The e-mail was from the CEO of a prominent mobile app developer, a company you've heard of if you're familiar with the mobile space. He makes software for a broad range of mobile devices – Palm OS, Windows Mobile, Symbian, etc. He told me that his overall application sales are disturbing:
"Companies like us (I've checked with a few others) have seen our market flatten or worse in 2005, especially in the 2nd half. While a simple example might be that this is due to new devices being late to the market...I keep wondering whether this might not be some deeper-rooted trend. I'd be delighted to hear about your view of our market (niche?) and its current dynamics."
Since then I've talked with a number of mobile developers, and heard eerily similar stories. Sales are stagnant to down, and the problem's not just focused on one OS. At one point I talked with the folks who run the Palm Entrepreneurs Forum to see if they'd be willing to let me survey their members, to confirm the problem. (PEF is an online forum for developers of software for all mobile devices, not just Palm OS. Their mailing list is highly recommended if you're running a small mobile software company. A lot of smart people hang out there, so I thought they'd be a good starting point.)
But the PEF folks told me, "Don't bother doing a survey. Everyone knows it's true." And sure enough, if you poke around on the web, you can find a lot of commentary raising questions about the viability of the mobile data market.
The situation was a big surprise to me. I knew from my time at PalmSource that many Palm OS developers weren't happy with their sales. No shock there. Palm OS hardware sales have been consolidating for a couple of years – Sony withdrew from the market, Handspring and Palm merged, Samsung hasn't done a new Palm OS phone in a long time, and several other Palm OS hardware vendors quietly withdrew from the market.
But I had thought it was just a Palm OS problem. Not so, the developers told me. They said application sales on Windows Mobile and Symbian are also stagnant, and although some developers report an increase in sales of RIM applications, the increase is on a very low base, and is not enough to offset the declines elsewhere.
It seems bizarre that this would be happening. The consensus among the industry analysts is that smartphone sales are rising sharply. Since the definition of a smartphone is that it can accept third-party applications, sales of those applications ought to be going up as well.
In some cases they may be doing so – the developers I talk to are not Java houses making simple add-ons like games and ringtones. There are anecdotal reports that sales of those are going pretty well. What I'm talking about is sales of more substantial applications, generally written to run native on the device's operating system. If the phone is becoming a multimedia computer, as some vendors claim, sales of these more sophisticated applications ought to be booming.
So why aren't they?
Before we can tackle that question, we need more data on device sales. Unfortunately, that's in very short supply. Three companies (Canalys, Gartner, and IDC) publish quarterly reports on shipments of handhelds and smartphones. Unfortunately, most of the information they collect is sent only to their paying customers, other than a teaser press release with a few statistics in it. Those press releases are not even issued every quarter, so there are gaps in the coverage. And the numbers themselves are not high-quality because they're just self-reported shipments into the channel. Vendors could lie, and even if they tell the truth all you know is what they shipped, not what the stores actually sold.
Nevertheless, these are the best numbers we have. By combining the Gartner, IDC, and Canalys numbers, and doing estimates to fill in a couple of gaps, I built the chart below. It shows estimated worldwide unit shipments of handhelds and smartphones, by quarter, for the last two years.
Quarterly worldwide unit shipments , in thousands.
This is one of those "stand back and squint" charts. Don't sweat the details of why a category went up five percent in one particular quarter – chances are that's a statistical anomaly. Look at the broad trends over the last two years.
A couple of notes on drawbacks of the chart:
--It's not possible to get an accurate estimate of quarterly Windows Mobile shipments, because the press releases don't report shipments by OS every quarter. They report by hardware vendor, and only the top five vendors are shown. The rest are lumped into "other." Most of Microsoft's licensees are smaller hardware companies that don't show up in the top five (even HP hasn't consistently been a top five vendor).
--I had to make some educated guesses about shipments of Symbian devices in Japan, because they sometimes make the top five and sometimes don't.
Despite these problems, it's possible to form some conclusions from the data:
--Total shipments of handhelds (Palm OS and Windows Mobile) are dropping steadily. Big duh, we all knew this.
--Total shipments of Palm Treo devices are growing, but not enough to offset the decline in handhelds.
--Total Palm OS + Windows Mobile + Other shipments have been declining on a year-over-year basis since Q2 of 2005.
--All of the year-over-year unit growth is in RIM and Symbian.
So it's not really accurate to say that the smartphone market is growing. The Symbian market is growing, the RIM market is growing, and everything else is flat to down.
What it means to third party application sales
I think there are three problems.
The first is that the two platforms that had been driving the most app sales, Palm OS and Windows Mobile, are not growing in total. The sales mix is shifting between them, but when you add everything up their overall sales are not increasing. That means we're selling more replacement units to the installed base rather than units to new users. Existing customers already have apps, so application sales drop.
The second problem is that as the mix of devices shifts from handhelds to smartphones, I think application downloads become less attractive. If you had a handheld, it was pretty clear that you could add more software to it, and since you synced it with a PC all the time it was fairly easy to get and install new applications. But a smartphone feels more complete – it has a lot more software bundled on it (in some cases more than you can use). Microsoft has also shifted much of its sales mix (we don't know how much) to devices that don't have touchscreens. On these devices it's harder to use some classes of mobile applications, and some Pocket PC apps simply won't run on smaller, non-touchscreen devices. Also, smartphone users are much less likely to sync to a PC than their handheld counterparts, and without regular syncing it's a lot more difficult to find and install apps.
The third problem is that application sales haven't tracked the growth of some of the smartphone platforms (in particular Nokia S60, which is producing most of the reported growth in smartphones). The CEO who wrote to me compared his sales of S60 apps to UIQ applications (UIQ is the user interface used on the SonyEricsson p900 series of smartphones):
"We have Symbian Series 60 and UIQ versions since 2004. Even though S60 outsells UIQ at least 10:1, our UIQ version out-sold S60 10:1 – 5:1, and that's pretty constant across the industry. Most S60 phones have not been marketed to end-users as smart-phones and therefore their clientele is not smartphone clientele."
When I was at PalmSource, we surveyed users of Nokia S60 devices, and most were unaware that there was even an OS in their phone, let alone that they could add applications to it. They just thought it was a multimedia phone. I know Nokia's trying to change that, and they've made some progress, but given what the starting point was I'm not too surprised when developers say they haven't seen heavy sales of native S60 apps.
(Note that I'm not trying to beat up on S60 in particular here; the developers I talk with are disappointed by every platform.)
If you add up everything that's happening, it's a lot easier to understand why many mobile app companies are depressed:
--Palm OS and Windows Mobile, taken as a whole, are not growing. That probably accounts for the decline in app sales on those platforms.
--Smartphones in general are less likely than handhelds to drive app sales. The more handhelds are cannibalized by smartphones, the tougher the application sales process becomes. This would worsen the effect of the flattening demand for Palm OS and Windows Mobile.
--The platform that is producing lots of smartphone growth isn't currently a big driver of sales of sophisticated apps.
What do we do about it?
The CEO who wrote to me put the question very well:
"Is the market shrinking? Is it saturated? If so – why? Are these devices really irrelevant to the "rest of the world"? Are they not as useful as we all thought they were 5 years ago? Or is it something else altogether? Strategically, I have to wonder whether this is a hiccup in the market, or is this what we're going to see moving forward."
I wish I could say it's just a hiccup, but the evidence points more toward a change in market structure plus saturation of the core market that had been buying Palm OS and Windows Mobile devices.
That doesn't mean we should all give up, but I think there will need to be some changes in the market before mobile app sales will really take off again. As a couple of mobile developers told me recently, "we need a new platform." I'll write about what I think that means, and the prospects for it, next week.
Many thanks to the folks at All About Symbian for including my post on Sprint's 3G smartphone in the latest Carnival of the Mobilists.