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552 CHAPTER 13 MARKET STRUCTURE AND COMPETITION

APPLICA TION 13.4
Smartphone Wars 26
product differentiation vis-à-vis other smartphones,
such as the Blackberry.
For many years the cell phone market was dominated The iPhone’s popularity grew rapidly, with sales
by Nokia and Motorola, which sold inexpensive phones of over 5 million units in 2009 compared to less than 1
with limited extra functionality. A distinctive competi- million in 2008. In response to the first iPhone models,
tor was the Blackberry made by Research in Motion RIM introduced the Pre, a smartphone with features
(RIM). The Blackberry was the first “smartphone”— somewhat similar to the iPhone. However, two days
essentially a small hand-held computer that allowed after the Pre was launched, Apple announced its
its users to not only make cellular calls, but also to re- newest model, the iPhone 3GS. This announcement
ceive and send e-mail messages, manage their appoint- stalled sales of the Pre. By the beginning of 2010,
ment calendar, and so forth. For years, the Blackberry Apple’s unit sales were nearly as high as RIM’s.
was relatively unique, with high horizontal differentia- The success of the iPhone spurred additional
tion from standard cell phones. Most Blackberry users competitive responses from Motorola and Google.
were businesspeople, who often had their phones paid Google designed an operating system for smart-
for by their employers. phones called Android, hoping to open up the mar-
In recent years the capabilities of smartphones ket for smartphones to many manufacturers. The
have increased dramatically, and their prices have goal was to spur innovation in apps to compete with
fallen. Industry analysts estimate that roughly 40 per- those on the iPhone, and also innovation and cost
cent of consumers now use or are planning to buy a competition among phone manufacturers. Motorola
smartphone by the end of 2010. In January 2010, the was an early entry in this initiative, announcing the
most popular consumer smartphone was Apple’s Droid phone in late 2009 to strong reviews.
iPhone, which leapfrogged the Blackberry in func- If the Android initiative succeeds, Apple’s iPhone
tionality. This phone continued Apple’s tradition of may lose much of its horizontal differentiation. At
elegant design and an easy-to-use interface. In addition the time of this writing, it was too early to tell
to a phone and camera, the iPhone could be used whether or not that would happen. However, one
to check e-mail, surf the Web, and store and play survey in January 2010 found that the percentage of
music and videos exactly as in an iPod. The phone also consumers planning to buy a new smartphone in
included a GPS (global positioning satellite) capabil- 2010 who said that they would buy an Android
ity. It had a relatively large screen compared to other phone was 21 percent, compared to 6 percent a half
phones, and it used an innovative touchscreen inter- year earlier. Meanwhile the percentage planning to
face, while other phones used small keys for entry of buy an iPhone had fallen from 32 percent to 28 per-
text and numbers. An important innovation and hori- cent. Notably, the survey found that potential users
zontal differentiator of the iPhone was the presence of iPhones and Android phones had very similar pat-
of “apps”—small applications that iPhone users could terns for usage of smartphones (in terms of calls,
download (sometimes for free, sometimes for a few Internet browsing, apps, social networking, and in-
dollars). Thousands of apps were developed by many stant messaging)—clear evidence of Apple’s potential
small companies, allowing iPhone users to add exten- loss of differentiation. If the survey numbers turn
sive functionality to their smartphones. These various into actual sales, Android phones’ market share will
features of the iPhone enabled it to achieve horizontal be nearly the same as Apple’s in its first year.

26 See Raven Zachary, “Who’s Winning the Smartphone Wars?” O’Reilly Radar, August 24, 2009,
http://radar.oreilly.com/raven (accessed March 11, 2010); “Smartphone Wars: Android Phones Close in
on iPhone,” ABC News, Ahead of the Curve, January 20, 2010, http://blogs.abcnews.com/aheadofthecurve/
2010/01/smartphone-wars-android-phones-close-in-on-iphone.html (accessed March 11, 2010).