This column was originally published on RealMoney on Aug. 22 at 12:34 p.m. EDT. It's being republished as a bonus for readers.

A major management challenge looms for the smartphone sector: Just as unit sales growth is starting to slow, the number of major product launches is climbing sharply.

The smartphone sales boom in 2003-05 was largely defined by


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strong Symbian phone push in Europe and Asia. Now



has placed Windows into one of its key autumn models, while

Sony Ericsson



are both ramping up their smartphone programs.

It's a situation in which a large number of new models are entering the niche just when annualized unit-growth pace is cooling markedly -- from 150%-plus in the first half of 2005 to 75% in the second quarter, according to Canalys, a small U.K. research outfit with a solid track record covering the smartphone industry.

It's possible that the delay of certain Nokia E and N series models into the third quarter dented the second-quarter growth a bit, but the hypergrowth era is now drawing to a close.

Managing the natural and inevitable slowdown in the growth rate after a period of hypergrowth is a familiar challenge in consumer electronics. It's a good problem to have -- a much nicer dilemma than trying to jump-start a device category that never took off in the first place. Nevertheless, it poses some very thorny pricing and product-placement challenges for handset vendors.

The likelihood of accelerating smartphone price declines may finally give the struggling mobile-software companies like





a shot at tapping into a mass market.

Maturity Beckons

A smartphone can be defined as a mobile phone that possesses a standardized operating system and is able to multitask between various applications. Notable OS rivals are Symbian, Windows and Linux.

Quarterly shipments of smartphones were well above 10 million units in the second quarter and may well reach 20 million units by the fourth quarter. Smartphone sales might be roughly 10% of total global handset sales volumes by the summer of 2007.

This is a high level indeed, considering that average sales prices (ASPs) for handsets worldwide are declining toward $100, while the smartphone ASP level remains close to $300.

But the smartphone ASP is dropping faster than the average handset ASP; slowly but surely, this product category is taking over the mid- to high-end market. You may not feel like you want a Symbian phone that can multitask between real-time stock charts and "Diner Dash 3," but smartphone volumes are growing so big that they are pushing "regular" high-end phones out of the phone shops.

Once the production volumes of phones equipped with specifically designed smartphone chipsets and complex software grow large enough, the price declines at a certain point guarantee that the added functionality will sort of be "handed out" to consumers.

The new wave of relatively affordable email phones arriving this autumn and winter is a major vanguard of mainstream smartphones. By and large, operators have been very aggressive in creating a new pricing structure for email phones.


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$200 email phone price seems to be the new benchmark in the U.S. market that






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are all expected to emulate over the next two months. And when you buy an email phone, you get a smartphone by default. What you do with it is the dilemma keeping industry people awake at night.

We are close to the tipping point when having either Windows or Symbian OS becomes a staple in high-end phones. Motorola's Q and Nokia's new email-and-music phones are smartphones --

Sony Ericsson's

Walkman phones and most of Samsung's high-end phones are not. However, Sony Ericsson and Samsung now seem to be accelerating their smartphone programs. Both are entering the email-phone market with smartphone entries, and this is likely to drive a proliferation of sibling models incorporating Windows or Symbian.

This looks like a formula for very aggressive pricing, particularly by the first quarter of 2007, as the new smartphones reach multimillion unit volumes. This is exactly what the mobile-content sector needs; but figuring out the correct price/volume formula may be a demanding task for handset vendors. It is possible that a well-managed smartphone ASP decline to the $150-$200 range could help the midrange phone market grow and boost the revenues for phone vendors that are the most nimble in this space.

That might help Motorola and Nokia continue to claw back the market share the Korean brands won over the past half-decade -- Korean brands by and large have been the weakest players in the smartphone market.

A Plus for Content Companies

It's possible that the low-cost smartphone era that is now dawning will finally shift some earnings power from old-school mobile telecom companies to a new generation of content, billing and distribution companies. The problem for investors is that very few of these companies are yet listed in America. Hopefully, the ongoing wave of consolidation among nonlisted mobile-software companies is going to lead to IPOs in 2007. Meanwhile, software investors are paying close attention to Openwave and Opera as they try to recover from the crushing recent lows.

I think both may have a stronger 2007 than is now anticipated, but there's no denying that 2006 has been a brutal disappointment for the mobile-software sector. A deep and wide smartphone market with several subniches could give mobile-software vendors the kind of market they need to thrive. At the moment, phone vendors can meet most of their own software development needs, or at least keep terms with contractors very lean.

During the past year, several key mobile-software companies have disappointed investors deeply, from Jamdat -- recently acquired by

Electronic Arts


-- to Openwave to Opera, for various reasons. But a fundamental problem common to the mobile-software sector has been low uptake of mobile-content services, which has left these companies in a lousy negotiating position with operators and branding partners.

As expected, an M:Metrics study from last May indicates that the mobile-content usage rates among smartphone owners is much higher than among consumers owning regular phones. But Telephia just released a report pegging the global mobile Internet user base as just 34.6 million, a modest figure among 2 billion global mobile subscribers.

That's why we haven't seen the


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of the mobile sector yet. And that's why investors continue to focus on phone vendors and operators rather than the software plays.

At time of publication, Kuittinen had no positions in the stocks mentioned, although holdings can change at any time.

Tero Kuittinen is a senior product specialist for Nordic Partners, Inc., a pan-Nordic brokerage firm. Although Kuittinen is an employee of Nordic Partners, Inc., the statements above are being made in Kuittinen's personal capacity and are in no way are the statements of Nordic Partners, Inc., nor attributable to the company. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback;

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