Dell's iPhone Killer rejected by carriers as too dull

After signaling its intent to follow Apple's wildly successful iPhone into the smartphone business, Dell's first attempts to produce a phone have been rejected by the carriers for being too dull and lacking enough differentiation to stand out in a competitive environment, according to a report.

A research note published today by Kaufman Bros. analyst Shaw Wu said that Dell's new prototypes, capable of running both Windows Mobile or Google's Android, simply didn't interest the carriers.

Mobile service providers either want basic phones they can sell for free (as the majority of LG units do) or headline grabbing models that can stand out and hopefully pull new subscribers from rivals, such as AT&T's iPhone 3G, Verizon Wireless' BlackBerry Storm, T-Mobile's Android G1, or Sprint's hopeful Palm Pre.

"From our conversation with supply chain and industry sources," Wu wrote, "it appears that it ultimately came down to lack of carrier interest and small subsidies, making it difficult for Dell to make a profit. In our view, the last thing Dell needs is to enter another money losing business as it seeks to preserve its operating margins of 5%-6%.” Wu noted that those figures compares with HP's 11% margins and Apple and IBM at 15%.

Wu said Dell is “going back to the drawing board in designing a cell phone with more differentiation,” that could “likely involve vertical integration of some sort including software and/or services.”

"PC guys are not going to just figure this out"

Dell's failure to successfully step from the commodity PC business into the mobile handset market should come as no surprise, as smartphones requires expertise in software platform development, consumer design savvy, and portable device engineering, all things Dell has never demonstrated any proficiency in.

That calls to mind the quote from Palm CEO Ed Colligan, who said “PC guys are not going to just figure this out. They’re not going to just walk in." He was specifically referring to Apple, which did "just walk in" with the iPhone launch, but carried with it a half decade of experience with the iPod and decades of experience in maintaining successful software platforms building highly customized hardware.

Some pundits have speculated that Dell may need to buy its way into smartphones, citing Palm as a target. Palm is struggling to release its new webOS and the Palm Pre as the first phone to use it. As sales of its aging Treo line collapse, Palm has been kept afloat only by millions of new venture capital injected by Elevation Partners. Were Dell to buy Palm and inherit the webOS, it would come at the expense of Windows Mobile and Android, both of which are trying to line up new licensees.

Smartphone shakeout

Microsoft is being hit particularly hard, with two of its top names from last year (Samsung and Sony Ericsson) abandoning Windows Mobile for the Symbian OS in their new flagship phones demonstrated at this year's Mobile World Congress, leaving Microsoft's main licensees LG (which also has plans to sell Android phones) and HTC (which makes 80% of the phones that use Microsoft's mobile OS, but is similarly planning Android phones and is apparently losing its business of building phones for Palm).

The smartphone market's ability to resist collapse during difficult economic times, paired with the shrinking global market for PCs, has already sent other PC makers scrambling to enter the phone business, including Acer, Asustek and Lenovo. However, the tough competition for attention in a complex market that requires building relationships with the carriers who control the retail sale of phones through service plan subsidies is not going to allow PC makers to "just walk in," as Colligan stated.

Long time phone makers Motorola and Sony Ericsson are in big trouble, with little to excite new buyers and mounting pressure to catch up with Apple's App Store, its vertical MobileMe cloud sync offerings, and its sophisticated software development tools. Even market leading Nokia is having trouble announcing plans to maintain the pace of Apple in the areas of software updates; API and development tools; and music, video, and mobile software and gaming offerings.