Yankee Group research reveals that trends within the smartphone ecosystem are profoundly impacting the power dynamics between original equipment manufacturers and carriers.

Traditionally, carriers have had the upper hand when working with device manufacturers to bring a new device to market, but the power dynamics are shifting. With more competitive entrants, tighter budgets and increased consumer expectations, OEMs and carriers need to work together, on equal ground, to thrive, according to the Yankee Group.

"We're seeing a change in the balance of power, because it used to be that operators had all the power and they told device manufacturers what to make, and now it's going the other way," said Carl Howe, director of consumer research for Yankee Group, Boston, MA. "Now they have to figure out how to grow the revenues for both parties, not just the operator.

"We're seeing a difference in the overall marketplace in part due to the decline of voice in operators' revenue -- voice is not as important from a profit point of view as it used to be," he said. "The mobile data experience is becoming as important or more important than the phone experience.

"In the U.S., an awful lot of the power is being consolidated into just a few carriers, the big four, so there are fewer places to go and more of a need for a hero device like the iPhone or Pre to draw consumers into those folds, because there aren't a lot of new consumers to be acquired."

Yankee Group has a global presence, with operations in North America, Europe, the Middle East, Africa, Latin America and Asia-Pacific.

The new Yankee Group report "Latest Palm Device ?Pre'-views Future OEM-Operator Relationships" shows the smartphone category is emerging as the most important competitive battleground in wireless today.

Forty-one percent of consumers are likely to choose an advanced OS phone -- a smartphone -- as their next mobile phone purchase.

Smartphone volumes will grow to 38 percent of all handsets by 2013, representing the largest growth opportunity within mobile devices, according to Yankee Group.

The average U.S. consumer has had four mobile devices, increasing his or her appetite for enhanced features and more sophisticated designs when he or she purchases a fifth device, according to Yankee Group.

"The smartphone category is clearly a growing segment of the market for consumers, and while at the moment it still represents a relatively small percentage of U.S. consumers who have a mobile phone, about 13 percent, it looks like it's going to triple in the next five years and become a much more important part of our buying behavior," Mr. Howe said.

The release of the Palm Pre spotlights the changes in the OEM-operator dynamic.

Sprint and Palm Inc. are two companies desperate for a blockbuster hit. And as such, they are either the perfect -- or worst possible -- partners for one another.

The fate of both companies relies on the success of their alliance around the Pre.

"Palm Pre marks a shift in the balance of power between the operators and the handset makers," Mr. Howe said. "You can argue that the iPhone was the first case where there was a handset that was so attractive that it convinced consumers to change carriers, and the Palm is probably another one of those and is the harbinger of more to come.

"A lot of it is simply based on better design and user experience," he said. "The iPhone 3G S is another one of these hero devices, which already has a built-in base of consumers who are eager to at least take a look at it if not buy it.

"The question is, what is the third hero device, and one could argue BlackBerry, but it is still not as much of a consumer draw as a business draw."

With the competitive stakes set so high, carriers see exclusivity agreements for "hero" smartphones as essential.

Verizon Wireless has the BlackBerry Storm from RIM, while T-Mobile has HTC's G1 on Google's Android OS, neither of which has generated the buzz that the iPhone has achieved. It is still too early in the game to gauge the Pre's success.

AT&T does not want to contemplate losing its exclusive grasp on the iPhone, nor does Sprint want to give up exclusive control of the Pre.

"If either AT&T or Sprint were to lose their exclusivity agreement, it would hurt them," Mr. Howe said. "As far as the Sprint launch of the Pre, they really wanted that device, and they were willing to do whatever was necessary to pick it up.

"For them this was a device that can bring customers back to Sprint, which is clearly important for their business strategy," he said.

So what if Verizon Wireless gets the iPhone eventually?

"Hero devices are differentiators among the operators, and those exclusivity agreements are going to be a battleground for a while," Mr. Howe said. "If AT&T were to lose their iPhone exclusivity to Verizon, their largest competitor, it would be a problem.

"A cautionary example from an OEM perspective is Motorola, because the RAZR went from a $400 ?it' phone to being available on every carrier for free in pretty short order, not to the benefit of Motorola," he said. "Sometimes grabbing at marketshare at all costs is not the way to play the game."