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Nokia's Camera Phone, Samsung's Outdoor Handset Point to a Fragmented Market

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Like mountain biking? There's a phone for that. The need to stand away from the crowd, and improve margins, has smartphone makers moving into niche markets.

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The Galaxy S4 was announced in March, and there's a good chance you heard about it. Samsung's (OTCMKTS:SSNLF) spring event, like Apple's (NASDAQ:AAPL) fall one, has turned into something like the State of the Union address. One day a year, everyone tunes in -- even those who could normally care less -- to get informed about the seminal issues of our time.

What you may not realize is that there are actually five Galaxy S4s. There's the standard 5-inch version, and there's the 4.3-inch Mini. The Galaxy S4 Mega is a pocket-stretching 6.3-inch phablet, while the Zoom is a camera phone with a beer gut. Finally, there's the Active, a water-resistant S4 that goes mountain biking on the weekends.

Samsung's surprisingly complicated lineup reflects an increasingly complicated market. For years, the smartphone industry was a vanity race between rock-star handsets, namely Apple's iPhone and the Galaxy line. Today, however, even low-end devices offer handsome form factors, high-resolution screens, and advanced data connections. In many cases, consumers no longer need the latest and greatest, and they're settling for the cheapest. The industry is commoditizing, and this in turn is driving fragmentation. In order to stand out from the pack, and prop up falling margins, manufacturers are turning to niche markets, where competitors are fewer and innovation might still get noticed.

This trend has brought us camera-smartphone hybrids like the S4 Zoom and Nokia's (NYSE:NOK) Lumia 1020, loaded with high-resolution lenses and advanced photography features. Samsung's S4 Active and Sony's (NYSE:SNE) Xperia Z1 will both survive a dip in the pool, while the Casio (TYO:6952) G'zOne boasts a rugged exterior built for wilderness survival. Google's (NASDAQ:GOOG) Moto X offers customizable backplates for those who simply need their smartphone to come in Spearmint, and the iPhone 5S sports fingerprint recognition for the privacy-minded individual. Some of these features may seem like gimmicks, unlikely to become industry standards; but with manufacturers focusing on their small game, we should probably expect to see more of this gimmickry.

If peripheral markets are one of the few big growth opportunities remaining, they're also somewhat friendlier to smaller brands and new entrants. To give one example, the demise of BlackBerry (NASDAQ:BBRY) has left a gaping hole in the enterprise. Businesses have embraced the iPhone, and yet it's a virtual certainty that Apple, as a consumer-facing company, will never cater its hardware or software to the workplace. Android poses security problems for IT departments, and Windows Phone is mostly limited to lipstick-colored Nokia handsets. Bring-your-own-device is often touted as an advantage of the mobile era, but it could also reflect the lack of a better option for the office. Perhaps there's a window of opportunity here for some new competitor -- or even for BlackBerry, if it can get its act together -- that can provide business-friendly features like advanced security, an email-friendly keyboard, and close integration with company IT.

Video gaming represents another potentially lucrative market. Sony already sells a Playstation-branded mobile called the Xperia Play, and Microsoft (NASDAQ:MSFT) is rumored to be working on closer integration of Windows Phone and the Xbox One. With the smartphone side of the equation standardized, consumers may begin to focus on the other things they can do with their handheld devices -- like play console games. Even a newcomer like Nintendo (OTCMKTS:NTDOY) could potentially carve its way into the market; brand recognition and a back catalogue of titles would go a long way.

We're also seeing fragmentation in software, with mixed results. The Moto X offers advanced voice recognition and other perks not generally found on an Android handset, and for those who enjoy Google's services, it could be an attractive option. Until this year, Microsoft refused to release Office apps for IOS and Android, hoping to drive consumers to Windows Phone. The strategy didn't work -- or at least, it failed to move Windows Phone out of a (very) distant third place. Facebook (NASDAQ:FB) Home promised an immersive social media experience to anyone who wanted it -- and few did.

Whether consumers embrace these niche products or not probably depends on what they're asked to sacrifice. Facebook Home was mostly an inconvenience for those who wanted to use their smartphones to make calls, shoot texts, or run apps; older generations of camera phones were awkward to hold or pocket. Compromises on form factor, usability, battery life, and price are a recipe for failure. First and foremost, a smartphone needs to be a smartphone.

It remains to be seen whether fragmentation succeeds in the marketplace. High-profile devices like the iPhone are still driving headlines, and stories about "the next big thing" continue to attract investors looking for an equally big return. One-size-fits-all makes for an exciting narrative, but the reality is that smartphones are deeply personal devices. They follow us everywhere, and have the potential to be useful in many different situations. Maybe we should expect some differences in personality.

See also:

All the News That Didn't Fit in Twitter's IPO Tweet

Good News for Apple and Samsung: Tablets Will Overtake PCs This Year

Microsoft Creates Answer to Apple's Siri?

Disclosure: Minyanville Studios, a division of Minyanville Media, has a business relationship with BlackBerry.
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