The transformation of the smartphone as we know it: about plateaus and switching logics
We all remember the launch of the first iPhone by Apple in 2007. Not only was it spectacular, but it also marked the beginning of an era: the age of the smartphone. In just twelve years, this little device conquered the world at an astonishing pace, reaching penetration levels as high as 80 percent in developed countries. It was only a matter of time before everyone had a smartphone in his pocket, preferably the last new model with the newest innovations to show off to our friends.
But after years of incredible growth, the tide is turning. Since 2013, the smartphone market is slowing down. In 2019, we can officially say we’ve reached a ‘smartphone plateau’.
The ‘smartphone plateau’, or when the hardware stopped being a priority
After an impressive rise, the smartphone market growth began to slow down in 2013, a trend that has persecuted the following years. In 2016, smartphone sales shifted to single-digit growth and in 2017, the industry experienced its first annual decline in smartphone shipments. With 3 billion unique smartphone subscribers worldwide and a meagre year over year growth of 1.2 percent in 2018, it seems the smartphone market has fully matured. Every smartphone vendor is now moving towards the edge of a plateau – the so-called ‘smartphone plateau’ – where, at best, they face single-digit growth in smartphone sales. No wonder signs of desperation are starting to kick in.
The concept of a ‘smartphone plateau’ not only refers to the flattening of smartphone sales, but also to the innovation deficit in the smartphone industry. When Apple released the iPhone 5 back in 2012, it was already evident that the fundamental capabilities of smartphones hadn’t changed much. Paying hundreds of dollars for an upgrade that only offers an improved camera, a slightly faster processor, a moved fingerprint sensor and a brighter screen is a tough sell.
But how did we get there?
The flattening in smartphone sales didn’t magically happen overnight. Experts studying the smartphone plateau have formulated a variety of reasons that could explain this phenomenon. Three major observations seem to have a share in this trend.
First, let’s talk about China. It is a fact that Chinese smartphones are on the rise. As Chinese smartphone vendors further tap into the Chinese and European market, incumbent players like Samsung and Apple see their market share shrink. Chinese smartphone player Huawei is leading the charge and has been flirting with the position of world’s second-largest smartphone vendor for a while, topping Apple for the first time in 2017. In the fourth quarter of 2018, Huawei sold over 60 million smartphones and experienced the strongest growth of the quarter (37,6 percent) among the top 5 smartphone vendors. In fact, without Huawei’s tremendous growth, the smartphone market might be characterized by its own form of recession.
The second and perhaps biggest contributor to upgrade fatigue is the ever-increasing price level of smartphones across the whole industry. Today, flagship smartphones breaking the $1000 barrier are commonplace as premium brands like Apple and Samsung try to offset their reduction in sales. The premium smartphone segment managed to grow 18 percent YoY by the end of 2018, despite the overall stagnation of the smartphone market. In contrast, the budget segment, representing smartphones priced below the $200 mark, plunged about 10 percent, dragging down the overall market. We face a world where consumers increasingly buy expensive, future-proof phones which they hold onto longer, leading to an extended upgrade cycle.
Thirdly, the ever-growing prices of smartphones lead to users treating their smartphones differently. Instead of replacing their whole smartphone when the screen is cracked or the battery life has been reduced dramatically, customers prefer substituting the malfunctioning part of their smartphone rather than buy a new one, which of course shows in the sales.
Why foldable smartphones are not the solution, but adopting a service-dominant approach could be
As the mobile industry finds itself at the top of the s-curve, smartphones are on the verge of becoming a commodity. A fate Apple and Samsung desperately try to avoid. Accordingly, companies turn their attention to any new technologies that they believe could help them gain an edge over the competition and get customers to switch. An example is the recent introduction of the foldable smartphones. While the industry wants us to believe foldable screens are the next big thing, U.S. consumers aren’t quite convinced of this innovation: when asked about features that would excite them to buy a new phone, only 17 and 19 percent of iPhone and Android users, respectively, named foldable screens as a desired feature. There is a clear discrepancy between the technological innovations that smartphone producers are trying to offer and the relevance of these novelties for the smartphone user.
The main issue is that smartphone players are missing the bigger picture: the smartphone is not just a combination of hardware and software, it is a device that gives the user access to information, entertainment, knowledge and much more. It is no coincidence that hardware upgrades become less relevant to the consumer and that people hold on to their phones longer: as it is the case for many industries, there’s a need to switch from a product-dominant logic to a service-dominant logic. Apple more or less seems to get this: although they’re famous for their wide range of devices such as iPhone, iPad, Mac, Apple watch, Apple Tv, HomePod and AirPods, Apple’s strength really is the software and services all their products offer. Think about iCloud, Apple Music, Apple Pay and the recently announced Apple Arcade, Apple News and Apple TV+. All these services – and many more – can be considered a ‘walled garden’ or “a closed ecosystem in which all the operations are controlled by the operator”. It’s no longer about the device, but about this walled garden that gives you access to all the services you want. However, the walls are high: not only does Apple control what’s entering the system, they also avoid customers looking over the wall and exploring what else is out there. Apple’s approach has paid off massively: while iPhone sales remain stagnant, Apple’s service revenue reached an all-time high of $10.9 billion in the first quarter of 2019, a 19 percent increase over the same period last year, eclipsing the iPad and Mac to become the company’s second-largest business segment. This shift in revenue stream is remarkable and might forecast that the smartphone as a product will become less important. The real sale are the services within the ecosystem that the smartphone manufacturers are able to offer.
So is this the end of the smartphone? It is obvious that we’ve reached a smartphone plateau and that sales will continue to decline in the years to come. We could say it is the end of the smartphone as we know it, meaning the focus on the product itself will shift to the services that the device will offer. That’s why smartphone players that adopt the service-dominant logic and that understand that the smartphone they produce is much more than a harmony of hardware and software are on the winning team.
Jakob is a Growth Analyst at Callebaut Collective. He has a strong taste for in-depth research into emerging trends and is curious about novelties.