Technology Research April 2011

Wireless Technology

Q1’11 Mobile Developer Survey

William . Power, CFA Steven J. Beckert [email protected] [email protected] 214.361.1129 414.298.7850

Andrew T. Flis [email protected] 414.298.6179

1 Key Points

• RIM developers open to switching to Android. 75% of RIM developers stated they would shift some or all of their work to Android if that platform was adopted by RIM (survey closed pre-RIM announcement). We are concerned that RIM may be incenting its developer base to work on a different platform, which could hurt QNX in the long run. Additionally, BlackBerry OS and QNX ranked low in ease of development and long-term outlook, though both ranked near the top in revenue generation.

• Increased interest in WP7 after announcement. 66% of developers responded that they were probably or definitely more likely to develop for WP7 now that Nokia has adopted the platform. and Meego scored poorly in ease of development and long-term outlook. WP7 held its own in several categories, ranking well in ease of use and visibility, though has room to improve in revenue generation.

• Android fragmentation still a significant issue, though well known. 55% of Android developers cited this as a significant issue, with many increasingly concerned about multiple Android app stores. Despite that, developers viewed long-term prospects as bright.

• Apple/Android remain dominate. Though not a significant surprise, developers continue to rank iOS and Android well above competing platforms in many areas.

• A few stats: 1) App. visibility – 39% of iOS developers cited high visibility, followed by 26% for RIM. Android trailed by a wide margin in this category at just 15%. 2) Ease of development. iOS and Android led, followed by and Flash/AIR. 3) Ability to make money – iOS again dominant, followed by RIM, 4) Long-term outlook – Over 60% of respondents listed Apple and Android as having an “excellent” long-term outlook with less than 10% for each of the other platforms.

• Stock implications: • AAPL - No change in outlook - Apple continues to dominate in most categories, which seems to support our Outperform thesis. • HTC (TW:2498) - Incrementally positive - Growing developer interest in WP7 via Nokia decision should also benefit HTC. Additionally, the release of Android 3.0 honeycomb may drive increased developer interest to Android tablets. • NOK - Incrementally positive - Per earlier comments, Symbian developer interest in WP7 should benefit NOK. • RIMM - Mixed to negative - While RIM still scores well on app visibility and ability to get paid, its long-term outlook remains poor, and we believe the decision to enable Android apps could backfire by reducing developer interest in its core QNX platform.

Wireless Technology 2 Survey Background

• Participants. We contacted roughly 2,000 mobile app developers and received roughly 250 complete or semi-complete responses.

• Geography. 51% of our participants were located in North America, with 35% in Europe, 9% in the Asia Pacific region, 2% in South America, 2% in the Middle East and 1% in Africa.

• App categories. “Games” was our most popular developer segment, roughly consistent with the broader app ecosystem, followed by productivity and tools classifications.

Geographic Dispersion Developers by Category

South America Africa Middle East 2% 1% 25% 2% 23% 20% Asia 14% 14% Pacific 15% 10% 10% 7% 7% 7% 5% 5% 4% 5% 5% 4% North America 2% 2% 51% Europe 0% 35%

Source: Baird Survey Data Wireless Technology 3 Survey Background

• iOS/Android overlap. 71% of the respondents develop for Android, followed by 62% for iOS. 70% of the iOS developers also develop for Android, with 63% of Android developers also developing for iOS. 71% of respondents develop for at least one other platform. 41% develop for 3+ platforms. 27% develop for 4+ platforms.

• Tablets. 72% of respondents are currently developing for tablet platforms, but only 23% of tablet developers are developing for more than one platform, which is similar to our Q4’10 survey results. Of note, iOS currently commands a dominant share of tablet developer activity.

Developer Sample by OS Developer Sample by Tablet OS

60% 80% 71% 70% 62% iOS, 49% 50% 60% 50% Android, 38% 40% 40% 29% 27% Don't currently 30% 23% 26% develop for 20% 9% 30% tablets, but 8% 4% 8% 10% considering it, 0% 19% BlackBerry QNX 20% No Plans to (PlayBook OS), develop for 10% 10% Windows tablets at this time, 4% Phone 7, 4% Other, 3% webOS, 1% 0%

Source: Baird Survey Data Wireless Technology 4 Platforms: Difficulty to Develop For

• iOS, Android, 7 continue to receive high marks for ease to develop on. Developers generally reported that iOS, Android, and were relatively easy to develop for. Windows scored slightly less well than it did in Q4’10, though continued strength is a good sign for the long term success of the ecosystem.

• Symbian difficult for developers. Symbian took the mantle of the most difficult platform to develop for from BlackBerry QNX, so probably a good thing Nokia is moving to WP7. 21% still list QNX as difficult to develop for, though that is better than the last survey’s 62%.

How difficult are these platforms to develop for?

Q4‘10 Q1‘11

Android Android 2.0‐3.0

iOS iOS

BlackBerry BlackBerry

BlackBerry QNX BlackBerry QNX

Windows Phone 7 Windows Phone 7

webOS webOS

Symbian Symbian

0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%

1 (Easy) 2 3 4 5 (Difficult) 1 (Easy) 2 3 4 5 (Difficult)

Source: Baird Survey Data Wireless Technology 5 Visibility

• Apple, RIM: most visible platforms. Apple and RIM received the highest scores for app store visibility again this quarter. RIM’s high visibility scores may be in part because of its relatively large user base but small app ecosystem.

• Android continues to struggle. Developers in this quarter and in Q4’10 were concerned with the level of “junk” apps in Android’s ecosystem. This seems to be less of problem for Android 3.0 developers, which may be a result of the recent launch of the Honeycomb platform.

How visible are your apps in these respective app stores?

Android 2.0‐3.0 iOS

BlackBerry

BlackBerry QNX

Windows Phone 7 webOS

Symbian

MeeGo

0% 20% 40% 60% 80% 100%

1 (Very Visible) 2 3 4 5 (Not Very Visible)

Source: Baird Survey Data Wireless Technology 6 Best Revenue Opportunity for Paid Apps

• Apple still reigns in revenue generation, others improve. iOS continues to be considered the with the highest revenue opportunity for developers, with 74% of respondents ranking it a 1 or 2. That said, Android, BlackBerry and QNX all improved QoQ, with QNX improving the most dramatically. Developers mentioned that the demographic makeup of Apple’s subscribers made them more likely to spend money on an app, a statement we generally agree with.

• Purchasing revenue offset by ads. The increase in Android revenue may be in part due to increased revenue from advertising. Multiple developers stated that ads were becoming a larger portion of total revenue for apps on the Android platform.

Which mobile platform provides the best revenue opportunity? Q4‘10 Q1‘11 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0%

1 (High Revenue Opportunity) 2 3 4 5 (Low Revenue Opportunity) 1 (High Revenue Opportunity) 2 3 4 5 (Low Revenue Opportunity)

Source: Baird Survey Data Wireless Technology 7 Mobile Advertising Service

• Google and Apple ad services – feedback improving. 45% our developer sample reported using advertising services from Google and Apple. However, profitability feedback on both was mixed. iAd improved quarter over quarter to be more profitable than Admob, and some developers noted that advertising is making up a more meaningful portion of total revenue. However, overall sentiment was that both services have room to improve from a profitability perspective.

• Anecdotal feedback on BlackBerry Ad Service negative. Anecdotally, BlackBerry Ad service users noted that the platform was not enormously profitable, much like competing products.

• Other services. Other services used by developers include inMobi, Mobclix, Inneractive, Greystripe, Jumptap and Smaato

Who do you use for mobile advertising? How profitable has your ad service been for you?

Don't Use Advertising Google/AdMob Google/Admob 30% 31% 28%

41% Q4'10 Q1'11 iAd/Quattro Wireless

22% 9% Millennial Media Other iAd/Quattro 11% Wireless 15% BlackBerry 0% 20% 40% 60% 80% 100% Adservice Millennial Media 1 (Very Profitable) 2 3 4 5 (Not Very Profitable) 4% 9%

Note: In Q4’10 we did not request data on BlackBerry Ad Service or Millennial Media, those companies would have been accounted for in the other category. Source: Baird Survey Data Wireless Technology 8 Android Fragmentation

• It’s a problem, not improving. 56% of Android developers said that OS fragmentation is a meaningful or huge problem. Worse still, the percentage increased from our Q4 survey. Three months is clearly a limited timeframe, but this would be a negative trend if it were to continue.

• Store fragmentation also a concern. Several developers also expressed concern over app store fragmentation. Generally, developers seem to prefer a unified, single store experience like Apple’s App Store.

• Negative for Android ecosystem, though well known. We view this feedback as directionally negative for the Android ecosystem and its handset partners, though we would note that this risk is well known by the market and developers view Android’s long-term prospects as bright. Do you view Android Fragmentation as a Problem?

Q4‘10 Q1‘11

Not a Not a Problem, 14% Problem 11% Major Problem 23% Somewhat of a Huge Problem, 24% Somewhat of a Problem Problem, 13% 16%

Meaningful A Problem, 17% Meaningful A Problem Problem, 33% Problem 20% 30%

Source: Baird Survey Data Wireless Technology 9 Nokia and WP7

• Symbian developers show increased interest in WP7. 66% of Symbian developers responded that they were probably or definitely more likely to develop for WP7 now that Nokia has adopted the platform, with only 7% definitely not interested. We believe that moving the sizeable base of Symbian developers to WP7 will be a determining factor in the outcome Nokia’s adoption of WP7.

• General interest in WP7 increases. Among Non-Symbian developers interest in WP7 increased meaningfully as well, with 52% of developers saying they are probably or definitely more likely to develop for WP7.

• Incrementally positive for Nokia, HTC. Successfully moving developers onto its new WP7 ecosystem is an area of focus for Nokia, and our data indicates that it may have an easier time of that then previously assumed. Additionally, we view an increase in WP7 developers as a positive for HTC, as it is one of only major OEM’s that has invested in the WP7 platform. Are you more likely to develop for WP7 now that it has been adopted by Nokia? Non‐Symbian Developers Only Symbian Developers

Definitely not, 7%

Definitely not, 12% Yes, Definitely, 19% Probably not, 12%

Yes, Definitely, Probably not, 23% Probably, 33% 40% Unchanged, 14%

Unchanged, 20% Probably, 26%

Source: Baird Survey Data Wireless Technology 10 Porting Apps

• Most developers still not using any porting tools, but percentages improving. 56% of developers surveyed said that they are not currently using any tools to port apps between platforms, with 28% reportedly looking for a solution. This is an improvement from 60% not using any tools and 23% looking for tools in Q4’10. Recall that 71% of developers surveyed develop for more than one platform.

• In-house tools most mentioned alternative to Adobe. The majority of developers who said they have a non-Adobe solution for porting apps said that they use tools that they developed themselves. Other tools mentioned include Unity3d, Titanium Appacelerator, MonoTouch, and MonoDroid.

Do you use tools to port apps between platforms?

Q4‘10 Q1‘11 Yes, Adobe Yes, Packager for Adobe iPhone, 3% 5% Yes, Other Yes, Other, 12% 13%

No, but No, but currently currently looking, 28% No, 56% looking No 23% 60%

Source: Baird Survey Data Wireless Technology 11 Android Honeycomb

• Honeycomb increases tablet interest. 51% of developers stated that the release of Android 3.0 Honeycomb has probably or definitely increased their interest in developing an Android tablet. That said, some of our developers expressed concern that honeycomb needed time to mature and become more polished.

• Incrementally positive for HTC, , and LG. Increased development of tablet specific apps will help Android tablet manufacturers compete on more level footing with iOS.

Does the release of Honeycomb increase your interest in developing tablet‐specific applications for Android? Definitely not, 6%

Probably not, Yes, definitely, 16% 27%

Maybe, 27% Probably, 24%

Source: Baird Survey Data Wireless Technology 12 Android Apps on RIM

Of note, the survey was closed prior to announcement by RIM that it would be opening QNX to Android applications. • RIM developers likely to shift work to Android. 75% of RIM developers would shift part or all of their work to Android if RIM were to allow Android apps on the platform. Many developers indicated that they would be excited by a shift to Android, but thatthey were worried it would be negative for the QNX platform. We believe that it is possible that a meaningful number of RIM developers will develop fewer, if any tablet apps specifically for RIM, and will instead develop apps for Android and then port them onto the PlayBook.

• Android apps raise interest in RIM platform. On the flip side, RIM will gain significant interest in its platform from non-RIM developers due to opening it’s the QNX platform from Android. As Co-CEO Jim Balsillie stated at the announcement, RIM now has the tonnage of apps that many have long stated it would need to succeed in the tablet arena.

• Directionally negative for QNX and RIM. Though increased visibility and tonnage from Android apps is a positive, we are concerned that RIM may be incenting its developer base to work on a different platform. Our initial reaction is that the long-term negatives outweigh the near-term positives for the QNX platform. How would you respond to if RIM were to enable Android applications to run on its devices? RIM Developers Non‐RIM Developers

I develop for a RIM I do not develop for platform and would I develop for a RIM a RIM platform and continue to do so, platform and have no increased 25% would shift part of interest to do so, I do not develop for my work to 40% a RIM platform Android, 45% I develop for a RIM but would be more likely to do so, 60% platform and would shift all of my RIM work to Android, 30%

Source: Baird Survey Data Wireless Technology 13 Mobile Platforms: Long-term Outlook

• Positive for Android and iOS. Developers continue to have an overwhelmingly positive long-term outlook for both Android and iOS, in line with our expectations.

• Negative views on RIM & others. In stark contrast to developers’ opinions on Android and iOS, developers’ views of RIM’s platforms skewed sharply negative. Microsoft’s Windows Phone 7 had the highest average score of the remaining platforms.

How do you view the long‐term outlook for the following platforms?

Android () Android (Tablets) iOS BlackBerry OS

BlackBerry QNX (PlayBook) Windows Phone 7 webOS

Flash/Air

0% 20% 40% 60% 80% 100%

1 (Excellent) 2 3 4 5 (Poor)

Source: Baird Survey Data Wireless Technology 14 RIM and QNX

• Average and below average scores cause concern. Compared to all other platforms, RIM was ranked below average in ease of development and long-term outlook, while scoring better than average in revenue opportunity. We are concerned by developers negative outlook as it could portend a shift in developers away from BlackBerry OS and QNX.

• Recent actions might make future transitions difficult, weaken QNX’s long term viability. As discussed on slide 13, RIM developers indicated that they were highly likely to shift some of their work to Android in the case of RIM enabling Android Apps. We believe this could limit interest in developing QNX specific apps. A consequence of limiting interest in developing QNX apps, in our opinion, may be that the QNX ecosystem matures at a slower rate than it otherwise would. This could result in making the transition to QNX on a smartphone more difficult for RIM, as it will not have a large app ecosystem in place when the first device is unveiled sometime in 2012.

QNX Results Q4’10 vs. Q1’11 Average RIM Scores compared to All Platforms Note: A score of 1 is the best possible outcome, 5 is the worst Note: A score of 1 is the best possible outcome, 5 is the worst

5.0 5.0

4.0 3.7 4.0 3.6 3.6 3.63.6 3.3 3.3 3.2 2.9 2.9 2.9 2.8 3.0 2.7 3.0 2.7 2.7 2.7 2.9 2.7 2.5 2.5 2.6 2.62.5 2.4 2.2 2.0 1.8 2.0 1.51.5

1.0 1.0 Ease of Visibility Revenue Long‐term Outlook Ease of Visibility Revenue Long‐term Outlook Development Opportunity Development Opportunity iOS Android Average Across All Platforms BlackBerry BlackBerry QNX Q4'10 Q1'11

Source: Baird Survey Data Wireless Technology 15 A Sampling of Comments

• “Android has lot of junk apps in the marketplace and our good apps never get the appropriate visibility.”

• “You forgot to mention/take into account the impact Amazon is going to have on the whole market with the opening of their new app store.”

• “Win7 is a disaster for Nokia and will take them out of the smartphone market for the next 3 years. Android was their only sensible short-term option before they develop their own based ecosystem.”

• “iOS is the only platform that has demonstrated that its customers are willing to consistently pay for quality apps. What platform would you develop for?”

• “The iPad still has no real competitor among the piles of reactionary tablets unveiled in recent months, and I think we'll need to wait until late 2011 or early 2012 to see one emerge. Honeycomb needs time to be polished, and vendors need to find a way to beat Apple on price without sacrificing too much in their hardware. This is unfortunate, because competition that drives the development of better products helps us all.”

• “Advertising revenues are increasing and providing the same or more income as our full paid version.”

• “WP7 is out - as in left at the gates. If they do end up edging back into the market it won't be with the current iteration of OS. Nokia made a mistake not switching to Android.”

• “I don't want to develop for iOS due to the control they keep on apps in their marketplace. I can register and have an Android app posted for sale in 2 minutes. That's "Internet Time” and Apple can't compete.”

• “It's too late [for RIM]. The only reason they are not as bad off as Nokia is that they have good relationships through their sales people to businesses. But that is a temporary lift.”

• “Android apps on RIM would be very nice. We considered spending time porting to RIM, but decided it wasn't worth the effort. Would be very nice to get on that platform for nearly free in development time.”

Source: Baird Survey Data Wireless Technology 16 Nokia and Microsoft What type of change could they make that would increase your interest in developing for WP7?

• “I've actually developed WP7 apps that are stuck in the WP7 AppHub approval process because I didn't think it was worth the time to release and support."

• “I would consider developing for WP7 if the number of users nears that of Android and iPhone or shows evidence of eventually reaching that point. I would also consider developing for WP7 if Microsoft or Nokia were willing to fund some of our development costs.”

• “First, acquire massive user numbers. Second, offset my out of pocket costs. This can be anything from sending us courtesy development devices, to paying developers enough to hire another engineer, to making a strategic investments in mobile startups.A few small seed-level investments into the 'hot' mobile app startups could encourage a lot of people to take a closer look at those platforms."

• “Possibility to develop games with OpenGL in ++. Currently only XNA is available on WP7 and C# language.”

• “Reduce license fee to develop games. Bring it at par with Apple and Android at the least. Reduce waiting time for application approval. Improve embedded advertisement. “

• “I chose to become a Mac / iOS developer because of the consistency and ease of working with the Cocoa frameworks. Microsoft lacks an attractive development platform, although their WP7 interface is well-thought-out. Were they to make the development environment much easier to work with, I might give the platform a look.”

• “Increased focus on developer profitability. (more favorable terms, lower cost of entry, increased marketing infrastructure)”

• “Games must be written in C# & XNA. This isn't viable when every other platform supports mechanisms for using native C++ & OpenGL. It makes much more sense to use C++ and OpenGL to hit more platforms in one go rather than restricting yourself to Windows Phone which has a low user base anyways.”

• “It's a confidence problem. Microsoft has been doing bad stuff since ten years ago.”

• “Quickly release a number of good WP7 phones. WP7 needs considerable upgrades like real Multitasking and more extensive APIs like Symbian has. The market share of WP7 needs to rise above 10% at least.”

• “Make it easy to port apps to WP7”

Source: Baird Survey Data Wireless Technology 17 Disclosures

Covered companies mentioned in this report:

• Nokia (NOK-$8.55-Neutral)

• Research In Motion (RIMM-$56.08-Underperform)

• Apple (AAPL-$344.56-Outperform)

• HTC (2498.TW-NT$1,140-Outperform)

(See recent research reports for additional information on covered companies mentioned.)

18 Valuation

Apple

• Current valuation. AAPL is currently trading at 15.0x our calendar 2011 EPS estimate and 12.6x 2012. That compares to NOK, RIMM, and HTC at 12.8x, 10.3x, and 15.2x our 2011 estimates, respectively. Ex. current cash, AAPL is currently trading at 12.2x our calendar 2011 EPS estimate and 10.2x 2012.

• Target price. Our $450 target price is based on 15x our fiscal 2012 interest-adjusted EPS estimate of almost $26 plus $64 in current cash per share. A 15x multiple reflects a slight premium to the S&P 500, which we believe is justified by higher-than- average growth and strong cash flow and balance sheet.

HTC (2498.TW)

• Current valuation. HTC is currently trading at 15.2x our 2011 adjusted EPS forecast and 13.3x '12, vs. Apple, RIM and Nokia at 15.0x, 10.3x and 12.8x '11, respectively. Adding back current cash would lower the 2011 multiple to 13.9x '11 and 12.1x '12.

• Target price. Our NT$1,120 target price is based on 15x our 2011 adjusted EPS forecast plus roughly NT$91 per share of current cash. Though above big-cap tech, a 15x multiple is in line with the broader market and well below its anticipated growth.

Source: Baird Survey Data Wireless Technology 19 Risks

Apple

• Increased competition from Android.

• High expectations.

• CEO succession plans.

• iPod business in decline.

HTC (2498.TW)

• Android fragmentation.

• Increased competition.

• Patent litigation.

• Supply chain risks.

Source: Baird Survey Data Wireless Technology 20 Appendix – Important Disclosures and Analyst Certification

Robert W. Baird & Co. Incorporated and/or its affiliates expect to receive or intend to seek investment-banking related compensation from the company or companies mentioned in this report within the next three months.

Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12 months. Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months.

Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A-AverageRisk- Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H-HigherRisk- Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price volatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility and unknown competitive challenges.

Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizonof12monthsbutthereisnoguaranteetheobjectivewillbe achieved within the specified time horizon. Price targets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all securities. Specific information regarding the price target and recommendation is provided in the text of our most recent research report.

21 Distribution of Investment Ratings. As of March 31, 2011, Baird U.S. Equity Research covered 651 companies, with 52% rated Outperform/Buy, 47% rated Neutral/Hold and 1% rated Underperform/Sell. Within these rating categories, 13% of Outperform/Buy-rated, and 6% of Neutral/Hold-rated companies have compensated Baird for investment banking services in the past 12 months and/or Baird managed or co-managed a public offering of securities for these companies in the past 12 months.

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Analyst Certification The senior research analyst(s) certifies that the views expressed in this research report and/or financial model accurately reflect such senior analyst's personal views about the subject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.

Disclaimers

Baird prohibits analysts from owning stock in companies they cover. This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.

22 ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST

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Copyright 2011 Robert W. Baird & Co. Incorporated

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Robert W Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the Financial Services Authority ("FSA") under UK laws and those laws may differ from Australian laws. This document has been prepared in accordance with FSA requirements and not Australian laws.

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