Android is mixed blessing for phone makers

BARCELONA (Reuters) - The mobile industry has emerged from under the shadow of Apple and its wildly popular iPhone this year, but Google's free software platform that has helped this happen will be a mixed blessing.

While Mobile World Congress has been all about iPhone clones for the past two years, this year the buzz at the wireless industry's annual fest in Barcelona is all about Android.

Android has already turned around the prospects of struggling Motorola, which had a surprise hit with its Droid phone last quarter, and has quickly become the preferred platform of loss-making Sony Ericsson.

But it has also lowered barriers to entry to the already fiercely competitive industry, furthering the ambitions of PC makers including Hewlett-Packard and Acer, also a loyal partner of rival Microsoft -- just over a year after the platform was first introduced.

Technology research firm iSuppli estimates that about 30 percent of all smart phone models introduced this year will use the Android operating system, compared with 9 percent last year.

"Android is getting a lot of traction," Henri Richard, head of sales and marketing at chipmaker Freescale, told Reuters in an interview. "It's an enabler, for sure."

Freescale is one of dozens of chipmakers, handset makers and operators who have embraced Android and helped build a thriving community around the year-old system, which supports small mobile devices like netbooks as well as smartphones.

HTC said it had had orders from a record number of operators for the Android-based Desire, while Motorola launched its eighth Android model this week.

Android is rapidly gaining ground on Nokia's Symbian and Microsoft's Windows-based phone software, and already has about 5 percent of the market.

VALUE TRANSFER

"It's both an opportunity and a threat," Scott Bibaud, head of mobile at chipmaker Broadcom, told Reuters.

Bibaud said Android was helpful in reducing the fragementation in mobile operating systems -- "I think the word 'free' has something to do with it" -- but also removed one key way in which phone makers differentiate themselves.

"A phone today is starting to look like a black rectangle," he said.

Bank of America Merrill Lynch's technology research team wrote in a recent report: "Android has turned the smartphone market into a PC-like environment. It has transferred the value from hardware manufacturing to software and applications."

Apple, by setting the bar at a level unattainable for most handset makers, has left the way wide open for Google to come in and plug the gaps.

"We have to demystify the notion that it's untouchable," Verizon Wireless Chief Marketing Officer John Stratton said of the iPhone, which is sold only by selected operators in most markets, as he launched the Droid offer.

Verizon Wireless is offering the brand-new Droid for $199 with a two-year contract. That compares with the original price of $499 or $599, depending on the model, for which AT&T sold the iPhone at its 2007 launch.

And Android-based phones capable of surfing the Web, delivering email and offering access to online widget stores will likely soon be on the market for as little as $100.

Mobile chip maker ST-Ericsson said this week the first Android phone using its new low-cost chip platform and with a wholesale price of around $100 would reach shops next month.

Rival chipmaker Marvell also announced a new cut-price chipset ahead of Mobile World Congress that it said would drive $99 smartphones into the market, supporting Android and other platforms.

HIDDEN COST

Not only does Android save phone makers money -- Microsoft charges an estimated $7 to $25 per license, although it never comments on prices -- but it vastly speeds time to market, thanks to a large and active community of developers.

In return, Google gets more and more users driven to use its email, search and other services -- and valuable information about where those users are -- that will enable it to extend its huge online advertising business to mobile phones.

Google's Chief Executive Eric Schmidt gave a keynote address in Barcelona this year, his first appearance at the fair, in which he urged carriers to embrace the Web and said mobile was becoming more and more important to Google.

Many consumer groups are worried about the loss of privacy this could entail, and fear Google already knows too much about the people who use its services.

Microsoft's CEO Steve Ballmer, asked at the fair whether he would consider abolishing license fees for mobile, said the company was happy with its current model, and warned there was a hidden price to pay for free software.

"My parents, like most other parents, say: 'If something is free, you should take a look and find out where the real cost is,'" he said. (Additional reporting by Nicola Leske and Matt Cowan, Editing by Sitaraman Shankar)