Qualcomm and Android alliance defines mobile market

Vendor consolidation

Analyst Jack Gold also foretells smartphone vendor consolidation, although not right away. "Will all the Android vendors ultimately survive? Probably not, but I don't expect to see much fallout for the next two to three years."

He said the market is growing too quickly to eliminate smartphone makers. After another two years, however, "there very well could be that fallout and/or acquisitions and mergers, but that is the way of tech."

Gold said in the long term, Apple and BlackBerry maker Research in Motion will continue to have the highest profit margins, since they control their own destiny with their own ecosystem, where they make an OS and control hardware components and manufacturing.

In a similar vein, industry leader Nokia, with its Symbian OS, has the potential for higher smartphone margins, although it has not been successful in the US.

At the chip level, Gold said Qualcomm clearly has the advantage in selling ARM-based chips used in smartphones and other devices, and it should continue to dominate for the next one to two years.

But Gold said not to count out several contenders, such as graphics chip maker Nvidia in tablet computers, as well as Marvel, Samsung and TI in smartphones and other devices. Intel is also developing mobile chips.

Gold agreed with PRTM that the Quadroid alliance will ultimately mean that vendors will "compete brutally to win customers," and Hays added that it's hard to say who would lose.

Several Asian makers of Android devices such as Samsung, HTC and LG have come on strong in the past year in a market that also includes Motorola, Sony Ericsson, ZTE, Huawei, Acer and Dell.

The impact on consumers

Will Quadroid ultimately be good for customers? It might seem that if manufacturers are taking lower profits, that itself would lead to a lower costs for consumers.

But PRTM noted that manufacturers facing a dramatically lower profit margin under Quadroid will try to differentiate themselves by considering new phone designs, new users experiences and new business models.

"In short, they will need to act more like Apple while staying different from Apple," PRTM's report said.

In coming months and years, PRTM said that consumer demand for smartphones is bound to become more volatile.

"Faced with many similar products based on the core technologies [such as Quadroid], fashion and viral enthusiasms will drive volume highs for successful products," PRTM said. "Meanwhile, good-but-not-great products will languish, calling for exceptional agility in vendors' manufacturing and supply chains."

Gold agreed that lower profit margins, while potentially lowering the cost of devices, will mean less investment by the manufacturers in research and new technologies since they lack the money to fund it.

"Short term consumer gain is offset by longer term loss of compelling and leading edge devices from the vendors," Gold said.

Hays said that since PRTM published the Quadroid report in mid-November, many phone manufacturers have contacted the firm about the foretold pressure on profit margins and ultimate consolidation.

"They are quite concerned," he said. "Apple is watching all of this closely and may be content to allow Quadroid to take its course... with consolidation likely."