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Analyst: Smartphones in "Race to the Bottom," Except for Apple

iphone profits android

The smartphone market may start to copy the e-reader's "race to the bottom" business model next year, with commoditization leading to low profits. The one exception: the iPhone.

Needham & Company's Charlie Wolf noted to his investors today that the smartphone market is at a critical point at the moment, driven by the flood of Android devices and the recent arrival of Windows Phone 7. Wolf feels the Windows Phone 7 will gain greater marketshare in 2011, at the expense of Android. As he says, Android moved "into a vacuum created by the implosion of Windows Mobile" a few years back, and Microsoft has a long history of winning marketshare with late-arriving products.

Microsoft launched Windows Phone 7 on several handsets at once. Android smartphones are available from a huge list of makers, each with subtle differences, offering different power and performance at different price points—which suggests that the Google platform will become horribly fragmented.

Ultimately, says Wolf, "commoditization, accompanied by deteriorating prices and gross margins appears inevitable for licensees of the Android and Windows Phone 7 operating systems."

This argument is something we've discussed before in relation to e-readers. While Amazon led the way into this new market with the Kindle, a host of other makers arrived and the price of e-readers quickly tumbled in a race to the bottom. The fast followers tended not to have as powerful an ecosystem as Amazon's, though in some cases their technology may be better. Amazon has failed to radically innovate the Kindle, which now finds itself facing strong competition from the iPad. 2011 may see the e-reader quickly relegated to fringe-device status.

Wolf's prediction for the smartphone business is similar, with one important difference: He thinks Apple may be the "last man standing" in the profitable smartphone game. Apple has continually innovated the iPhone since its arrival, and has made no effort to shift its premium device status (though it has kept last-generation technology on sale to entice lower-budget consumers).

As a result, the iPhone's marketshare has remained pretty stable for nearly two years, despite the sudden rush of Android and other competitors like Palm OS. With the "growing brand equity" and supposed Verizon iPhone in 2011, Apple could well stand firm while everyone else scrambles to compete with each other.

To read more news on this, and similar stuff, keep up with my updates by following me, Kit Eaton, on Twitter.