when everything is free, differentiation must come from something else. As Seth Godin puts it, Free by itself is no longer enough to guarantee much of anything. 

Now, the same can be said for smartphone, when every phone becomes smart, how do you differentiate? A nice recent report is The “Smartphone” Is Dead: Long Live Smart Phones And Smart Gadgets.

The executive summary:

Apple’s and Google’s arrival in the mobile market is causing knock-on effects throughout the market and is opening up opportunities. All mobile handsets are becoming smarter and Internet-capable. Yesterday’s smart high-end phone is today’s midrange phone and tomorrow’s entry-level phone. The “smartphone” category is no longer useful as all phones become smart. Instead, we propose three new frameworks to segment the smart mobile device market: openness and extensibility; consumption and creation; utility and entertainment. All mobile strategies must adapt now: Consumer electronics makers must decide on their response to widely available smarter phones and the mobile Internet; handset makers must leverage software to play the mobile Internet game and differentiate long term; media, finance, retail, and other Internet companies’ strategies must exploit mobile opportunities now or lose ground to faster rivals. But the mobile market will remain fragmented with no single platform — no Windows PC equivalent — anytime soon on mobile devices. Therefore, mobile strategists must analyze their target consumers carefully before embarking on large mobile investments.
 

Software differentiation and Internet applications that complement the device seem to be the next battleground. Read NokiaWorld: Distracted by the N97 Flagship, Mobile App Stores Represent the new Battleground and Nokia: “Irresistible” solutions combining devices and services will be a key to future success.