by Tony Daltorio, Investment U Research

Smartphones have taken the handset market by storm.

Demand for Apple Inc. (Nasdaq: AAPL) iPhones and BlackBerrys from Research in Motion Limited (Nasdaq: RIMM) have stayed strong, even through the economic downturn.

It appears that no matter what, many people simply need their touch-screen, pocket-sized, multimedia gadgets.

Sure, it costs a little bit extra to purchase a smartphone (as opposed to a “dumb” one, I guess), but consumers seem willing to splash the extra cash. Consider this…

• Three years ago, smartphones accounted for a mere 7% of the market. Today, that number has increased to 14%. In another three years, analysts expect it to rise to 50%, amounting to some 500 million smartphones sold worldwide.
• Research firm Garter expects regular handset sales to shrink by 4% this year, compared to 2008.

• On the other hand, smartphone sales could jump by more than 20%.

And with that potential spurring them on, tech companies have stepped up their game. Over the next few months, a variety of phone makers will be introducing a host of nifty new models to an already enraptured flock of consumers.

The Global Android Invasion

Smartphones have traditionally cost more than their less advanced competition, but the upcoming models aim to change that.

That’s great news for folks who thought $99-$399 was a bit pricey for a mere phone (even one with Internet capabilities and tons of applications). But it might not be so much for companies that bank on a higher-paying clientele.

Apple and its investors seem largely confident in their juicy profit margins, but that could easily change, depending on how well Google Inc. (Nasdaq: GOOG) does with its Android operating system for smartphones.

And it’s off to a good start already.

So far, Android has strong support from companies such as Verizon Communications (NYSE: VZ) and Sprint Nextel (NYSE: S). They both should sign on by the end of the year, while the Deutsche Telekom (NYSE: DT) T-Mobile unit already has a contract with Google.

(Verizon has already launched a prominent anti-iPhone advertising campaign called (iDon’t), which satirizes the iPhone and its exclusive carrier, AT&T (NYSE: T).

Android has come a long way since 2008 when it originally premiered on one device with one carrier. For example, it’s now employed in 12 different handsets with 32 carriers in 26 countries. And in China alone – the world’s largest mobile phone market – market leader China Mobile (NYSE: CHL) has already announced the upcoming debut of Android-based phones from several different makers.

In stark contrast, only number-two carrier China Unicom (NYSE: CHU) will sell the iPhone.

A Big Future for Google’s Android

The growth in the Android smartphone operating system seems to be the tip of the proverbial iceberg – an iceberg that could diminish Apple’s hold on the market, as well as that of Research in Motion and Finnish phone giant Nokia (NYSE: NOK).

Right now, Nokia, Apple and Research in Motion have an 80% global market share combined, plus two-thirds of the smartphone market in the United States.

But Gartner sees Android eating into Nokia’s leading market share and operating on 18% of smart phones by 2012 – up from 1.6% at the beginning of 2008. To put that in perspective, Research in Motion and Apple currently operate on 13.9% and 13.6% of handsets respectively.

Analyst Ken Dulaney says that Android has what it takes in the long run, if only because Google has more contracts with phone makers and therefore more to offer to a more diverse consumer base. On the other hand, Apple only has one model – the iPhone – and doesn’t license its operating system or technology to anybody else.

And chalk up another point for Google. It’s improved the iPhone’s hardware with a new version and over 10,000 applications developed exclusively for Android, making the entire software package very competitive.

Of course, nobody can predict the future with 100% accuracy. But there are some telling signs. And one thing is certain: Apple’s days of fat profits and gross margins of over 50% on the iPhone are numbered.

Good investing,

Tony Daltorio

View original at: Investment U

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