Who will control the heart of handsets‾

In years past, when the mobile-phone industry gathered for its biggest annual convention, the talk was mostly about bells and whistles"”who had the sexiest, thinnest, or most feature-packed handsets. Not this year. At the 2008 Mobile World Congress in Barcelona, Spain, the center of attention has shifted to the software inside phones that most consumers don't ever think about.

From flashy newcomer Apple (AAPL) with its hit iPhone, to gate-crashing Google (GOOG), to stalwart Nokia (NOK), the titans of tech are locked in a high-stakes battle for the heart and soul of mobile phones. At stake is nothing less than the future of mobile communication"”and, by extension, of the Internet, as a growing number of consumers around the world access the Web from handheld devices.

It's no wonder operating systems have become the industry's new focus. The majority of today's handsets are still based on proprietary operating systems developed by makers such as Nokia and Motorola (MOT) for use in their own phones. These closed software environments are costly for makers to maintain and upgrade, limiting the opportunity for economies of scale that would be possible if phones from many makers shared common software.

What's more, by fragmenting the market, closed systems make life more difficult for operators and suppliers of mobile software and services. Paris-based Gameloft (GLFT.PA), for instance, the leading seller of mobile games, has to separately develop, test, and support hundreds of versions of every game it makes thanks to the lack of software standards in mobile phones and differences in operator network configurations.

Industry leaders are fed up. 'Today there are 30 to 40 different operating systems for mobile, and that is too many,' said Arun Sarin, the chief executive of Vodafone (VOD) during a Feb. 12 speech in Barcelona. 'We need to narrow that range to three, four, or even five.' To get there, Sarin urged his rivals to join forces in defining the handful of operating systems that could power mobile phones in the future.

Fight for midrange phones

Undoubtedly, one of the strongest contenders is London-based Symbian, a software maker owned by a consortium of phone makers including Nokia, Sony Ericsson, Samsung Electronics, and Panasonic. Symbian is already used in nearly half of the smartphones"”high-end devices with computing capability"”sold today. But to stay in the game, the company is scrambling to move its software onto less expensive midrange devices of the sort now powered mostly by proprietary homegrown operating systems.

It will face far stiffer competition there. Microsoft (MSFT) and BlackBerry maker Research in Motion (RIMM) are eyeing the same opportunity as they try to move beyond business-oriented devices into the consumer market. And the elephant in the room is search giant Google, which is spearheading an initiative called Android that seeks to create a Web-friendly software platform, based on open-source software, for midrange phones.

The grassroots Linux software community, which has long coveted a role in mobile phones, has been shocked into action by Google's ploy and is trying to coalesce around a new organization called the LiMo Foundation. The group prompted lots of buzz in Barcelona with a series of announcements, including the launch of new LiMo-compatible handsets from Samsung, LG Electronics, NEC (NIPNY), and others.

And then, of course, there's Apple. While the consumer electronics pioneer shows no intention of licensing its iPhone software to other companies, it has raised the bar for all other handsets with its revolutionary user interface and ease of use.

 

The challenge for rivals, says Geoff Blaber, director of devices at British mobile consultancy CCS Insight, is to recreate the Apple experience on less expensive phones"”and thus create a mass market.

In smartphones, Microsoft gains on Symbian

For now, Symbian remains unperturbed by the competition. More than 200 million phones around the world currently run its software, and the company, which announced annual results on Feb. 12, says 77.3 million Symbian-based phones shipped in 2007, up 50% from the year before. 'We have established a fabulous base camp at the top of the pyramid and are now aiming to move throughout the mobile portfolio,' says CEO Nigel Clifford.

To get there, Symbian engineers are shrinking and speeding up the software engine behind the user interface to help handset makers produce devices closer in look and feel to the iPhone. The company is also working closely with hardware partners to create phones that appeal to a wider audience"”everyone from businessmen to soccer moms. Four of the world's five biggest handset makers"”Sony Ericsson, Samsung, LG, and Nokia"”announced new Symbian devices at the Barcelona show.

But archrival Microsoft is slowly gaining ground. Some 35 million devices around the world now run the pint-size version of Windows for smartphones, and the company says its user base grew by 14.3 million last year. To move beyond business customers, Microsoft made two surprise announcements at the show. First, on Feb. 11, it said it will buy Palo Alto (Calif.)-based startup Danger, maker of the popular Sidekick, a consumer-oriented phone, organizer, and wireless Web browser. The move signaled Microsoft's desire to reach a hipper, younger mobile audience"”the sort who want to use Web services such as Facebook on their handsets, says Microsoft's Pieter Knook, senior vice-president for mobile communications business.

The software giant also scored a coup by signing up London-based Sony Ericsson as its latest Windows Mobile licensee. A co-founder and heavy investor in the Symbian consortium, Sony Ericsson saw the move as a way to grow its U.S. market presence. For its part, Microsoft says it plans to collaborate with the handset maker on mobile browsing, music, and other media, which could help both companies better straddle the line between phones for business users and sophisticated consumers, or so-called prosumers.

Thanks to this and other deals, Microsoft should see its share of smartphone operating system units grow from 9% last year to 13% in 2008, predicts Richard Windsor, an analyst with brokerage Nomura Securities in London. Windsor figures Symbian's share will hold steady at 48%. It's unlikely Microsoft ever will win over Nokia, which holds 40% of global handset market share and has a controlling stake in Symbian.

Android might have to partner up

Research in Motion is also expanding its reach. At the show, Vodafone said it has agreed to collaborate with RIM on the development of Vodafone consumer services for the BlackBerry platform. RIM is now one of Vodafone's 'preferred consumer operating platforms,' that is, one of the top four operating systems supported by the world's largest independent mobile operator. (The other three are Symbian, Microsoft, and LiMo.)

LiMo's sudden ascendance could pose an unexpected challenge to the Google Android program. The LiMo Foundation announced in Barcelona that mobile operator Orange (FTE) had joined the group, as well as Japan's Access, a mobile Linux pioneer that now owns the Palm operating system used in some Treo handhelds.

 

Researcher CCS Insight says the growing operator and handset manufacturer support for LiMo will put pressure on Google's Android project to join forces with it. Whether Android remains independent or joins with LiMo, industry players say it's now clear that at least one Linux-based mobile operating system will be among the platforms competing to be installed in the billion-plus mobile phones sold every year.

It's unlikely, though, one single operating system will prevail, as it largely has on Windows-based personal computers. At least not if operators can help it. 'We don't want only one,' Sarin told show delegates. 'We have seen that movie and we don't want to go there.'

Schenker is a BusinessWeek correspondent in Paris.

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