The value is migrating from firms that run networks and make hardware to those that make software and offer services

Inquiring minds are reading the Economist's Cleverly simple and Copycats:

Sales of smart-phones were up by nearly 15% in the 2Q of 2009, according to IDC, a market-research firm. The market for smart-phones is expected to grow so quickly in part because they are changing. Expensive pocket computers such as the iPhone and BlackBerry are giving way to new models that come with popular services built in, but are less versatile or run on open-source operating systems, and are often cheaper. All this reflects a broader trend in the industry, where value is migrating from firms that run networks and make hardware to those that make software and offer services.

New handsets from Motorola, an industry veteran, and INQ, a rising star, illustrate these changes. They both feature built-in support for online services, including popular social-networking sites such as Facebook and Twitter.

INQ and Motorola are also both betting on Android, an open-source operating system developed by Google. Although the internet giant’s operating system only has a small piece of the market, it is clearly gaining momentum.

Android will also accelerate the third trend. Prices are now on a downward spiral, says Ben Wood of CCS Insight, a research firm. Several other handset-makers are already offering cheap smart-phone-like devices. Android allows cut-price Chinese firms such as Huawei and ZTE to enter the smart-phone market, which they had previously stayed out of for lack of the necessary software.

But if pared-down smart-phones become the norm, handset-makers risk becoming sellers of commodity hardware while operators face a future as dumb pipes for data. Hence the recent rush into services.

Xerox’s move follows Dell’s recent $3.9 billion offer for Perot Systems, another services company. Both bidders are betting that profits from their targets, which boast fat margins and multi-year contracts with customers, will offset shrinking returns from the increasingly commoditised hardware business. They hope the deals will help them sell more photocopiers, computers and other gear too. The combined firms will compete with behemoths such as IBM, which now gets more than half of its revenues from services, as well as Indian rivals such as Infosys and Wipro.

Splicing hardware and services firms together can pay off handsomely. Witness the experience of HP, which last year forked out $13.9 billion for EDS, a services giant. (On September 23rd HP renamed the business HP Enterprise Services.) After a difficult integration process involving thousands of job losses, HP’s operating margin in services has hit a ten-year high of 15.2% and it now has deals involving $4 billion-worth of HP equipment in the pipeline. Before the acquisition, EDS mainly touted kit from HP’s rivals. Dell and Xerox must be hoping that this success can be copied.