"In yesterday’s essay “SMS: Nvst B4 It’s 2 L8” in The Daily Reckoning, I asserted, “There is going to be a rapid acceleration in the adoption of smartphones very soon. This is because the Android operating system has basically won the technological battle of the bands. It will become the standard. Microsoft has been beaten in the mobile space and its proprietary operating system is fading fast. Nokia has made a series of blunders as well and is now losing the mobile operating system space it once seemed destined to own forever.” Today, I’ll tell part of what this development might mean for investors.
I lived and worked in Silicon Valley, mostly doing public policy research, but occasionally consulting for software companies. I was able to rub shoulders, at least, with most of the historic names. Bill Gates wasn’t one of them, however. As you probably know, he relocated to Redmond, Wash. He may have done so in part because he was so universally loathed in the Valley.
I have no window into the business culture that created the management philosophy of Microsoft. Regardless, it was Microsoft’s unrelentingly hardball business practices and skillful utilization of FUD – fear uncertainty and doubt – that energized the open source software movement. That movement is now at last on the verge of making the company largely irrelevant. Developers who felt they had been treated unfairly or unethically by Microsoft often devoted enormous time, money and effort to create an alternate OS outside the control of Redmond. Sun Microsystems, a subsidiary of Oracle, gave more than a billion dollars to Linux developers. Linux, as you probably know, is an open source OS based on Unix, the OS developed first by AT&T employees at Bell Labs.
Current Linux operating systems are, in my opinion, superior to Windows. Nevertheless, I use the latest MS system because so many of the programs I need run only on Windows. I don’t, however, use MS Office, preferring Sun’s free OpenOffice. My wife, however, specialized in Oracle on Linux when she was helping look for Z bosons at the Stanford Linear Accelerator. To this day, she simply won’t use Windows, even if it makes some tasks more difficult.
She is, however, part of a minority. For the most part, Linux advocates failed to dent Microsoft’s’ OS dominance. This is not to say that the existence of a free alternative to Microsoft’s operating systems didn’t have a beneficial effect. I think the existence of a high-quality option to Windows has helped keep, to a certain degree, MS from completely controlling non-Apple software development. Apple, of course, completely dominates its software chain, which is why it accounts for so little of the market. Apple is a profitable company and makes great gadgets, but it’s unlikely they’ll ever have a bigger piece of the market than they now have.
There’s more to Linux, however, than Red Hat and GNOME. Linux programmers did succeed in denying Microsoft control of the server market. For non-techies, servers are just computers that do things other than interface as personal computers. They “serve” other uses, frequently “serving” processes and data on demand. Linux-based server software, especially Apache, have long dominated the server market. Apache, by the way, started out as a very “patchy” program. Linux-based software has also prevailed in the realm of supercomputers and research clusters used by many of the biotech companies in our portfolio.
While some economists say that Microsoft has been good for computing and America, I think that its negative impact on third-party developers may be greater. If you want to sell a product that runs on the Microsoft OS but are not a chosen partner of the company, you’re going to be at a severe disadvantage. Those disadvantages don’t exist in the server world, because Linux standards are open, giving no one special privileges. This allows more and faster innovation, which is what I care about most.
The most important Linux product of all time, however, is just beginning to have its impact. That is the mobile operating system Android. Google bought the original developer Android Inc. in 2005 and pretty much gave it to the Open Handset Alliance. This was part of Google’s strategy to move computing into the cloud and beyond Microsoft’s control. I think they’ve succeeded in that but, ironically, they seem to have overlooked a critical consequence of that move.
In Q4 2010, the Android OS was the world’s best-selling smartphone platform, ending the 10-year rein of Nokia’s Symbian. Recent events have solidified this trend. Open source advocates may have lost the personal computer battles, but they’re set to win the mobile war. This opens the doors for third-party developers like they’ve never been open before. Most importantly, it does so just as mobile devices, including phones and pad computers, are gaining the power they need to supersede laptops.
The next generation of Android pad computers is simply going to rock. Moreover, the OS is a major cost component of smartphones. Since the industry is settling on the open source Android standard, which costs basically nothing, this will shave as much as $150 off the price of a device. The equivalent of smartphones that now sell for $200 will cost $50, or they will be given away free in place of the old feature phones.
Naturally, many third-party developers are going to exploit the killer app, SMS text. SMS will be the cheapest and fastest way to access increasingly complex cloud-based applications. These cloud-based applications will be accessed via the mobile device but the processing will be performed in the distributed network, the cloud. Even now MMS, Multimedia Messaging Service, abilities are being added to SMS. These include pictures, audio and video files, all the stuff that you now access via the Web. In short, SMS will be nearly indistinguishable from the Web, but cheaper and probably faster."