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The Great Smartphone Bear Market

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As smartphones start to look more and more alike, Apple's iPhone just looks better and better.

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Ladies and gentleman, toss out your Goldman Sachs (GS) and Morgan Stanley (MS) research reports because I'm going to tell you everything you need to know about the mobile-phone industry in a sentence short enough to fit in a tweet:

Buy Apple (AAPL) and sell everything else.

Yes, the smartphone market is a growth market, but the iPhone is the only smartphone that actually ends up driving someone's bottom line.

Just take a look at the facts:

1. Palm's (PALM) Pre and Pixi couldn't stand the heat from the iPhone assault.

2. Motorola's (MOT) Droid was a hit, but dragged down by a legacy dumbphone business.

3. Nokia (NOK) somehow managed to deliver a stinky quarter while generating a 50%-plus increase in smartphone unit sales.

4. Qualcomm (QCOM) just blew up on pricing pressures.

5. Google's
(GOOG) Android operating system is outstanding, but is free to phone makers.

6. Microsoft's (MSFT) revenue base is simply too huge for its mobile operating-system business to make a real dent.

Research in Motion
(RIMM) remains the wild card because it has a very strong brand presence within corporate IT departments and appeals to budget-conscious smartphone shoppers. However, I recently sold my short-held position in the stock because of today's double-whammy of bad news from Nokia and Qualcomm, which indicates that there's increasing risk to Research in Motion's aggressive June-quarter guidance. (See BlackBerry Losing Market Share, But Brand Is Strong.) I also recently took a bearish bet on Motorola using out-of-the-money put options -- an unusually aggressive stance for me.

Forget the whole concept of a rising tide lifting all boats. The smartphone market ex-iPhone has turned into something truly awful: a bull market in unit shipments, a bull market in product quality, and a bear market in profits.

Mobile-phone makers have fooled themselves into thinking that slapping together a processor, a touchscreen, and Android is the way to make money -- or at least avoid the potential embarrassment of trying to stand out from the crowd. The Motorola Droid was hot for a few months but then was overshadowed by the Google Nexus One. And of course, the HTC Droid Incredible will show those two up before getting crushed by yet another hot Android phone three months later.

And I'm willing to bet that we'll see the same trend with Windows Phone 7 after its debut later this year.

The brutal competition is great for consumers because we're getting awesome phones at rock-bottom prices.

But the commoditization is killing branding and staying power, which directly plays into profitability. We're seeing from Qualcomm that pricing pressure at the retail level is making its way through the supply chain -- a sign that phone makers have painted themselves into a corner.

Apple will almost definitely release a new iPhone this summer, and I don't see a single competitor with a stomach strong enough for the fight. I love the rise of Android phones, but let's get real. It's pretty darn hard to differentiate between all the various models.

Forget about megapixel counts and video-output jacks. The most important aspects of the phones, the physical and virtual interfaces, remain the same.

And you know what? That's great for Apple, because as every other phone in the store starts to look more and more alike, the iPhone just looks better and better.

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Positions in AAPL and MOT.
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