Smartphone Wars in 2013

Following six years of innovation and upheaval in the smartphone industry, 2013 was shaping up to be no different. Industry players continued to differentiate and capitalize on the rapidly evolving landscape. Early market leaders struggled to recapture market share lost years earlier to newer entrants, and new players vied to remain disruptive. Apple, whose iPhone had sparked the smartphone frenzy in 2007, sought to broaden its appeal by introducing a less ex- pensive iPhone that had a casing made of plastic, instead of glass. Search engine giant Google’s Android OS was the most widely adopted smartphone platform, with almost half of all Android devices being made by Samsung, the Korean electronics company. Having started its smart- phone endeavor by building phones and supplying parts for other equipment manufacturers, Samsung had burst on the scene in 2010, rapidly gobbling up market until it had become the world’s highest-volume phone maker in 2012.1
Meanwhile, Research in Motion (RIM), Nokia, and Microsoft, which were all market leaders in the pre-iPhone smartphone industry, continued to sputter (see Exhibit 1). After an exclusive partnership with Nokia failed to produce strong enough results, Microsoft announced an agreement to acquire the Finnish phone maker in hopes that the combination might yield cost savings and innovations that neither company had been able to obtain on its own. Microsoft Windows 8 Phone sales had not met expectations, but analysts remained hopeful that new developments would produce the next wave of creativity and value. By 2013, RIM, which had changed its name to BlackBerry after its iconic banner product, had struggled with ventures in tablets and new operating systems. Finally, in late 2013, BlackBerry announced plans to cut 40 percent of its workforce and stop selling to consumers.2 Every player in the smartphone wars had delivered innovative products at some point and had dealt with strategic moves by competitors, but market leadership had been fleeting. These companies dealt with challenges on every front. Each move brought with it competitive responses and countermoves. New products, such as tablet computers and smart watches, threatened to make the entire industry obsolete.
Could any of the companies involved in the smartphone wars find a path to sustained industry leadership? And if not, could they at least avoid the path of demise followed by RIM?

EXHIBIT 1 Global Smartphone Sales to End Users from 1st Quarter 2009 to 2nd Quarter 2013, by Operating System (millions of units)
Android iOS Microsoft RIM Symbian Others
2009 2.76 16.22 10.83 23.83 57.02 7.92
2010 67.22 46.59 12.38 49.65 111.58 12.47
2011 220.67 89.27 8.76 51.53 88.41 14.25
2012 449.54 129.07 17.01 34.21 28.51 19.27
2013 334.09 70.23 13.4 12.4 1.98 3.28
Source: Gartner Company, “Gartner Says Worldwide Mobile Device Sales to End Users Reached 1.6 Billion Units in 2010; Smartphone Sales Grew 72 Percent in 2010” [Press Release] (February 9, 2011).

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History of the Industry
The first mobile phones emerged shortly after World War II.3 Briefcase-sized and very limited in range and functionality, commercialized mobile phones took another three decades to gain critical mass. These first mobile phones were typically so large that most were only found in cars. However, in the 1970s, the first handheld mobile phones hit the market. The United States, Japan, Denmark, Sweden, Finland, and Norway all rolled out mobile phone networks between 1979 and 1981. These first handhelds ran on an analog system, called 1G.
Beginning in the 1990s, the new all-digital 2G network continued to expand as more cellular towers were built. Better technology allowed for smaller components, new features such as SMS text messaging, and smaller phones. As phones became more convenient to carry around, demand exploded. With the 2G network, the first downloadable ringtones introduced a concept that would later be crucial as smartphones gained popularity a decade later: down- loading information from the Internet via a wireless connection.
Smartphones emerged as “a category of mobile device that provides advanced capabilities beyond a typical mobile phone. Smartphones run complete operating system software that provides a standardized interface and platform for application developers.”4 These new smartphones were more advanced and offered greater flexibility than feature or “dumb”5 phones. Early smartphones would hardly be recognized as such today, however. In 1993, IBM launched the first smartphone, the Simon,6 which offered a full touchscreen. The Simon had a few applications, or apps (software used for functions other than running the device’s operating system7), such as fax, personal digital assistant (PDA), pager, calculator, and address book. Unlike users of later smartphones, which stored applications on the device itself, Simon users had to switch out memory cards that held individual applications in order to enjoy many of the features offered. In addition to being bulky and expensive (the Simon retailed for $899), The Simon lacked access to a wide variety of apps. Within two years of hitting the markets, IBM had retired the Simon. Although a business failure for IBM, the Simon was the first spark that ignited a new sub-industry of smartphones.
Throughout the next 10 years, additional smartphones hit the market.8 Nokia and Ericsson launched their own versions in the late 1990s. Ericsson’s second generation phone featured a full touchscreen at a time when button-centric devices dominated the landscape. In addition, this device offered the first “open” operating system (OS), the Symbian OS. An open OS allowed third-party developers to create applications to be downloaded and run on a device. Third- party developers gave users access to a much broader array of technologies on their devices. These early smartphones developed slowly until the birth of what modern smartphone users would recognize as the earliest “pure” smartphones. By 2007, Nokia, Palm, Microsoft, and RIM had all risen to power, but new companies such as Apple, Google, and Samsung would usher in a new wave of innovation.

Nokia
Nokia was a Finnish company that rose to prominence in the late 1990s, enjoying market leadership in the mobile phone industry for more than 15 years. Mass adoption of feature phones helped Nokia establish itself as the leading producer of handsets. Following success among mass consumers with feature phones, Nokia launched many different smartphones. The first Nokia smartphones were expensive and primarily targeted to business customers.9 Nokia smartphones, like Ericsson’s, ran on the Symbian OS, making it the largest OS for more than five years. Nokia strove to differentiate its phones early on by investing heavily in mobile gaming and music technologies. However, Nokia struggled later in the decade as the BlackBerry (see below) gained momentum. Although easily the top overall cell phone supplier, Nokia felt the sting of losses in its smartphone business and took measures to protect its market share among smartphone users. For example, in response to the growing threat of Palm smartphones, Nokia began launching phones with a full keyboard.

Palm
An early player in the PDA realm, Palm decided to merge its PDA functionality with a cell phone in 2002,10 calling it the Treo. The resulting technology was a great solution for business people who didn’t want to carry around a PDA and a phone. Although the Treo enjoyed mass adoption and market domination, its reign on top of the smartphone world was threatened by two other players that launched smartphones in the same year—software giant Microsoft and a startup called Research In Motion, or RIM. By 2007, Palm controlled less than 10 percent of the smart- phone market and watched the rest of its share erode over the next couple years.11

Microsoft
Envious of the growth of other technology companies in the mobile industry, the maker of the seemingly ubiquitous Windows OS for PCs, Microsoft, decided to stake its own claim in the mobile game. In 2002, the company introduced what it touted as a “Microsoft Windows-powered smartphone.”12 Microsoft hoped the first handset to run its new OS, the Orange SPV, and subsequent devices would leverage its reputation in desktop computing to create a “pocket PC” that would appeal to customers already using Windows for their PCs at home or in the office. Rich in software-building capabilities, Microsoft entered the smartphone market in a revolutionary manner. Previously, the phone and the operating system that powered the phone were made by the same company. However, in the spirit of its desktop history, Microsoft decided to sell its open Pocket PC operating system to equipment manufacturers such as Samsung and HTC. By licensing its OS, Microsoft earned new revenues without needing to branch outside of its core software competency into hardware manufacturing. For the next five years, the Microsoft OS increased in proliferation and market share.13

RIM/Blackberry
In 2002, the Canadian startup, RIM, launched the first version of a blockbuster line of products. Although Palm’s Treo represented a significant technological advancement by combining a PDA and cellular phone, many corporate technology departments were not keen on the idea of providing employees with phones that offered access to corporate email accounts, unless the email could be made more secure. Sensing a market opportunity, RIM launched the first email-optimized smartphone, the BlackBerry. The BlackBerry ensured a secure and protected connection to corporate email accounts. First road warriors, then the rest of the business world, and finally average consumers, bought BlackBerrys. Its plastic keyboard and large screen added to its appeal. People everywhere seemingly could not get enough of their “CrackBerries.” RIM, recognized by many as a leader of innovation and creativity, invested millions into think tanks and technological institutes.14 A second market-smashing product, the BlackBerry Pearl, came out in 2006, propelling RIM to market leadership through 2009.15
By 2007, BlackBerry was on top of the world, and Microsoft and Nokia were not far behind. Consumers loved their phones, which allowed them to email, talk, or text anyone cheaply and quickly. As the year started, none of the phone makers could have imagined their worlds would be turned upside down by a maker of computers and MP3 players. However, Apple’s new iPhone served as the catalyst that completely redefined the battle for smartphone supremacy and paved the way for the rise to dominance of Apple, Google, and Samsung.

Apple
Apple Computer, a Silicon Valley–based computer hardware and software maker, had been making headlines for years because of an adjacency move—leveraging strengths built in one industry or business to help the company in another area—that not only reshaped an industry but saved the floundering Microsoft competitor. By the turn of the century, Apple cofounder Steve Jobs had returned to the company and was again CEO. Faced with slipping sales and market share in the PC industry, Jobs introduced a new product in 2001 that would revive Apple’s creativity and design prowess that had all but had disappeared in the recent past. The new iPod16 was an MP3 player capable of holding more than 1,000 songs, which users could download from Apple’s iTunes music platform onto its 5 GB hard drive. Although it was hardly the first MP3 player, the iPod’s unique design and gargantuan capacity turned the music player device industry on its head. For the next six years, Apple continued to launch different iterations of the iPod. Incumbents were caught off guard by Apple’s jump into, and dominance of, the MP3 market. Similarly, six years later, few people expected what was to come next when Apple made another leap into the smartphones market.
On January 9, 2007, Steve Jobs unveiled what Apple touted as a combination of an iPod, a cell phone, and an Internet communications device17 all merged into one pocket-sized machine, the iPhone. The initial iPhone featured EDGE (a predecessor to 3G technology that provided Internet access over cellphone networks) and Wi-Fi capabilities, which allowed users to connect with the Internet anywhere there was service. It came with built-in applications, or apps, including Google Maps, Google Search, a calendar, iTunes, and an email client that could connect to most commonly used email accounts. Initially, Apple partnered with the largest cellular company, Cingular (later acquired by AT&T), as the exclusive provider for the iPhone.
Although the iPhone attracted media attention, most competitors believed it was not a serious threat. Unlike previous smartphones, the iPhone did not have a physical keyboard; all operations were carried out on its large touchscreen. The 8 GB iPhone was set to retail at $599, a price point similar to other high-end smartphones at the time, although Windows phones were frequently discounted substantially from list prices.18 Some critics scoffed at the new product, saying it would never become a substantial player in the highly competitive smart- phone industry, especially among BlackBerry-addicted business people. Windows CEO, Steve Ballmer, whose Windows Mobile OS was enjoying a 17 percent market share at the time, boldly stated, “That is the most expensive phone in the world, and it doesn’t appeal to business customers because it doesn’t have a keyboard, which makes it not a very good email machine.” Ballmer continued, “I kinda look at that and I say, well, I like our strategy. I like it a lot.”19 Instead of directing its initial focus on business customers, Apple sought to grab market share by appealing to general consumers. Apple included applications on the iPhone such as its iTunes music player, a full Web browser, and a photo management application for its 2-megapixel camera. The combination of iPhone-only apps and impressive design made June 29, 2007, one of the most anticipated release dates and product launches ever.

Google
At the time of the iPhone’s launch, Google and Apple had an unusually good relationship for two of the nation’s largest tech companies. Apple featured Google’s search and mapping technologies prominently in its marketing campaigns, increasing the iPhone’s appeal and driving search results to Google. In addition, Google’s CEO, Eric Schmidt, sat on Apple’s board of directors.
However, Google, always eager to spot the next big technology trend, began to recognize the tremendous potential smartphones and mobile computing had in shaping the future of technology. Google realized that the company owning the operating system most phones ran on would be well positioned to reap the benefits of this growth. In November 2007, Google announced that it had partnered with multiple tech companies, including Samsung, HTC, Motorola, and ARM, in acquiring a startup that had been developing a mobile OS called Android. These companies joined together to form the Open Handset Alliance (OHS) with the goal of creating the first truly open and comprehensive platform for mobile devices.20 With this announcement, Google threw its hat into the smartphone ring. Unlike Apple, however, Google was not interested in building phones; rather, it wanted to provide an open OS that could be run on phones made by different manufacturers. The first Android-powered device, a cellphone made by HTC and carried by T-Mobile, launched later the next year. Although not as flashy or heavily promoted as the iPhone, the cheaper Android phones began rapidly grabbing market share.

Samsung
The Korean conglomerate, Samsung, first got involved with the smartphone industry by building smartphones for Sprint in 2001. Unlike many stylus-centric phones of the time, Samsung phones were touch-friendly. As the RIM BlackBerry gobbled up market share, Samsung re- leased a copycat version in 2006, which ran on the Windows OS, the Blackjack.21
In 2005, Samsung contracted a deal with Apple to provide flash memories for iPods at a locked-in price.22 Samsung increased its business with Apple over time, providing inexpensive, quality components for its electronics. Supplying parts to other hardware manufacturers, although a viable cash stream in and of itself, also allowed Samsung to develop its own hand- sets more cheaply through the economies of scale these activities produced. The first iPhone ran on many Samsung parts. “Samsung supplied the majority of Apple’s NAND flash memory and a large portion of another chip type, the ‘DRAM (both important components of a cell- phone’s computing capabilities)’ in mobile devices,”23 estimated Mark Newman, an analyst at Sanford Bernstein in Hong Kong. Samsung would continue to become a more important player in the smartphone industry.

Industry Dynamics
After Google’s announcement of the Android OS, competition intensified as rapid moves by each player accelerated the rate of change in the industry. The Android platform followed an open model, meaning any third-party software programmer could develop apps for the Android market, from which Android owners could download the apps onto their phones. Apple, on the other hand, maintained a closed software model, tightly controlling which apps were available for download. After the announcement of Android, however, Apple adjusted its strategy to allow third-party developers to launch apps in the App Store after Apple had approved them.24 By making this move, Apple sought to mitigate fears that Google’s totally open platform might entice developers to create more apps for Android than Apple, thereby increasing the market appeal of Android-powered smartphones and creating a network effect. Apple made this change to allow third-party apps in its App Store months before Android devices were avail- able, stemming any damage that might have been inflicted had the company made the move later. The App Store topped 10 million app downloads in its first weekend.25
At the same time, Apple launched a new version of its phone, the iPhone 3G,26 which allowed users to surf the Web at twice the speed of the EDGE technology built into the first phone.27 The iPhone 3G also introduced GPS navigation in a phone. Like the App Store, the iPhone 3G met a warm welcome, selling one million phones in the first weekend.28 The new phones sold for less than one-third the price of the first iPhones.
Former market leaders were baffled as they ceded market share to two companies with no prior experience in the mobile industry. Microsoft’s Windows Mobile platform sputtered as the software giant struggled to develop a response to Apple’s iPhone. RIM continued to grow for two more years after the launch of the first iPhone, but it too fell from grace as the Android OS gained traction.29 Samsung released the Instinct, an iPhone lookalike, which ran on a patchwork Java-based OS. A few months later, Samsung launched another smart- phone, the Omnia, running on Windows. Although neither of these products achieved the hoped-for success, early vestiges of future user-interfaces (UI) were first seen with these launches.30
There were many changes in the rapidly evolving smartphone industry during 2009. Google launched its newest version of the Android OS, called “Cupcake,”31 which offered a touchscreen (or soft) keyboard and video recording capability. For this Android update (each update is named alphabetically after a popular confection), Google and Motorola teamed up to produce a keyboard-less phone, the Droid. Later that year, Eric Schmidt was asked by Apple’s director, Steve Jobs, to resign from Apple’s board. Jobs stated, “As Google enters more of Apple’s core businesses with Android and now Chrome OS, Eric’s effectiveness as an Apple Board member

will be significantly diminished.”32 The two former allies had officially become competitors. However, Google’s and Apple’s approaches to the market still differed substantially. Said one industry expert:
Google’s answer is that most computing tasks should happen in the cloud, via sok- ware that runs in massive Internet data centers housing users’ data, files, and contacts so they’re accessible from anywhere. Apple’s vision for the future is very different. Its business is about selling elegant, powerful, high-margin machines that put much of the computing power in your pocket [iPhone], in your briefcase [MacBook], or on your desk [iMac]. For that it relies more than any other tech company on so-called ‘native code’ written for a specific machine. Apple, more than any company in tech history, has been able to create its own proprietary environment.33
Apple faced another major challenge in addition to Google, though. Since 2005, Apple had sourced many parts for its devices from Samsung. But, as the Korean electronics company increasingly moved into head-to-head competition with Apple for smartphone sales, Apple executives began searching for alternative suppliers. Apple leaders believed that, although Samsung claimed to keep its parts and phones businesses separate, sending design plans for its new products was giving a dangerous advantage to a growing competitor. In 2009, Apple started sourcing most of its NAND flash memory from Toshiba in an effort to diversify its supply chain strategy.34

Evolving Markets
As 2010 began, Android really took off. By then, Google had released multiple versions of Android, which handset manufacturers tweaked in order to differentiate their products, often adding their own look and feel to the native Android version. In an effort to present Android as Google had meant it to be, the search-engine-giant-turned-mobile-OS provider commissioned HTC to build the Nexus One, a phone without any of the tweaks that other Android phone makers added to their phones. The Nexus One ran a “pure” version of the Android OS. Although the project to bring an unaltered Android representation to market might have seemed minor in light of the hundreds of other Android devices, it represented an important milestone in the battle between Google and Apple. The Nexus One demonstrated a shift in Google’s strategy as it started moving closer to actual hardware manufacturing, instead of just providing a free operating system.35 By the end of the first quarter in 2010, Android had started to reach critical mass, gaining a 10 percent market share.36
In the first half of 2010, Apple made its own shock waves by debuting a new product, the iPad.37 With the iPad, Apple merged its phone and computer products to create a new product segment of computing devices, called tablets. The iPad drew heavily on the processing and power of Apple computers, while incorporating the Apple’s mobile operating system, iOS. Uncertain about whether tablets belonged to the phone or computer world, phone and computer makers responded with tablets of their own.38 Additionally, in June 2010, the next version of the iPhone, the iPhone 4, was released. The iPhone 4 was the thinnest smartphone ever and featured a front-facing camera for its FaceTime application, a function that allowed users to make video calls from their phones. The phone also ran the newest version of the Apple mobile operating system, iOS 4. By the launch of the iPhone 4, more than 225,000 apps were available on the App Store, and more than 5 billion apps had been downloaded (see Exhibit 2).39

EXHIBIT 2 Total App Downloads
Q3’10 Q4’10 Q1’11 Q2’11 Q3’11 Q4’11 Q1’12 Q2’12 Q3’12 Q4’12 Q1’13 Q2’13
iOS App Store 6 7 11 13 15 18 25 30 34 37 40 50
Google Play 1 2 3 4 6 10 13 20 23 29 40 48
Source: “The App Store’s 50B Downloads vs. Google Play’s 48B: Android Closes the Gap,” TechCrunch (May 15, 2013).

As the Google versus Apple battle continued through the summer of 2010, Samsung released the first phone in its Galaxy product line, the Galaxy S Vibrant.40 The Vibrant ran on Android with a slightly customized UI. The Galaxy S was somewhat successful, but more importantly, it paved the way for the Galaxy S II and S III—two phones that would have tremendous impact in solidifying Samsung’s market share and popularizing its brand among smart- phone users.
Former competitors, Nokia and Windows, were both losing market share rapidly and looking for ways to stop the bleeding (see Exhibit 3). Nokia’s CEO, Olli-Pekka Kallasvuo, was replaced by Stephen Elop of Microsoft’s Office Division.41 The new Windows Phone 7 went on sale in November and was available on the Samsung Focus and two models from HTC.42 This release was Microsoft’s response to the iPhone launched over two years earlier. The Windows Phone did not have the hoped-for effect of increased sales, however. Both former smartphone heavyweights, Nokia and Microsoft, partnered in early 2011 to combat the undeniable market shifts brought on first by Apple and intensified by Google. In a presentation alongside Microsoft CEO Steve Ballmer, Elop announced Nokia’s commitment to use Windows Phone software in future smartphones.43
At the same time, Apple was having struggles of its own with one of its largest suppliers, Samsung. Worried that Samsung was encroaching too much into Apple’s phone business, Apple executives tried to move the screen production of its new iPad to electronics company Sharp. However, Sharp was unable to meet the time demands and product requirements, and Apple was eventually forced to return to using Samsung as its screen provider. Samsung then unexpectedly moved to acquire a 3 percent stake in Sharp. The move, said one analyst, “would make Samsung not only Sharp’s fifth-largest shareholder but its key client, potentially preventing Apple from gaining more bargaining power with Sharp.”44
Smartphones continued to dominate the market (see Exhibit 4), but phone makers were increasingly exploring the tablet computer space. In February of 2011, Google released a version of its OS exclusively for Android tablets, which represented a strategic offshoot from the search company’s main phone business.45 Apple responded a month later with the launch of its second tablet iteration, the iPad 2.46 In that same month, Google beefed up its game across phone and tablet platforms by introducing in-app billing functionality. In-app billing allowed app developers to collect money directly from end users, instead of hassling with phone carriers who had allowed users to charge app purchases directly to their phone bill and had traditionally taken a large chunk of all app revenues.47 Google’s strategy in introducing this flexibility in billing was to entice more developers to build Android apps, creating a more appealing OS (see Exhibit 5).
In April 2011, Apple, Google, and Samsung all made headlines. Apple became the largest smartphone vendor by revenue and units sold, selling 18.6 million iPhones in the first quarter of 2011. Samsung was close behind, with 17.5 million phones shipped. Google hit a milestone by becoming the most universally used smartphone platform. Its Android OS had a 36.6 percent market share, as opposed to former market leader Symbian’s 27.0 percent.48

EXHIBIT 3 Top Five Smartphone Vendor Shipments (millions of units)

Vendor Unit Shipments
2010 2011 2012
Nokia 100.3 77.3 35.1
Apple 47.5 93.1 136.8
BlackBerry 48.8 51.1 32.5
Samsung 23 94.2 215.8
HTC 21.5 43.6 32.6
Others 61.5 136 92.4
Source: IDC Worldwide Mobile Phone Tracker (January 24, 2013; January 27, 2011).

EXHIBIT 4 Smart Versus Feature Phones

Month Type
Smartphone Feature Phone
Sep-10 29% 71%
Oct-10 30% 70%
Nov-10 30% 70%
Dec-10 35% 66%
Jan-11 36% 64%
Feb-11 38% 62%
Mar-11 37% 63%
Apr-11 37% 59%
May-11 40% 58%
Jun-11 41% 57%
Jul-11 42% 56%
Aug-11 43%
Sep-11 44% 56%
Oct-11 44% 54%
Nov-11 46%
Dec-11 48% 52%
Jan-12 48% 52%
Feb-12 50% 50%
Source: Nielsen Mobile Insights (February 2012).

EXHIBIT 5 App Revenue per Platform Index
Month iOS App Store Google Play
Jan-12 100 7
Feb-12 95 8
Mar-12 105 10
Apr-12 115 13
May-12 103 14
Jun-12 98 13
Jul-12 114 17
Aug-12 115 18
Sep-12 11 24
Oct-12 117 27
Nov-12 124 30
Dec-12 170 46
Source: Data approximated from the App Annie Intelligence Index (App Store January 2012 Revenue Index set to 100).

Worried about the momentum of its suppliers in its own smartphone business, Apple sued Samsung for “copying hardware and design features from Apple.”49 In response, Samsung launched its second Galaxy phone, the Galaxy S II, in May, causing Apple to double-down its efforts to push through litigation.50 The Galaxy S II exploded on the smartphone scene. In the past, many phones were released on only one wireless provider (like iPhone and AT&T’s initial partnership); however, Samsung arranged deals with three of the four major US carriers for the Galaxy S II launch. Its wide availability and iPhone-esque design (one of the reasons Apple was suing Samsung) played important roles in Samsung’s strategy for driving mass adoption at a rate faster than Apple’s.
After losing most of its market share, Microsoft won an important legal battle requiring LG, Samsung, and HTC to pay per-handset royalties for patent infringements.51 Although the adoption of the Windows Phone 7 had not met optimistic predictions, Microsoft secured a revenue stream on handsets made by these three companies.
In a move that baffled analysts, in August 2012, Google announced its decision to acquire the cellphone division of Motorola, one of the early pioneers in the commercialization of mobile phones during the 1980s. Industry experts were shocked to see Google, a software company, purchase a hardware company. The search giant agreed to pay $12.5 billion for Motorola Mobility.52 With the acquisition, Google took another step closer to competing in the hardware side of the smartphone war just as much as it did on the software side (see Exhibit 6).
Searching for an option to stunt the growth of its Silicon Valley neighbor, Google, Apple launched the iPhone 4S in October 2011.53 Apple hoped to slow down Google by reducing the search traffic Apple sent its way. So, the new iPhone integrated Siri, a virtual personal assistant app that helped users access information without sending them to Google’s search engine. Apple’s extensive marketing campaigns for the 4S launch were directed at creating hype around the Siri feature, in hopes that such enthusiasm would lead fewer people to turn to Google when they needed help.54 First weekend sales of the 4S topped 4 million devices.55 (See Exhibit 7.)

EXHIBIT 6 Google Simplified Financials 2009–2012
Google (USD Millions)
2009 2010 2011 2012
Revenue 23,651 29,321 37,905 50,175
Cost of revenues 8,844 10,417 13,188 20,634
Gross margin 14,807 18,904 24,717 29,541
Operating costs 6,495 8,523 12,975 16,781
Operating profit 8,312 10,381 11,742 12,760
Source: Google Annual Reports.

EXHIBIT 7 Apple Simplified Financials, 2009–2012
Apple (USD Millions)
2009 2010 2011 2012
Net revenue 42,905 65,225 108,249 156,508
Cost of sales 25,683 39,541 64,431 87,846
Gross margin 17,222 25,684 43,818 68,662
Operating costs 5,482 7,299 10,028 13,421
Operating profit 11,740 18,385 33,790 55,241
Source: Apple Inc. Annual Reports.

Samsung stole the show for the last quarter of 2011 and the first quarter of 2012, however. In November 2011, it became the global leader in smartphone shipments, surpassing Nokia and Apple.56 Samsung also won the contract to produce the newest version of the Google Nexus. Early in 2012, Samsung unveiled a new category-busting product. The Galaxy Note was too large to be considered an ordinary smartphone, but it was not large enough to really act as a full-fledged tablet; therefore, the “phablet” was created.57 At first, analysts worried this oversized phone would not gain a foothold in the market, but sales for the Note boomed. Android-based phones now accounted for more than 50 percent of the smartphone market58 and continued to grow as Google continued to improve its OS and release new features. One such feature, Google Music (now Google Play Music, after the Android Marketplace became Google Play), allowed Google to compete with yet another feature of Apple’s offering, a music store.59
After five years of struggling, first against the iOS and then against Android, RIM’s co- CEOs and co-chairmen, Jim Balsillie and Mike Lazaridis, resigned in January 2012.60 The former market leader had seen the company’s market share erode over the course of a few short years. At its peak in May 2008, RIM stock prices had reached $138.87 per share. Now, a little more than three years later, stocks were scraping along at a measly $16.63 per share. In an attempt to rejuvenate sales, RIM had developed and launched a new operating system. The OS was first released on the company’s first tablet product, the PlayBook.61 However, before the beginning of 2012, RIM had already been forced to write off nearly half a billion dollars for the unsold and discounted tablets still sitting in inventory.62 The company hoped to slow the bleeding by launching a new phone, the BlackBerry 10, but the product’s outlook remained bleak.
In the summer of 2012, Samsung tightened its foothold again with another version of the Galaxy (see Exhibit 8). The Galaxy S III was released on all four major US carriers and was even featured in the opening ceremonies of the 2012 London Olympic Games.63 The Galaxy S III combined hardware, availability, and intense marketing to drive its success.64 As Apple announced the new iPhone 5, a group of Samsung marketers teamed up with an advertising agency to craft a response. The result was a marketing spree poking fun at Apple fan boys (die-hard Apple product fans), portraying smart customers to be those who chose the Galaxy S
III.65 In its first 100 days on the market, more than 20 million Galaxy S IIIs were sold.66 Samsung passed Nokia for total cellphones (smart plus feature phones) shipped worldwide, selling 93 million units to Nokia’s 83 million and Apple’s 35 million.67
A marketing attack by Samsung was not the only concern Apple had to face with the iPhone 5’s launch in September.68 After its attempt to choke the search stream being sent to Google by introducing Siri, Apple took its plan one step further. Google Maps, a highly fea- tured app on the first iPhones, Apple announced, would be replaced by an Apple map app.69 However, Apple’s alternative left many owners of the new iPhone 5 disgruntled and lost. The company’s mapping capabilities, said customers, were not good enough. After two months of bad press, Apple finally surrendered and, with a quiet announcement, returned Google Maps to the App Store.70

EXHIBIT 8 Samsung Simplified Financials 2009–2012
Samsung (USD Millions)
2009 2010 2011 2012
Net revenue 25,355 30,631 154,049 187,754
Cost of sales 19,280 20,347 104,701 118,245
Gross margin 6,075 10,284 49,348 69,509
Operating costs 5,927 7,429 34,742 42,389
Operating profit 148 2,855 14,606 27,120
Source: Samsung Electronics Co LTD Annual Reports.

In November 2012, Microsoft released its next smartphone, the Windows 8 Phone.71 The phone’s launch was accompanied by Microsoft’s release of the new Windows 8 OS for PC and its first tablet, the Surface. All products, including the Xbox 360, were compatible with each other. Following the Windows 8 Phone debut, a report from comScore revealed that Microsoft-powered smartphones had actually decreased in overall market share.72 However, a report by Frost and Sullivan predicted, “Nokia/Microsoft will continue to gain share based on brand recognition of both companies and device designs. The Nokia Lumia 710 has consistently been one of the top-five selling smartphones on T-Mobile USA since it launched in January 2012.”73 Whether Windows could capitalize on synergies with Nokia remained unclear.
In January 2013, Samsung continued to make gains in the market. Forty-five percent of all Android phones were made by Samsung. However, the Korean phone maker also released a Windows 8 Phone and announced plans to continue working on the development of a new OS, Intel-backed Tizen.74 Long the global leader in smartphone sales, Samsung passed Apple as the leader in domestic smartphone sales75 for May 2013, after releasing the Galaxy S IV.76 In July, Apple finalized a deal with Taiwanese TSMC to begin making some of its chips starting in 2014—another effort to reduce its dependence on Samsung.77

Looking Forward
Nearly two years after announcing the deal to acquire Motorola, Google and Motorola released the Moto X in August 2013.78 It was the closest pure “Google Phone” to ever hit the markets.
On August 23, 2013, Steve Ballmer, the only CEO besides co-founder Bill Gates to lead the software giant, announced plans to retire within the following year. Within two weeks of the announcement, Microsoft also revealed a deal to acquire virtually all of Nokia’s business. In a joint press release, the move was explained as follows: “Microsoft aims to accelerate the growth of its share and profit in mobile devices through faster innovation, increased synergies, and unified branding and marketing.”79 In addition, the deal would give Nokia more financial stability.
Later that month, Apple announced two new iPhone models, the 5S (a standard improvement on the 5) and the 5C (the first iPhone with a plastic case).80 Many industry experts expected the 5C to represent a strategic jump by Apple into less expensive smartphones. However, after the announcement, some analysts were disappointed by a $99 price tag, which they felt was still too steep for mass adoption in developing nations, where the world was seeing the fastest growth in smartphone sales.81

Conclusion
The relentless pace of technology ensured ever better handsets would continue to emerge and that companies would be locked in a feature race for the foreseeable future. Windows and Nokia had committed to working together in hopes of regaining a market that Nokia had once dominated. RIM desperately sought to find some way out of its downward spiral. In an effort to more fully control the whole mobile offering, Google continued to push forward with its partnership with Motorola. Apple strove to retain its reputation for high-quality products and beautiful design, while somehow reaching a broader base of developing- market consumers who demanded a cheaper iPhone. In the United States, Apple was also faced with the challenge of stemming Samsung’s meteoric growth. Samsung had a bright future but still faced challenges in navigating its relationships with Apple for component parts and Google for the Android OS. As smartphone companies look toward the future, each wonders how it might position itself to remain a viable successful player in the decades to come.

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