However, as both companies realize, they are not completely above the fray. In Q1, for example, as Verizon went on a smartphone tear that marked the rise of the original Droid, Samsung pulled far ahead of LG, which suffered as more Verizon customers adopted smartphones instead of its feature phones that are popular at the carriers. In Q2, as Verizon ended its buy one-get one smartphone promotion, LG made up some lost ground with Samsung. LG also launched the Ally, its first Android smartphone, at Verizon Wireless.

For its part, Samsung, which has dabbled in the Android market with the Moment at Sprint and the Behold II at T-Mobile, has made a multi-carrier assault with four flavors of its Galaxy S device. The Captivate and Vibrant have already launched on the nation’s largest GSM carriers, while the Epic 4G and Fascinate remain on tap for Sprint and Verizon. As Samsung pushes forward on Android and Bada, and as LG becomes a lead Microsoft partner for Windows Phone 7, the next year will help to determine if thee market leaders have been sleeping giants in the smartphone market.

Revenue stream diversification in the cellular service market is also working in Best Buy’s favor. While Best Buy Mobile enables the retailer to gain more experience with the subscription model, increasingly we will see models for connected devices that are either fully subsidized (such as those for e-readers such as the Kindle) or pay per use plans such as the iPad. At AT&T’s briefing at CTIA, it was clear that the carrier is opening its doors to a wide array of devices that include the familiar (PNDs) to the emerging (the OpenPeak Web tablet) to the quirky (a connected dog collar). Regardless of whether it’s participating in the heart of the cellular market or preparing for the next generation of mobile electronics, retailers will need to master the art of selling the connected product.

 When the iPhone 3G was launched, AT&T could justify deep discounts for upgraders because it wasn’t losing any money on subsidizing the first iPhone. Now, though, iPhone 3G users are complaining that AT&T is charging $300 or more to upgrade to the iPhone 3G S. The problem for early adopters is straightforward. Contracts are on a two-year cycle but the iPhone is on an annual upgrade cycle so AT&T can’t recoup its subsidy fast enough. And of course other handsets that keep pushing the leading edge are becoming available all the time. It is certain that today’s hot Palm Pre will look less alluring two years from now as Palm releases models with more features.

The cell phone subsidization model is outstanding for getting leading edge technology into consumers’ hands, but it has no easy way to keep early adopters there for the term of the contract. What the plaintiffs ignore, though, is that if they had bought a similar high-tech device without a contract, they would have paid a much higher relative price for the first purchase and the upgrade were it not for the carrier subsidization model that makes the upgrade look relatively expensive. Consumers who see value in the enhanced performance of the iPhone 3G should take advantage of the discount, even if it’s not as attractive as one that rewards a switcher.

Over at Technologizer, Harry McCracken proposes an interesting option; simply extend the contract for the full length of both contracts to offer the lowest price to existing customers. That, though, sacrifices the savings on customer acquisition when selling into the installed base and sets up potential for indentured servitude-like contract terms. Another option would be an additional fee — almost like obsolescence insurance — that offers more flexibility on trade-up frequency, but it’s hard to see how the economics of that would make it worthwhile. Regardless of the extent of subsidization, those who live on the bleeding edge bleed green.

 
But there was also a sign of the challenges connected products face in the marketplace as Navigon announced that it would withdraw from the portable navigation device business in North America. As recently as CES, I had held Navigon up as an example of success in PNDs. A late entrant to the category, Navigon leveraged free live traffic updates (via FM radio) to help build volume and market share in a consolidated category. But it appears as though enough consumers weren’t trading up enough to justify the subsidization of the service. According to NPD’s retail tracking service, March unit sales were flat and revenue declined, with the average selling price dropping 26 percent year-over-year.

As the ill-fated Dash Express first showed, two-way wireless connectivity enhances the utility and usefulness of PND — the rub is that it’s the same two-way wireless data capability integrated into cell phones. In March, sales of cell phones with integrated GPS capability passed 60 percent for the first time, according to NPD’s Mobile Phone Track. Indeed, Navigon says it intends to focus its North American efforts on developing navigation software for cell phones. And with version 3.0 of its operating system, the iPhone will support turn-by-turn navigation on its large 3.5″ touchscreen, a screen size competitive with some of the best-selling PNDs on the market. The iPhone’s two-way connectivity will, in the eyes of many, make it a better PND than the best PNDs, just as it has become a better iPod than even the iPod touch.

At the recent CTIA wireless trade show in Las Vegas, several of the nation’s top carriers reaffirmed their commitment to support devices beyond the smartphone, with AT&T claiming that any CE device that didn’t have at least Wi-Fi next year would be at a severe disadvantage in the marketplace. However, the carrier is also willing to compete in at least one traditional retail category, and rolled out its plans to offer subsidized netbooks in its stores to consumers who sign up for data contracts. Sprint and Clearwire rolled out their 2009 and 2010 national deployment plans for Clear, the WiMax service that features unsubsidized devices intended to be sold at retail. And Verizon discussed its Open Development Initiative to allow the embedding of its network connectivity into devices far beyond its handset portfolio.

Meanwhile at the concurrent NCTA cable trade show in Washington, D.C., the industry took further steps toward adoption of Tru2Way, the highly touted successor to CableCARD that promises to finally provide direct connectivity to televisions and AV devices from consumer electronics companies. Tru2Way televisions are currently being used in trials in a few U.S. cites; greater availability should come in 2010.

Faster and more versatile wireline and wireless connectivity could do much to transform the nature of even mature consumer electronics categories, but unsubsidized devices will face tough competition as service providers continue to cater to the mass market with low-cost or free subsidized devices. Examples abound. While smartphones offer the ability to install applications that aren’t pre-approved by the carrier, unlocked smartphones sold at retail can easily cost more than $500 and remain a limited opportunity stateside. While the Amazon Kindle has done well in its niche, Amazon has been able to completely subsidize the cost of wireless service because the device sips data and locks in users. The recently released Moxi DVR from Digeo that uses CableCARD forgoes monthly fees, but costs $799, not including a satellite unit that will allow multi-room viewing.

A loosening of purse strings in 2010 could certainly bode well for advanced technology products, but manufacturers and retailers will need to work hard to earn sales of new and enhanced categories of devices that offer tantalizing connectivity, albeit at a dizzying premium above the service provider baseline.

But the greatest promise of the SDC is to expose consumers to the breadth of functionality that lays behind the keypad, keyboard, or touchscreen. The need for better consumer education regarding cell phone functionality was borne out by NPD’s recent Mobile Phone Usage report, which found that 45 percent of consumers use their cellphones only for voice. Service Delivery Card is not a substitute for better design and discoverability, but it can help bridge the gap in the inherent complexity of convergence we see not only in smartphones but even advanced feature phones. SanDisk notes that carriers can offer sophisticated SDCs that configure themselves on the fly to the nuances of the handset in which they are inserted.

For handsets where carriers are including a microSD card in the box anyway, such as the T-Mobile G1 or the Blackberry Storm, SDC seems like a no-brainer. Why not take advantage of the additional expense of the flash memory to elaborate on the device’s features and benefits once the customer has left the store?

However, there are cases where microSD won’t work. Nearly all Sony Ericsson handsets use a competing card format and, more ominously, high-profile handsets such as the iPhone and Palm Pre have snubbed any memory card slot (as has the Kindle 2). These handsets come with 8 GB or more of integrated flash memory and have sacrificed the card slot to achieve a slimmer profile. Unlike Apple, though, Palm seems open to microSD card support in future webOS devices as it supports memory cards in the Treo.

This helps to illustrate why the support of handset companies would help SDC. If, as internal flash memory grows, more manufacturers pass on the cards, though, SDC is still worth exploring for carriers. Lessons learned in designing applications and instructional content for the cards today could be used for preloading internal flash memory on the phones themselves tomorrow.

While one could debate whether other businesses contribute to success in cell phones, though, having a broader portfolio is certainly correlated to sales leadership in the U.S.  Samsung, LG, and Motorola, the three most popular domestic handset brands by far, according to NPD’s Mobile Phone Track, all play in industries other than mobile. In fact, if you add up many of the larger companies focused solely on mobile, a group that includes Nokia, RIM, Sony Ericsson, Palm, and HTC, they cumulatively accounted for little more than a fifth of all handset sales for the first 11 months of 2008.

The area where the Pre really breaks new ground is its webOS operating. Even here, there’s nothing inherently mobile about the Web — many Web sites remain handset-hostile — but Palm’s Synergy architecture weaves content from online properties increasingly exposing their information into its fluid flow of operation. Such integration would surely benefit a wide range of information and entertainment products, but has the most near-term potential in the one device that’s rarely far from the consumer or the Internet.

• Make the Connection: Consumers and the Next Era of Digital Living at the NPD/DisplaySearch client cocktail reception
• Storage Technology and The Market for Entertainment and Consumer Storage, and Reaching and Informing Consumers and Channel Partners at Storage Visions 2009
• The annual TWICE retail roundtable at CES (a closed event)
• Delivering on Digital Entertainment, an Industry Report Card at CntrStg
• The 2008 Holiday Season: A Giving One or the Grinch? at CES (in the LVCC)
• Mobile DTV Primer: Separating the Wheat from the Chaff at CES (in the LVCC)

I’ll be moderating that last panel, which will bring together representatives from the worlds of broadcasting, wireless service providers, and mobile platforms. Most of the attention at CES is on giant screens, but the past year has seen an explosion in PC-based broadband TV and video on sites such as Hulu and those of the major broadcast networks. That’s a dramatic contrast from the walled gardens that have characterized the mobile TV offerings to date from providers such as MediaFLO USA and MobiTV, the latter of which recently passed the 5 million subscriber mark.

Additionally, whereas most of the growth in Internet video on these sites has been focused on on-demand viewing, most of the services aimed at mobile phones (and other portable video platforms via the near-final mobile digital television broadcast standard) have been linear broadcasts. Clearly that’s a sensible approach for news and sports, but consumers today are increasingly becoming accustomed to nearly unlimited choices and having them on-demand. What are the odds that you’ll find “something good on” when you have a few minutes to kill and in an area where you have sufficient coverage. Of course, one popular phone provides on-demand TV shows via sideloading if you’re willing to pay (or use elaborate alternatives).

Some of the broadcasters on MediaFLO respond by time-shifting select programs to provide more alternatives to the soap opera-averse during the day whereas a recent conversation with MobiTV revealed that the company is giving more attention to on-demand video as it has been implemented in its Mobi4Biz offering.

Unlike MobiTV and MediaFLO, broadcasts that use the ATSC mobile DTV broadcast standard will be free and available to other kinds of devices besides cell phones, such as portable DVD and digital video players. In piggybacking onto these product categories, mobile digital TV is poised to reach a broader audience than analog broadcasting did catering exclusively to handheld TVs such as the Sony Watchman. But even free reception may not prove a strong driver to consumer adoption as the challenges of HD Radio has shown.

However, it’s not simply the raw floor traffic and greater scheduling and geographic availability of Apple stores that has likely led the company to abandon its once-biannual homecoming, it’s the quality of interactions it has there. Its Fifth Avenue flagship store in New York, for example, is programmed like a cable network — an unending series of seminars and support sessions that provide opportunities to educate consumers about Apple and third-party products sold at the stores. And at both its physical stores and its Web site, Apple has a more direct path to monetization that it has within the walls of Moscone Center (even with its Market Street store just a few blocks away).

From a more strategic focus level, however, Apple is not the same Mac-centric company it was in Macworld Expo’s early days.  While the Mac is still its greatest cash cow, it sells far more iPods, and its iPhone represents great growth potential — particularly among consumers who would never attend a Macworld Expo.

In the early days of such seminal Mac applications as PageMaker, QuarkXPress and Photoshop, and peripheral makers such as SuperMac, Radius, Farallon, Asante, and APS, and in the brief interlude during which there were Mac clones, there was so much happening in the Mac market that Apple was simply in the center ring of the circus. However, for the past decade, the attention around Macworld Expo has been focused squarely on Apple’s announcements.

Years ago, I attended one of the last Boston-based Macworld Expos after Apple had pulled out, and it had all the energy of the 8:30 AM statistics class I took sophomore year. Even with more tech companies in the Bay Area than in Boston, the days may soon end when those who follow both Apple and the rest of the consumer technology industry angle to work in a quick trip to San Francisco around time in Las Vegas.

There’s little doubt as to why Walmart would want to carry the 3G iPhone. NPD tracked the device as the best-selling handset in the U.S. in Q3, surpassing the Motorola RAZR in a dramatic consumer embrace of Web-savvy smartphones. Recent smartphones such as the T-Mobile G1 and Blackberry Storm already represent the second wave of would-be “iPhone killers” following advanced touchscreen feature phones that appeared earlier in the year.

Without such a radically different configuration as the one rumored, an iPhone debut at Walmart would be more of a symbol than a sales beachhead. After all, Walmart has carried iPods for years where they have had lower market share than in other retailers. And the factors that go into choosing a handset, particularly among the pre-paid purchasers dominant at mass merchants, are far more complex than those for an MP3 player.

But as demonstrated by Best Buy’s aggressive rollout of Best Buy Mobile areas within its stores as well as standalone stores and as reinforced by several operator presentations this week, the trend toward the separation of handset and service represents tremendous opportunity for retailers to differentiate the handset-buying experience. Carrying the iPhone would enable Walmart to expose its customers to the potential of wireless Internet access, which could open doors for data with even less expensive devices on different carriers.