricing. The results (Figure 4) are similar.

Figure 4: Hypothetical app market sizing by platform
Installed Apps Per Total Lite Price Full Price Conversion Total
Base Phone Per Downloads Rate Revenue
Month
iOS 121 10 1,208 0.99 4.99 3% 1,377
Android 52 10 520 0.00 4.99 3% 78
Windows Phone 1 12 12 0.99 4.99 3% 14



To better gauge the sense of the problem we also tested the Android developer revenue
opportunity’s sensitivity to a variety of factors. First, we looked at a sensitivity to conversion
rate, then we looked at the number of apps per month, and finally compared both of these to
the size of the addressable market. By this math, the most important factor is the size of the
installed base. All else being equal, the Android developer opportunity cannot match the iOS
opportunity until the Android installed base reaches 800 million, from roughly 50 million at the
end of last year. We think it can reach that size, but not until 2015. If Android users started
doubling the number of apps they download, then could pull that date forward by a year, but
that seems difficult to achieve.

Figure 5: Android ecosystem sensitivity to conversation rates and installed base
Conversion Rate
78 1% 2% 3% 4% 5%
50 25 50 75 100 125
Installed 171 85 171 256 341 427
Base (m) 250 125 250 374 499 624
400 200 399 599 798 998
500 250 499 749 998 1,248
800 399 798 1,198 1,597 1,996

Figure 6: Android ecosystem sensitivity to app downloads and installed base
Apps Per Month
78 5 10 15 20 25
50 37 75 112 150 187
Installed 171 128 256 384 512 640
Base (m) 250 187 374 561 749 936
400 299 599 898 1,198 1,497
500 374 749 1,123 1,497 1,871
800 599 1,198 1,796 2,395 2,994

We then compared these figures to the Windows opportunity. WP7 has a tiny installed base
today so the opportunity today is essentially immaterial. However, their willingness to share
some of this data points to a better ‘Marketability’ on this platform. This is extrapolating
considerably, but shows how much easier it is for this platform to become profitable than
Android with a much smaller installed base.

Figure 7: Windows ecosystem sensitivity to app downloads and installed base
Apps Per Month
14 5 10 15 20 25
50 285 570 855 1,140 1,425
Installed 171 974 1,949 2,923 3,898 4,872
Base (m) 250 1,425 2,849 4,274 5,699 7,123
400 2,279 4,559 6,838 9,118 11,397
500 2,849 5,699 8,548 11,397 14,246
800 4,559 9,118 13,676 18,235 22,794



State of the mobile OS
Two years ago we published a FITT report looking at the mobile landscape titled Anarchy in
the OS. As the title implies, we noted a huge degree of fragmentation across the mobile OS
landscape. Since then much has changed, but we are no closer to a common OS platform for
mobile phones than we were two years ago. In an update piece that we published in March
last year, Digits #20 The Big Idea, we updated our thesis on the space with the idea that over
time the only unifying force for the mobile OS will be the Web itself and the use of web tools
for developers. Slowly, the industry is moving in this direction.

We think a few trends have become apparent:

Smartphones are exploding, and will continue to grow rapidly.

Android has tremendous momentum. It already has the largest share of smartphone
sales, overtaking Symbian in December. And this is only the beginning. We think its
growth will accelerate this year and again in 2012 as smartphone component prices
continue to fall sharply.

Despite its success, Android has many flaws. These are unlikely to put a dent in its
momentum but will likely leave open the door for others to carve out niche markets or
grow their already highly profitable segments.

With even Google talking openly about the eventual move towards web-based operating
systems, we expect the fight this year to center on the features of HTML5, the next
generation of the web standard towards which many OS makers aspire. Key among
these will be the codecs for video and the <video> tag, cloud synchronization, and the
struggle between apps and web pages as metaphor.

Developers will go where the money is. Android offers volume but uncertain
monetization. Apple’s iOS remains far more lucrative for app developers. All other
platforms remain works in progress.
In short, the industry remains in flux, and we expect many companies to continue to find
ways to build strategic advantage through various approaches to mobile operating systems.



Smartphone growth
One of the clearest trends in technology today is the growth of smartphones. Our current
handset forecast estimates 39% growth in 2010. We are still compiling end-of-year numbers
and suspect that estimate will prove to be too low. Similarly, we think growth in 2011 will
exceed our 28% target. Most importantly, as we pointed out in our sister publication Signals
to Noise last week, we believe smartphone growth will accelerate in 2013 as powerful new
processors enter the market at far lower price points. In particular, we believe that by 2013
we will see volume shipments of 1 GHz processors in phones priced at USD100. At that
point, feature phones will quickly disappear, with survival dependent on the pace of
consumer education and carrier data plan pricing.

We think smartphone growth will have a profound impact on broad technology trends along
two axes. First, as noted above, smartphones are now essentially as powerful as laptops.
Most of the population of the world will never own a PC, but within a few years most of
them will own a smartphone. The phone will become the data device for most people.
Second, the kind of things that people use their phones for will greatly expand. By
comparison, the changes brought upon by the advent of the Internet a decade ago will seem
minor in comparison. In developed markets, we expect to see a significant change in the way
that people shop and interact. In emerging markets, we are already getting a glimpse of the
impact of having unfettered access to data on the political process. Not all the effects will be
positive. For example, those concerned that video games dumb down children, will likely rue
the effect of having video games become completely portable Ask any parent with an
iPhone. This is not the venue to expand on the wonders of technology; we will save that for
Wired and the tech press. Suffice it to say that the Mobile Web will be a powerful force.

Big picture thesis
We believe that smartphone hardware is rapidly become a commodity. By this, we mean that
any hardware feature can quickly be replicated, providing no sustainable barrier to entry.
There is still immense room for improvement and we expect to see some very impressive
improvements in industrial design in coming years. However, all of this can be copied. In
some cases, we have seen top tier handset models copied before the phone even reached
the market.

In this kind of environment, the only way to differentiate a phone is through improved
software, brand building and distribution. These are all tricky and often rest outside the
expertise of many incumbent vendors. The obvious example of this sort of differentiation is
Apple’s iPhone which has a powerful combination of software expertise, marketing prowess
and a wide retail network to distribute its products. No other company can match these
precisely.

By software, we are referring to two elements: first, the operating system (OS) of the phone
including its user interface (UI) or user experience (UX) and second, the ecosystem of third-
party software applications available for the phone. These concepts are clearly linked. And for
a phone or a company to be successful both elements need to be in place.

Operating system landscape
In our first report on the topic two years ago, we identified seven prominent smartphone
operating systems. There are nine today, but only a few of these are shipping in any true
volume today. We provide of a summary of the nine in Figure 8 and detail the outlook for
them in a later section.



Figure 8: Smartphone landscape summary
Vendor 2010E Units (m) Installed base (m) App Store Apps New models shipped Tablet models in 2011?
in 2010
Symbian 100 ~300m 30,000 10 0
Windows Phone < 2m ~20m (incl. WM) 11,500 3 0
Android >50m ~50m >200,000 >100 >100
Limo/Lisp ~10m 100m ? ? 0
iOS ~100m ~100m >300,000 1 3?
RIM 50m 60m 10,000 5 2?
Palm <2m 5m 5,056 0 1
MeeGo 0 0 0 0 0
Bada <5 m <5m ? 3 0
Source: Deutsche Bank, company data

Changes in the OS landscape
In recent weeks, it has become clear that Android has overtaken all other OS unit shipments.
Despite this, the landscape remains highly fragmented. The total cell phone market in 2010
was about 1.4 billion units, of which around 20% or close to 300 million were smartphones.
When viewed on this basis, it should be clear that the landscape is still fragmented. While
Android led the market in December, for the year it only had 20% of the smartphone market,
a small piece of the overall market.

We think this fragmentation is important. Despite Android’s success, we think there is still
room for other platforms to exist. There are also powerful forces that will likely mean the
market remains fragmented for many years to come. On the other hand, we think the
economics of software will pressure the market to move towards a common platform that
works on all phones. Our view, which we detailed in Digits #20 (The Big Idea, March 2010),
holds that the only solution to this dilemma will be web tools. The only force capable of
reconciling the industries players and providing a unified platform will be the web.

The idea of web tools is itself very complicated but we expect it to be the key battleground in
coming years. We had originally viewed this trend as meaning that eventually cell phones
(and probably all computers) would eventually become very sophisticated browsers. It turns
out the vision is more complicated than that.

So first let’s look at what these devices will have in common. We believe that ultimately
smartphone run times will be entirely accessible by common web programming tools using
HTML, CSS and JavaScript. To simplify, developers who program apps today using advanced
languages will eventually be able to use far simpler set of programming languages. This will
open up app development to a far wider range of developers. There are probably a few
million programmers today working in C, C++, Objective C and the like. By contrast there are
hundreds of millions of people who can write in HTML. Most high school students in the US
today learn basic HTML skills, if for no other reason than they learned how to customize their
MySpace pages. This will also open the market to websites that even further simplify the
design process. For instance, as MySpace wanes many teenagers have started to create
custom sites using Tumblr, a popular blogging app that is actually a disguised HTML
authoring tool. As smartphones move to HTML environments we expect an explosion of
development.

In many areas, these tools are already accessible but are yet to fully move into mobile. This
delay is in part due to the early stage of the smartphone industry. One area of investment we
think could prove particularly interesting for the venture community would be in this area. The
search for the mobile Tumblr is on.



However, there are many areas in which web tools are not yet ready for mobile. HTML was
originally designed for desktop PCs with always-on connections to the Internet. For the
standard to proliferate on mobile, it needs to be able to operate in areas where there is no
network connection. The standards body behind HTML, the W3C, has been working on this
problem. The next version of the standard, HTML5, is being designed to make better use of a
device’s local capabilities. That is to say browsers of the future will be able to execute code
without an Internet connection. They will be able to use the local processor and be able to
store large amounts of data on the device.

Again, many of these features are available today, and are slowly being incorporated into
devices and web pages. But the standard is not complete, and work still needs to be done on
a few important areas. The most contested of these, so far, is the video component. HTML5
includes a new function for video, <video>, but much of the specs for this component are
still being ironed out. Among the difficulties here are agreeing to a common video codec or
compression scheme. Codecs are important for ensuring minimum bandwidth requirements
for video streams. The most common codec today is H.264 and is commonly used on most
video web sites. Most of the HTML constituents are comfortable with this standard which
has been around for many years. The issue is the associated intellectual property (IP) and the
patents on which the standard is based. These are owned by MPLA, a media industry patent
pool. MPLA requires content providers, the companies that stream video, sign a license for
use of this technology. Some in the web community are concerned that MPLA will eventually
begin charging for the license. Google, concerned about this, launched an alternative codec
called WebM which is entirely open-sourced. MPLA responded by extending the current
license until 2015 and then further extending it saying H.264 will be royalty free for its
lifetime. This offer is actually not as straightforward as it sounds, but conversely no one has
tested WebM’s patents so there may be patent holders there who could emerge. The debate
about web video is ongoing, and it is too soon to call a winner.

To further complicate matters the existing de facto web standard for video is not an open
license at all; it is Flash platform. This is an important revenue stream for Adobe, or more
precisely the tools used to create Flash video. This is the root of a public debate between
Apple and Adobe. Our view is that Flash will likely remain a video platform for the mobile
web, but will gradually give way to the common HTML <video> format. On the PC web,
Flash is not only used for video. It is a complete programming environment in its own right
and is used to write ‘apps’ for web pages today, especially games. Adobe had hoped to
make this a common platform for mobile apps as well, in effect a competitor to HTML5. This
now seems unlikely to occur. Aside from Apple’s refusal to implement Flash on the iPhone,
there are technical barriers that make this unlikely. Getting Flash to work on different
processors and different operating systems remains a surprisingly cumbersome project.
Essentially, Flash has to be ported to each version of a chipset. This is immensely time-
consuming and labor-intensive. While Flash (may) have some performance advantages over
HTML5, the time-to-market issue will likely prove to be a significant barrier to widespread
adoption.

It should be clear that the subject of web video will not be resolved soon and thus HTML5
will take some time to achieve its goals. And this is just one aspect of HTML5 being
resolved. At heart, the key difficulty faced by the World Wide Web Consortium (W3C) and
HTML5 is the same issue that has plagued the mobile community for years. Smartphones are
incredibly diverse with innumerable combinations of processors, screen sizes, form factors
and input methods. HTML5’s task is to unify all of these in a common framework, but device
difference will persist.

Until HTML5 becomes more mature, OS makers will continue to deploy various tools to
bridge this gap. As a result, we have seen many of them launch alternative software
environments. One of the key elements of an OS is the Software Development Kit (SDK) that



each OS provides to developers. SDKs have three key elements that rest at the heart of a
developer’s ability to tap into a particular OS. These three are the Application Programming
Interface (API), an emulator and developer tools. (SDKs contain many more elements, but
these are the three major ones).

APIs are the list of functions or commands available to programmers, and each SDK contains
a dictionary-like list of APIs that describe all the ways in which they can be used. To put this
in context, version 4 of Apple’s iOS contained 1,500 new APIs to the thousands available in
previous versions. APIs are a key metric for developers, measured in quality and not only
quantity. Google, for instance, withholds APIs of each new version of Android for several
months, giving one hardware partner an advanced set to give them a short-term advantage in
the market for launch of flagship devices. There is also a debate about so-called “private”
APIs for use only by the OS designer to build special apps. In iOS, the various multi-task
functions are controlled by Apple. In Android, Google restricts access to Google apps like
Gmail and Google Maps. (This is a complex issue which we will save for a further note.)

Emulators are tools that run on desktop computers which can simulate how an app will
perform on a phone. This is useful for testing new apps and is emerging as an important
differentiator for developers as well. There is a perception that Android’s emulator offers a
better likeness of actual app performance than Apple’s, but as with all technology there are
trade-offs and no perfect solution.

Finally, each OS comes with a set of developer tools that perform a variety of functions.
These range from Apple’s well-regarded X-Code authoring tool (essentially a very advanced
word processor for typing code) to Nokia’s Qt toolkit which aids in developing common UIs
across multiple platforms (and potentially offers much more, please see Digits #25 for more
on this).

So far this is all relatively straightforward. However, each OS comes with its own set of
design principles. Those are expressed in the SDK, but do not always live up to the reality of
developing in the real world. Many device makers have found that their original intentions
cannot fully address the device diversity and have begun to add a more advanced set of APIs.
The most important of these currently is Android’s Native Development Kit (NDK). HP Palm’s
webOS was originally built to be entirely run by web tools, but due to the shortcomings in
HTML, they eventually released a Physical Development Kit (PDK). RIM’s new QNX is also
built with web tools in mind, but also offers Adobe AIR to let developers write more
advanced apps. Even the iPhone began life with only web tools available for app
development before releasing the full iOS with the launch of iPhone 3G.

This is a blur of names, but at heart, these alternative SDKs perform the same function. They
let developers take advantage of lower level processor functions. The key property here is to
tap into hardware acceleration for graphics and audio processing. Despite the appeal of web
tools, they are ‘higher layer’ or ‘more abstract programming languages. The goal here is to
abstract or decouple the app software from the underlying hardware so that devices can
bridge multiple hardware platforms. Apple is the furthest along here because they only ask
developers to support two highly similar devices (iPad and iPhone/Touch). Higher level
languages essentially insert a level of translation in between the app and the hardware. This
is highly desirable but can result in either a performance penalty or a lack of access to device
functions, and sometimes both.

We see all of these as necessary stop-gap solutions that could persist for a number of years.
Like the “Temporary” buildings built during World War II which housed classrooms at UC
Berkeley into the 1990s, we think these patches will persist until these issues are solved by
HTML5.



This problem looks so complex that it may never be solved and devices could potentially
always carry an element of proprietary programming. Critics of HTML5 point out that new
features are continually being added to smartphones and the ponderous pace of deliberation
of the W3C means HTML will always be several steps behind the curve. We think time will
eventually heal this issue, but several elements will need to be added to the standard and the
timeline is not entirely clear for their inclusion. They include:

Hardware graphics acceleration. As noted above, the ability for an app to tap into extra
processing power for graphics is important, especially for game developers. It will be a
long time before all phones offer this, so each OS and HTML will have to take this into
account.

GPS. The W3C is working on a specification for Geolocation but we believe this still
requires significant work, particularly around building common support across multiple
location data sources (GPS, location databases, etc.)

Device sensors. One of the key hardware advances of the iPhone was the addition of
motion sensors. We imagine that with time devices will have other similar sensors to
detect real-world phenomenon like temperature and light. This remains a work in
progress for web standards.

Connectivity. Wi-Fi and especially Bluetooth have a wide range of software profiles that
need to be supported. To achieve a truly web-only device this will need better support in
HTML.

Screen size. Perhaps the trickiest issue in smartphones will be the diversity of screen
sizes and resolution. This problem has largely been solved on the PC-based web, but
those computers have the advantage of ample processing power and screen real estate.
The issue will prove particularly troublesome in mobile for graphics intensive apps such
as games and design-heavy web sites.

The nature of the Web
Our belief is that with time all of the abovementioned issues can be resolved. The web
community may not be able to find a perfect solution, but should be able to find one that
works well enough for most. However, we think there remains another emerging divide in
the mobile web. This is a more existential question of what does having the web or the
Internet on a device truly mean. This sounds somewhat abstract but will likely become a key
issue in years ahead.

Over the past decade of the Internet’s existence we have grown accustomed to accessing it
through a common medium - the web browser. Users open a browser, the browser sends a
request to a web server which responds with various pieces of data. The browser then
renders this data into a readable format on the user’s computer screen. Users then navigate
to various other web pages and the process repeats.

We think ten years from now this metaphor will look dated. In the future, when we talk about
web pages our children will look at us like we look at our parents and grandparents when
they regale us with stories of the golden age of radio. We will access data on the web
through a variety of other mechanisms. We see the issue dividing into two separate disputes.
First, there is ownership of the browser and the rendering engines that powers it. Second,
there is the heart of the metaphor – the web page.

Browser engines
Rendering engines, also known as layout or browser engines are the workhorse component
of a browser. They take data, in the form of HTML code, and convert it into colorful,
information-packed web pages. This is a relatively straightforward process, but one that still
allows different browsers to customize on a common engine. One of the reasons that this is



important to mobile is that these engines are able to bridge the gap between the various web
standards and the hardware the browser runs on. Rendering engines execute a fair amount
of code but all strive to maintain compliance with the various W3C standards. Historically,
each browser vendor had their own engine, but over time many of the vendors began using a
common engine and sought other areas to differentiate.

This is a complicated arena with many proprietary and open source engines on the market.
However, increasingly the browser makers are standardizing on the WebKit engine, with a
few notable exceptions.

WebKit is an interesting case study. It began life as the internal engine for Apple’s Safari
browser. In 2005, the company decided to create an open-source project with the WebKit
name. They opened the code to outside developers and have worked over the years to
merge this version into their computers.

Since then, many companies have adopted WebKit as the common engine for their
browsers. On the desktop, the leading WebKit-based browsers are Apple’s Safari and
Google’s Chrome. More importantly, however, WebKit has gradually emerged as the default
choice for mobile browsers. Almost every pre-installed web browser on a smartphone that
ships today is based on WebKit. Essentially, the first dispute we mentioned above, has been
fought and WebKit has emerged as the clear leader, but not yet the winner.

There are, however, several notable exceptions. Arguably the most innovative browser
vendor is Norway’s Opera. While not well known in the US, Opera has an important browser
presence in many markets. They use an internally developed engine known as Presto. Opera
is important as they are the largest independent browser company on the market. As
providing browsers is their only business, they have generally been a step ahead in delivering
innovative features such as tabbed browsers. They have also developed a range of browsers
optimized for mobile environments.

Another important player is the Openwave mobile browser. Openwave was once the leader
in the mobile web, when the mobile web meant low-res WAP browsers. The Openwave
browser remains probably the most widely installed browser on the market today, although
the limitations of WAP browsing generate only a tiny share of the traffic of smartphone
browsers. Many of the thought leaders in the mobile web today are Openwave alumni, but
the company went through several difficult years. They sold their browser to Purple Labs
which is now part of the Myriad group, a leader in a wide range of mobile software.

Mobile web browsers are by no means exclusively the domain of incumbent desktop
browsers. The leading private mobile web browser is Skyfire. They have developed an
optimized browser for mobile environments, which in certain situations involves caching
content on their own servers for more streamlined delivery. Skyfire originally built their own
Gecko rendering engine but have since transitioned to WebKit.

The most prominent of these exceptions is Microsoft. They continue to build their desktop
and mobile browsers on the Internet Explorer and their internal Trident engine. This matters
for two reasons. First, if Windows Phone becomes successful (a big if) then Trident will
remain important. This will depend on the success of Windows Phone, a topic which we
explore further below. This is also important because Explorer remains the leading computer
browser and Microsoft’s actions hold considerable sway over the broad development of web
standards at the W3C. So there was a major sigh of relief when Microsoft announced it
would fully support HTML5. This was an important validation of the standard, but then
opened the door for the next wave of the browser wars.



Browser wars
Mention the subject of the browser wars in Silicon Valley (or probably Wall Street) and old-
timers will get a faraway look in their eyes as they relive those glory days. The browser wars
were an integral part of the first Internet Bubble.

For the 80% of our readers who are too young to remember that, the story is worth
recounting briefly. The remarkable growth and then IPO of Netscape essentially sparked a
great wave of interest in the Internet. It brought capital which fueled its early growth before
reaching exaggerated levels. Netscape’s founders had created the first browser and then
gone onto to start their own company with a commercial browser model. This was widely
seen as a threat to Microsoft’s dominance of the desktop. Futurologists of the time talked
about a future in which the operating system would be subsumed and all applications would
run on the browser and the operating system would become irrelevant. Microsoft took that
threat seriously enough to bundle its own Explorer browser with Windows. Over time, this
made life difficult for Netscape and eventually pushed Netscape from the market, but at the
price of exposing Microsoft to its antitrust woes which persist to this day.

Despite the eclipse of Netscape, we would argue that the vision persisted and has already
arrived. The best example of this is Apple. Set aside the iPhone for a moment, their computer
business remains very strong today. True, the iPod and iPhone helped this, but more
important was the web. A standalone computer relies entirely on the operating system.
Anything that is interesting or useful about a non-networked computer has to rely entirely on
the OS. Add the Internet, and suddenly there are many more interesting things to do with
that computer. Most people use their computers today for three things – work, e-mail and
web browsing. Of these three, only the work element really needs a robust operating
system, and even this importance is waning. For all those consumers who did not need the
best version of Excel and Word, and wanted a simple to use computer, the Mac was a
perfect choice. Apple owes its existence to the Internet.

So much for history. We recognize that the 1990s’ browser war ended with the OS remaining
dominant, but it opened the door for other entrants. Some would argue that the OS remains
important and the 1990s proved this. We do not agree, we think the browser wars were
really just the first stage. The next round, the one looming, could very easily go the other
direction.

We are already seeing the signs of the direction that the next browser battle will take and
think this time around the dispute will likely be a little trickier to follow. Instead of being
fought between two competing browsers in full public view, indications are that this fight will
take place in the committee and subcommittee meetings of the W3C. In the introduction we
mentioned the dispute over web video. One the one hand we have H.264 a standard which
has been designed in public set against WebM an ostensibly ‘open’ standard which has been
designed by a single company, Google. The company has claimed noble goals for their effort
around WebM whose code base they have donated to an open source initiative. There is
some credit due their intentions, but we would also see this as their attempt to tilt the
standard in their favor. This is just the most prominent of a whole range of issues to be
debated.

What is the Web?
Stepping back from the minutiae of standards specs, there is a more fundamental debate
taking shape over the very nature of the Web. So far this issue has seemed very minor,
something that has sparked a little bit of interest on the blogosphere and very little notice in
the wider public. That will change. We see this as almost an existential discussion that could
change the way in which we interact with data.



Historically, the web developed as a series of links to blocks of text. Over time, pictures,
video and eventually applications were added, but the fundamental metaphor of looking at
“pages” remained. Today people open web browsers and look at these web pages, but
there is no reason that data has to be organized this way. Increasingly, most data is coming
in the form of streams of data – RSS feeds, Tweets and Facebook updates. On mobile, the
notion of the browser and web page has given way to the “app” or application. If you look
under the hood of most iPhone and especially Android apps, they are essentially bookmarks
that take users to web pages.

Over time, we think alternative methods for accessing the web will become dominant. The
browser will give way to apps, and apps will give way to widgets, embedded data and host
other interface mechanisms. We believe that the apps will likely prove transitory for some
unknown, more intuitive interface.

In thinking about this, it is important to define a few terms. We tend to use the terms ‘web’
and the ‘Internet’ interchangeably, this is not truly accurate. The World Wide Web is a big
collection of web pages; users access them by making HTML calls into the Internet. The
Internet in turn is a vast collection of inter-connected networks that store all sorts of data
most of which is not structured as a page. The debate of the nature of the Web is sometimes
framed as a fight between HTTP and the Web, or of apps versus pages. We frame this as a
spectrum of interfaces for accessing data. In some context, say sitting in front of a computer,
the interface will remain the browser and the page. In other context, for example, looking up
movie times at theaters near you, when an app probably works best. In other situations,
embedded widgets with limited processing power, say a time and weather report in your
refrigerator.

All of these things will likely rely on the same set of Web standards, but the device in which
they reside will play a large role in determining the content they can offer.

In the context of mobile phones, tablets and other portable consumer electronics, this
somewhat esoteric debate takes on real meaning. We recently spoke with a developer who
contends that in the future companies will build new software with mobile in mind first, and
their PC web presence as a second priority. By his reckoning, his latest project is not a ‘site’,
it is an app, and this distinction has both technical and emotional connotations.

All of this gives OS makers considerable leverage, and their decisions will shape software
developments for their platform. From where we sit, it is still too early to see clearly how this
will all shake out. On the hand, the major players – Apple, Google, Microsoft, RIM – talk
about HTML5 eventually becoming the dominant platform, but that standard is not ready. In
the interim, we anticipate a broad scramble over the definition of HTML5. To draw a historical
analogy, this is like the end of World War One. Ostensibly, both sides called an armistice on
October 4, 1918, but fighting did end until the agreement was signed on November 11. In the
38 days in between both sides kept up the struggle to lay claim to a final border line.
Everyone knew where the end line was, but kept fighting until the end. In the mobile web,
everyone knows the endgame will be HTML5, but instead of 38 days this ‘final’ stage of the
conflict will last five years, with everyone struggling to eke out the best terms for
themselves.

We can make this a bit more concrete. Today most mobile apps are essentially web pages
rendered by WebKit. Developers can already write their apps entirely in HTML5, but we think
most app-makers would argue that doing so comes with a performance penalty. For
instance, we recently heard of one developer who built their app using HTML5 only because
they felt this would make it that much easier to port from iOS to Android. A few months later,
the developer completed the project and in hindsight now believes this path was a mistake.
Using web tools to write the app did save a lot of time in the initial coding of the app, but the


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