A little over a week ago, the world’s largest mobile phone maker, Samsung Electronics, announced a massive fall in its quarterly profits.
Of course, the South Korean electronics conglomerate is not about to go out of business just yet – this is the kind of crisis where $4.35 billion profit in one quarter (annualised to $17.4 billion) is seen as a bad result. Nonetheless, a 59.65% year-on-year fall in profits is never a good sign for a company.
Many analysts chalked this result up to intensifying competition from low-cost Chinese smartphone makers (such as Xiaomi, ZTE and Huawei) combined with high-end competition from Apple.
Of course, that analysis misses the real story – and it’s one with profound implications for every business. So it’s time to take a deeper look at what’s going on.
According to figures published in August, 66.2% of Australians now own a smartphone, putting us 13th in the world in terms of smartphone penetration.
This puts us well behind Singapore (85.3%), Korea (79.5%), and other nations including, the UAE, Saudi Arabia, Sweden, Hong Kong, Spain, China, Denmark, Norway, the UK and Taiwan. However, it is higher than the US (56.4%), Ireland (65.5%), Israel (62.4%), New Zealand (57.9%), Canada (57.4%), Germany (50.1%), France (48.8%) or Japan (46.1%).
In other words, most people in most developed countries now own a smartphone. Almost certainly, that section of the market who would upgrade from a feature phone to a flagship smartphone has already done so.
The worldwide market for smartphones during that quarter hit a record 301.3 million units worldwide during the second quarter of this year, with 255.3 million running Android, 35.2 million running Apple iOS and 7.4 million running Windows.
Three hundred million smartphones in one quarter translates into a whopping 1.2 billion smartphones a year, or 2.4 billion over two years (the lifetime of many smartphones). That’s quite a few smartphone owners already, especially when you consider the entire population of the planet stands at about 7 billion.
What this suggests is that while there’s still room for some volume growth globally, it’s predominantly in the very low, sub-$100 outright end of the market. (By comparison, the iPhone 6 retails at $869.) Even without the likes of Xiaomi, this is a high-volume low-margin business.
Until now, the vast number of people buying their first smartphone has meant, for example, that Apple has been able to lose market share even while the total number of smartphones it ships has grown. But the days of consumers in developed first-world countries trading in their featurephones for their first smartphone en masse are over.
This means the battle between Apple and Samsung becomes a genuine zero-sum game, where market share gains come by poaching the competitor’s customers, rather than a race to convince the most featurephone owners to upgrade (as it has been up to now).
Meanwhile, a growing number of phones costing between $100 to $300 outright (such as the Moto E and Moto G, the Kogan Agora 4G and the Microsoft Lumia 635 and 530) now boast features that were once the preserve of high-end flagship smartphones. These include 4G speeds, quad-core processors, or the same versions of Android as Samsung’s flagship Galaxy S5.
I would suggest these mid-range devices are putting as pressure on the high-end flagship smartphone makers as the Chinese vendors. After all, why choose the more expensive phone, or a more expensive plan, what a cheaper one does just as good a job?
It should come as little surprise, then, to find in its statement to investors, Samsung said while its shipments increased in the quarter despite intense competition, aggressive marketing and a lower average selling price hurt its revenues. The company also said it was selling a lower proportion of high-end devices.
In other words, smartphones and the mobile internet are moving from being a luxury product to being seen by consumers as a necessity of everyday life. From here on in, most buyers, especially in developed markets, will be upgraders rather than first-time smartphone owners. Those upgraders, in turn, will already have their favourite apps and an investment in the Apple, Google/Android or Microsoft/Windows ecosystems.
Back in July, I mentioned that the convergence of mobile phones and the internet in the form of the smartphone and the mobile-first internet had profound implications for businesses.
Well, the smartphone industry and the mobile-first internet is now roughly at the same point the desktop computer was in the mid ‘90s or the world wide web was at in the early-to-mid 2000s.
As with the early web and home computers before it, there was an early period of experimentation with the technology, and pioneering startups either changed the world or quickly burned out like a supernova. Then, with time, the industry matured. Costs and margins fell, and dominant players became entrenched.
I suspect we could be now at the point where the same thing could be happening with smartphones and the mobile web.