RBC Dominion Securities Inc.Mike Abramsky (Analyst)
Paul Treiber, CFA (Associate)
November 12, 2008
This report is priced as of marketclose November 10, 2008 EST.All values in U.S. dollars unlessotherwise noted.
For Required Disclosures,please see page 53.
Sizing the Global Smartphone Market
We believe the global Smartphone market will exhibit growth outperformance (37% CAGRversus 7% CAGR for the mobile phone market), driven by four key factors: 1) disruptiveinnovations in mobile software and hardware; 2) rising consumer/business demand for mobiledata (messaging, browsing, applications); 3) faster wireless networks; and 4) mass marketSmartphone and data pricing. In this report, RBC sizes the global Smartphone market, andrecommends investors with long-term (12-18 month) time horizons overweight Apple(AAPL), Research in Motion (RIMM), and Microsoft (MSFT). More speculative names wewould recommend include Google (GOOG) and Palm (PALM).
Smartphone Market Expansion.
RBC sees the global adoption of Smartphones risingover the next four years, expanding 37% CAGR, versus 7% CAGR for the mobile phonemarket (3% mass market phones). When defined as “data-centric” Smartphones (sold withdata plans), RBC sees Smartphone Market expanding from over 80 million units sold incalendar year 2007 or 7% Total Addressable Handset Market (TAM) , to 294 million unitsin calendar year 2011 or 20% TAM. RBC estimates there will be 449 million Smartphoneusers globally by calendar year 2011, up from estimates of 102 million by the end of calendar year 2007.
Our outlook is based upon a historic confluence of factors: 1) iconicSmartphones like Apple’s iPhone, Blackberry’s Storm, Google’s Android, etc.; 2) globaltransition from voice-only handsets to Smartphones, driven by demand for mobile email,browsing and mobile content/applications; 3) advancements in handset technologiesoffering compelling user experiences; 4) faster 3G networks and carrier focus on data; 5)lower handset/data pricing reaching mass-market inflection points; 6) momentum of mobileapplication platforms and third party mobile applications; and 7) mobilization of business.
Amidst the global economic slowdown, RBC views the Smartphonemarket – while not recession-proof – as a “market within a market”, outperforming thegeneral handset market, because: 1) mobile data services like email are 'sticky' (lessdiscretionary); 2) the market is international, with developing economies offsetting slowerregions; 3) lower data and handset pricing trends improve affordability; and 4) new productcycles. Although we expect growth to slow to 21% year-over-year in calendar year 2009(from 52% year-over-year calendar year 2008), we expect Smartphone shipments to grow37% CAGR by calendar year 2011. Our Scenario Analysis shows 30% upside to ourSmartphone Growth Forecast under 2%+ calendar year 2009 GDP and, 30% downsideunder -2% calendar year 2009 GDP.
Vendor Share Shifts.
While facing interim growth/margin threats from economicslowdown, this outlook offers long term positive implications for RIM, Apple, GoogleAndroid and Windows Mobile Smartphones. RBC forecasts Apple and RIM continuing togain share from incumbent vendors Motorola, Nokia (including Symbian), LG, andSamsung. With estimates at 1% of TAM (14% Smartphones), RIM need only achieve 1.9%of TAM in calendar year 2008 and 2.8% of TAM in calendar year 2009 to exceed RBCgrowth expectations in the next two years. Similarly, with 0.3% of TAM (4.4% share data-centric Smartphones), Apple need only achieve 1.2% of TAM in calendar year 2008 and1.7% of TAM in calendar year 2009 to exceed RBC iPhone growth expectations in the nexttwo years. HTC-branded (estimate 0.3% of TAM), Google Android and Windows MobileSmartphones are also expected to gain share, although the extent to which depends onbuilding competitive advantages, and successful uptake of pending product cycles. (RBCforecasts 1.1% of TAM for Google, 2.9% for Microsoft by calendar year 2011).