The Smartphone Business Loses Its Luster

The smartphone business was among the most attractive in the tech world until recently. That was before Microsoft (NASDAQ: MSFT) forced several makers of Google (NASDAQ: GOOG) Android-based phones to pay it royalties. It was also before Apple (NASDAQ: AAPL) missed targets for iPhone sales, and before the collapse of the sales of Research In Motion’s (NASDAQ: RIMM) BlackBerry.

Analysts may argue that the rise of products like powerful tablets have hurt smartphone sales. But, the problems within the industry are largely ones it has created for itself.

Google will launch new versions of Android this week. The operating system is called Ice Cream Sandwich and Samsung will make the first smartphone to use it. The issue the new OS will face immediately is whether it will become another target of patent pressure from Microsoft and Apple. The current version of Android costs most smartphone companies that use it $5 per unit paid to Microsoft. Apple’s intellectual property claims may push that figure to $10. Android’s open source software was supposed to be free. Now smartphone firms that adopted it have new margin pressure because of these royalties.

Motorola Mobility (NYSE: MMI) will release its newest smartphone this week. It will carry the old Razr brand. The first generation Razr allowed Motorola to become the world’s number two handset company, behind Nokia (NYSE: NOK), six years ago. Motorola did not create a new generation of the phone that sold anywhere near as well as the first. That nearly wrecked the company. Today, as it launches its new Razr — the thinnest smartphone in the world, according to the company — Motorola is in the midst of government scrutiny of its sale to Google. And, of course, it faces the same fees that other smartphone companies pay to Microsoft.

The two most damaged smartphone companies are Research In Motion and Nokia, which is still the world’s largest handset maker. RIM will release a new version of its BlackBerry OS software this week. RIM thinks this will reverse the loss of market share it has suffered because of the iPhone and Android-based products. There is no reason to believe that is true. The outage of the BlackBerry system earlier in the month makes the prospects for a RIM recovery even more distant.

Nokia will release new smartphones this month and next that will run on the Microsoft mobile operating system. Most analysts expect products created by the joint venture will be too late to market to take any share from Android and Apple. Nokia continues its slide into smartphone oblivion. It is expected to announce a quarterly loss this week, another sign of its terrible trouble.

Finally, there is Apple, which has not missed Wall St. earnings expectations in years. But it did for the most recently reported quarter. The company said it sold only a little over 17 million iPhones in the period, compared to analyst expectations of 20 million. Those sales were higher by 21% compared to the same period a year ago. That was not enough to satisfy investors. Apple blamed the shortfall on consumers who wanted to wait for the new iPhone 4S, which sold 4 million units over the first three days it was available. It remains to be seen if sales can stay at anywhere near that pace for the balance of this quarter. If not, Apple could disappoint investors again.

The pall that hangs over the entire smartphone industry is that a slow economy may undercut the growth rate of nearly all the companies in the sector. That, combined with the individual problems of firms in the industry, has raised the risk that the smartphone business is no longer nearly as good a business as it was just a quarter ago.

Douglas A. McIntyre