Nestled in a maze of streets in the London borough of Southwark is the headquarters of Symbian, a small company that could be a big thorn in Microsoft's side. It is poised to undercut the giant in the software market for next-generation mobile phones.

Founded in 1998, Symbian is a consortium owned by a clutch of the major mobile phone manufacturers, including Nokia, Ericsson, Panasonic, and Samsung. The idea: manufacturers license Symbian’s open operating system to power their “smart phones,” preventing Microsoft from sewing up the market for phone software – as it did for PCs. More than 1 million phones shipped with Symbian’s operating system last quarter, each netting the company an average licensing fee of $5.70.

On Monday, Nokia threw down the gauntlet to Microsoft by announcing that it intends to nearly double its share in Symbian by buying a 31 percent stake currently owned by Psion, a British handheld computer company. In 2002, Microsoft CEO Steve Ballmer gave his company’s mobile device business its own profit and loss account, indicating his commitment to the market.

Symbian’s CEO, 42 year-old David Levin, recently shared his views on the burgeoning smart phone market, Microsoft, and the role of mobile phones in the developing world.

Red Herring: Is there room in people’s pockets for a mobile phone and a PDA?

David Levin: I think the PDA market is dead. It’s going to be subsumed by the phone market. Many markets are going to be subsumed by the phone market: cameras, camcorders, gaming devices. The latest Symbian-powered phone in Japan has a 1.3 mega pixel camera. That’s amazing resolution.

What we are seeing is a set of features that is going to spawn various classes of devices. Some will be targeted at the enterprise, some at multimedia, some at gaming, and some at imaging.

These devices will all be capable of doing many things but will be optimized for a few. For example, on the Nokia N-Gage [gaming phone], I can find a calendar, a diary, a contact list – all of this is expected. But I don’t think people who want a PDA phone would choose the N-Gage. If you want a gaming phone, you choose the N-Gage, and you’ll still be able to use some of its PDA functionality.

Red Herring: Won’t Hewlett-Packard and Dell just turn their PDAs into phones?

Levin: HP and the computer hardware vendors have some serious choices. Clearly they are adding wireless to their devices – via local-area networks or wide-area networks. But the challenges of selling a primarily wide-area wireless product are totally different to selling an unconnected PDA or a PDA with wireless LAN. They are completely different channels and business models – a radically different proposition in every respect.

That means there’s going to be some conflict. You can’t just take a pocket PC device and say it’s a pocket PC phone edition. The manufacturer has got to work out the logistics of getting that product to market through mobile phone operators, and applying a subsidy. There are about 600 operators worldwide. There are very long lead times and this can’t be done casually.

It’s very different from a piece of generic computer kit where there’s no approval. You produce it roughly to certain standards and toss it out there. With mobile phones, you are producing a device that works across an operator’s private network and is subsidized to some measure by them.

Red Herring: Don’t you think we’re reaching a point where consumers will make do with their existing mobile phones? Will they pay for flashy extra features?

I don’t think that’s the case. What’s interesting is that the industry was caught up in the telecom bubble – obviously it was. If we look back at 1998 and 1999, some crazy predictions were made. At the time, the industry was very big on packaging technology – it sold blocks of technology. That was a terrible mistake.

Now people are being given some sort of value rather than some sort of technology. That’s far more compelling. For example, who cares about 3G? What you’re interested in is the set of features 3G brings. If you look in Japan, NTT DoCoMo announced in September last year that they had the first month where the numbers of PDC [2G] subscribers started to go down and were replaced by 3G subscribers. So the uptake is happening now. It’s being led in Japan and Korea. In Europe, sales of color camera phones are soon to exceed sales of color digital cameras – those are things that the consumer wants.

Clearly consumers are finally beginning to upgrade everywhere. Likewise, early indications show that in those markets, ARPU [average revenue per user] has followed – people actually use the services.

Red Herring: Who is your biggest competitor?

Levin: By far and away our largest competitors are the handset makers who have their own proprietary operating systems.

There were about 500 million phones sold in the last 12 months. So if we use analysts' figures – and we don’t know yet, but if we use their figures of 6 to 7 million out of 500 million, it tells you we are between 1 percent and 2 percent of the market.

That means 98 percent of the market has not been addressed. Arithmetically, zero percent of it is Microsoft. Palm likewise is in that kind of 0.0 percent market share. So for us, we are looking at the people who are shipping 98 percent as the principal competitor.

Red Herring: Last October, Motorola released the first smart phone in the U.S. that uses Microsoft’s Windows Mobile operating system. Does Microsoft’s hunger for the mobile phone operating system market worry you? Levin: There will be marketable implementations of Microsoft’s phone operating system. They will keep going and come back and come back and come back. But this is not an industry that is standing still.

So unlike the PC industry – and nobody can accuse the PC industry of having stood still – the rate of progress in wireless is unbelievable. So we are incorporating new and different protocols on an amazingly aggressive timetable. And there are differences between what’s required in Japan and what’s required in parts of the U.S. for CDMA networks. This is very different – there’s no single monolithic.

What we see with some of these Microsoft operating systems is they’ve been qualified for one operator for one network. That's fine and dandy but of course things move on and you need to be across hundreds of operators, not one or two.

Microsoft is going to be a real threat. They are a threat right now. They are going to keep investing in this space. But so far it’s been a massively wasted effort on their shareholders part. So far it’s yielded bitter fruit and much corporate embarrassment.

And actually it has exposed the weaknesses of any big monopolist who says “I’ll just apply my monopoly products to get into an adjacent sector.” It hasn’t worked. So far it has been a dismal failure.

Red Herring: Is there any news on a Symbian IPO?

David Levin: We don’t talk about it. The same criteria apply now as was the case in 2000 – mass market and financial market. So the availability of the mass market for these devices is one criterion. We’re now beginning to ship in the millions – that’s beginning to feel like a mass market, but it’s still early. We need to ship about a million and a half, 2 million a month, to break even. We need to be thoughtful about the point at which we hit those kinds of thresholds.

I don’t think it’s the only way forward for the company. To be honest, I don’t wake up in the morning asking, “When am I going to IPO?”

Red Herring: What lessons do you take from the success of products like the iPod?

David Levin: There are going to be music phones that happen to do iPod-like things. Music is a big category. We had a session here with some music producers talking about how music is evolving. Now a core production value in popular music is the ring tone. As a kid who grew up with the single, I find that appalling. But actually producers of popular music are saying a core value is what the jingle sounds like.

We’ve moved from pretty plain ring tones to polyphonic ones that are very rich. Then along comes a wonderful innovation: the caller ring-back tone. It’s the opposite of a ring tone, in that you can choose the ring that your friends and colleagues hear when they call you and you pay for that. And that is exploding! So what we think of as music and access to music is changing.

Red Herring: Can you see an iPod as a mobile phone?

Levin: You need to ask the question of Apple, and say “Apple do you want to challenge your business model and start adding a modem and distribute your product in a radically different way?” I would love to get Apple as a Symbian licensee – it would be a wonderful fit. But at this point, Apple seems to have decided not to focus on wide area wireless because it requires an approval from a mobile operator.

Red Herring: Has the historical development of cell phone services surprised you?

Levin: In the rearview mirror, evolution always looks incredibly logical. It’s just that it doesn’t seem so at the time. Take SMS [short message service]. Lots of people said “What a stupid way of inputting data… you’ve got to hit these keys three times to get the third letter. That’s a lousy interface and it’ll never work.” But it worked.

These things with hindsight look perfectly rational, but right now on the evolutionary process we don’t know what the winning combinations are. I can’t tell you if gaming is an absolute no-brainer or if it’s a dead duck. So our job is to allow people to experiment, to place those judgment calls, make their bets, and to create the value that way.

Red Herring: You work in Africa with the development agency Action Aid. How do you see the mobile phone influencing development in the developing world?

Levin: It’s an amazing vehicle for social change. I was in Mozambique in the middle of last year looking at various development projects for an international development agency called Action Aid. We went out to a small rural village, way below the income thresholds that I would recognize as offering a decent living. What do I find is the prize possession of a small family in the small village? A mobile phone.

The villagers look to this phone as their window to the world. They make a couple of big choices every week. The guy leaving to go to the market carrying all the village produce has to make a choice. He either goes to market A or market B. Before the mobile phone, he had no idea which market to go for. Now the guy sets off and knows he’s going to market B. The marginal value of that call is huge. Or somebody is ill and they have a way of accessing health care. So I think wide area wireless for the developing world is incredibly powerful. It’s a very democratic technology, it’s cheap, it's accessible, and it's very human.