Plenty Of Gains Ahead For Companies Making Smartphones More Useful

Whether it’s an ice cream parlor on the corner of Main Street or a multinational corporation worth billions, staying ahead of current trends – or at least adjusting to them – is crucial in today’s environment to achieve long-term success. Businesses that fail to innovate fall behind and then, more often than not, they fail. It’s the one constant that unites businesses across industries.

The need for constant innovation explains Facebook’s acquisition of Oculus VR last month. Sure, the deal has a revenue component, allowing Facebook to one day tap a trove of online data about key consumer demographics, which it could leverage into millions in ad revenue. But the deal also gave the company a piece of virtual-reality – a potentially transformative technology that could shape everything from the way doctors interact with patients to how Americans view sports on TV.

Innovation also explains Amazon’s recent moves. Seeking to move beyond its roots as online retailer, the company has been aggressive in trying to build its entertainment production, gaming and online streaming divisions. The launch of its set-top box device, Fire TV, earlier this month is just the latest example.

Meanwhile, other companies haven’t pursued innovation as aggressively. Perhaps the most glaring example is Microsoft MSFT -0.5%, which for years remained wedded to the PC components of its business, even as tablets and smartphones became more ubiquitous. And while it has made a greater effort to catch up in recent years, its line of Surface tablets haven’t gained much traction, while its Windows operating system powers less than 5% of the smartphone market.

This is an important lesson for the smartphone industry. As Americans become increasingly more reliant on their smartphones with each passing day, the market will begin to demand more from these devices. Companies that pursue innovations that align with such demands will grow and reward their investors. And companies that stand pat will likely suffer, much like Microsoft MSFT -0.5%, which briefly touched $37 per share in October 2007 and didn’t hit that mark again until last November.

With all of the fantastical technology ideas from delivering packages by drone or driverless cars. Many simple functionalities are still problematic with smartphones. Here is what users want from their phones, along with some of the companies best positioned to provide it:

**A better entertainment experience – As the cost of cable and satellite television continues to rise, millions of Americans are turning to online and mobile alternatives, such as Hulu and Netflix NFLX -1.66%, which are much cheaper, charging less than $10 a month. But the streaming experience is far from perfect. It’s rife with various play-back problems that cloud the picture and cause buffering. While some of these issues can be traced to overloaded broadband networks, device makers will need to upgrade their hardware systems to improve the viewing experience and capitalize on this trend. One company that could benefit from this effort is Himax, which manufactures an array of microchips and HD display screens used by many smartphone manufacturers.

**Easier in-store transactions– There is a huge opening for a virtual wallet technology that allows consumers to leave their cash and credit cards at home and make purchases with their phone. It’s just a matter of setting up the infrastructure to support it. Pay Pal, a subsidiary of EBay, is a good bet to facilitate such an enhanced mobile payment system. It enjoys a large user base and has much of the needed infrastructure already in place. Of course, the retail industry would have to get on board, too. Here, Verifone could have a strong incentive to develop technology that accepts mobile payments. As a leading provider of credit and debit card terminals, it would risk losing business should consumers begin to transition to mobile payments.

**Heightened Security – As smartphones become an even greater part everyday life – and hackers become more sophisticated – consumers will demand fingerprint technology and other biometric identifiers, such a retinal scans. While Apple AAPL +1.42%’s iPhone 5S includes a fingerprint security feature, this trend is in its infancy and the number of device makers looking to incorporate this technology into their future offerings will only increase. This is good news for Synaptics SYNA +1.95%. The company not only has a number of previously existing partnerships with multiple device makers but it significantly enhanced its touch-based capabilities late last year, when it acquired Validity, a leader in fingerprint authentication security.

**Greater interactivity – Her, a recently released movie about a man who falls in love with his operating system, is an extreme example, but it nonetheless contains an underlying truth – people want more out of their phones. Providing GPS feedback or restaurant recommendations isn’t enough anymore. Users want a personal assistant. To meet this demand, device makers need to integrate more intuitive voice features that actually work, including voice reminders about appointments, meetings or other important dates, as well as adding the ability to read aloud texts, email or even the news. While Nuance Communications NUAN +0.7%, which licensed Siri to Apple, suffers from lack luster management, it has developed a wide array of voice recognition software and offers value at its current valuation.

Apple introduced the iPhone during the summer of 2007. Less than seven years later, smartphones have become a fundamental part of everyday American life. It seems pretty safe to say that they will become even more important over the next seven years.

Although there have been great gains in technology over the last 5 years, there is still a long way to go. Within this environment, companies that continue to innovate and seek out new ideas will benefit, while the ones that stand pat will merely stay afloat – if they’re lucky.

Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki, an independent investment advisory and wealth management firm with approximately $200 million in assets under advisement. Clients and employees may own positions in various companies mentioned in the article, but readers shouldn’t buy anything without doing their own research.