It’s been a tough year for the U.S. smartphone market, with Apple reporting two straight quarters—the first in 13 years—in which its revenue didn’t increase, while other established phone makers including BlackBerry and LG see their futures becoming murkier.
Mobile market watchers say the problem appears to be the saturation of the U.S. smartphone market in particular, where the vast majority of people interested in using mobile phones have bought one, leaving little margin for new sales growth.
Furthermore, most current mobile phone owners in the United States are satisfied enough with their current devices that they haven’t been buying replacements on a regular basis.
Gartner global smartphone sales figures for the first quarter of 2016 showed Samsung continues to lead the world, selling 81.2 million phones to grab a 23.2 percent market share, followed by Apple, which sold 51.6 million iPhones to hold a 14.8 percent share. But Samsung’s sales were essentially flat compared with the first quarter of 2015, when it sold 81.1 million smartphones and garnered 24.1 percent market share, according to Gartner.
Apple, in its latest third-quarter earnings report, on July 26 announced a 15 percent drop in global iPhone sales to 40.4 million units in the quarter, down from 47.5 million in the third quarter of 2015. Apple’s third-quarter revenue and net income also fell for the second consecutive quarter as the iPhone maker reported $42.36 billion in revenue, down 15 percent from $49.6 billion a year earlier, and $7.8 billion in net income, a drop from $10.7 billion.
That contrasts with the company’s previous string of 13 years of quarterly revenue reports without a decline, dating back to 2003. That streak came to a halt in the second quarter of this year, when the company reported revenue of $50.6 billion, 13 percent lower than the $58 billion the company posted a year prior.
So what does this trend mean for the U.S. smartphone market over the next few years? Will sales remain sluggish or will it pick up as owners replace aging devices or decide to upgrade to the latest model? Or is the current sales lull evidence of a maturing smartphone market that won’t again see the rapid sales growth the market has enjoyed since 2007, when the first Apple iPhones hit the market?
There’s Scant Short-Term Optimism
Jan Dawson, chief analyst with Jackdaw Research, told eWEEK he doesn’t see the U.S. smartphone market recovering anytime soon.
“I think it is a long-term trend rather than a short-term trend” due to slowing upgrade cycles and because most users already have the devices, he said. That trend has been seen clearly in the past two financial quarters since the fourth quarter of 2015, as mobile carriers started reporting drops in sales after a steadily increasing curve for several years.
“It has always just grown and grown and grown after the start of the smartphone market,” said Dawson. “The reality is we’re going to be facing market saturation globally someday,” though that’s still in the distant future, he noted.
More change is coming, he said. In the U.S. market, smartphone makers that want to grow sales of their premium phones no longer can rely just on selling their own products as they have in the past. Now they have to come up with ways of eating into the sales of their rivals, he said.
“So if you want to grow your premium smartphone shipments, you have to take market share from competitors. Most companies are not going to grow because of that,” Dawson said.
Meanwhile smartphone owners have significantly extended their upgrade cycles.
“The phones that people have today are good enough so they don’t feel that same pressure to replace their phones,” Dawson said. It used to be that consumers replaced their smartphones on an average of every two years. The average has been lengthening to three years recently for carriers. “People who can afford the premium smartphones around the world tend to already have them.”
Sales Recovery Seems Distant Hope for Saturated Smartphone Market
What all of this means, said Dawson, are some tough times for smartphone vendors over the next few years—which already has been the case over the last year or so.
Apple’s latest iPhone 6 models went on sale last September but are awaiting a refresh this September, causing many consumers to wait for the new devices and hurting sales of today’s models.
“It remains to be seen how things will be for Apple after its bad second quarter,” said Dawson. “A lot of the major smartphone vendors are already quite challenged about making money.”
Some newer Chinese companies, including Huawei, Oppo and Vivo, are in ascendance, while old established players such as LG and BlackBerry have been in a prolonged decline, he said. Nokia has all but disappeared from the market since the Finnish company sold its mobile device business to Microsoft in 2014. Microsoft had little success selling Nokia-branded mobile phones since closing the acquisition.
“Of the majors in the Android world, Samsung is the only one to have some staying power. You’re seeing a change of the guard, really, where the old guard is heading out. It’s going to be ultra-competitive on the Android side, especially,” he said.
Samsung’s strengths are its good reputation with consumers, who see Samsung’s Galaxy phones as on par with Android; its massive sales and distribution scale; and its powerful nameplate in the marketplace. “People tend to go to stores saying they want to buy a Galaxy phone,” said Dawson. “It’s a testament to their advertising muscle and their relationships with the carriers.”
Smartphone Sales Echo PC Market Trends
Tuong Nguyen, an analyst with Gartner, agrees that increased sales levels won’t come to the U.S. smartphone market for at least several years.
“It takes much more than what we’ve seen in the last two or three years in terms of feature and functionality improvements for the U.S. market to kick back into that growth cycle that we saw before,” Nguyen told eWEEK. “My personal expectation is it’s not going to happen next year or the year after that or even the next year after that.”
The smartphone market, he said, is emulating the same pattern that occurred in the PC market a few years ago: The devices themselves are capable of far more than users require and have reached a point where users don’t see a need to replace them as often as they did previously.
“Consumers say ‘These phones do so much more than I need or even understand,’ while smartphone vendors then offer some new feature on top of that. It’s already too much,” said Nguyen. “That’s why we’ve seen sales fall. So the industry has become a victim of its own success—it’s almost like we’re all driving Ferraris now, even at the low end.”
What could again bring growth to the U.S. smartphone market, he said, are additional synergies between new and existing vendor platforms and desirable handsets, such as Apple integrating more features from its HealthKit, HomeKit and CarKit offerings into its smartphones.
“There are many steps being taken in that direction. Those tie-ins will help push future phones. They are pulling together these ecosystems, which Apple tends to do well. Whoever does that best and brings consumers the most value will kick-start the movement,” Nguyen said.
In the world of gaming, “it’s always been the games that drive the hardware,” said Nguyen. “I think it’s the same here; the applications are going to drive the need for the [phone] hardware. It will take consumers saying, ‘Where can I get a phone that will let me do that?'”
Another analyst, Daniel Matte of Canalys, said that when Apple’s Q2 iPhone sales figures flattened earlier this year, he knew that the high-end market in the United States was definitely saturated. “It’s well and truly a replacement market only, right now in the U.S.,” he said.
But it’s not just due to longer replacement cycles and customer satisfaction with their devices.
Sales Recovery Seems Distant Hope for Saturated Smartphone Market
“We’ve also run into the limits of physics in design and innovation,” he said. “The phones are already so thin you can only do so much” to improve them, while processor power and other advancements are also more difficult to bolster due to the limits of technology.
“All of the obvious improvements have mostly been done in the last five or 10 years. The things that remain take longer to accomplish,” he said.
Battery improvements are not likely to be a sales motivator for buyers in the near future because they are hard to come by for manufacturers, he said. “It’s just that the rate of improvements for batteries is much lower than it is for processors and other things. That said, we will get better battery life over time,” but it won’t be through giant steps.
An Optimistic View for 2017
At least one analyst, Linda Sui of Strategy Analytics, said that while the U.S. smartphone market certainly appears saturated in 2016, things are expected to begin looking up a bit starting next year.
“The U.S. market this year is going to be the bottom of the smartphone market lull, the worst of it,” with growth of less than 1 percent, she said. “In 2017, we’re going to see the smartphone market in the U.S. go up slightly” to about 3 percent, based on projections and sales forecast models.
“We believe Apple and Samsung are going to bring out really groundbreaking, innovative products next year” that will spur replacement purchases by many consumers in the United States, she said. Among the expected features that will lead sales increases are advances in device displays, she said.
Sui said her company expects Apple to launch an iPhone with a 5.8-inch display that incorporates the use of the screen’s edges for information, based on information Strategy Analytics is hearing from supply chain component makers. At the same time, Samsung is working on building smartphones with flexible displays for sale in the coming year.
“These innovations can help solve the U.S. market saturation,” said Sui. “These two features are going to drive people to replace their smartphones.”
And while virtual reality products and features are getting attention in the consumer market today, the technology likely won’t be an upcoming mass market feature in smartphones for some time because VR “still has lots of room to improve,” she said.
Nostalgia for Two-Year Mobile Service Contract
One thing that could inspire a marked change in the number of smartphones sold in the United States is a possible re-emergence of two-year mobile service contracts and subsidies for handsets from some of the major mobile carriers, said Sui. And maybe the idea isn’t so crazy, she said.
The ending of those subsidies from several carriers in the last couple years has been a prime driver for customers holding on to their existing devices for up to three years, which has cut big time into new phone sales.
If subsidies and contracts return, that could help encourage more frequent device upgrades, which is certainly a desire of mobile carriers and device makers, Sui said. That could happen and likely would be started by one or two carriers at first and then adopted by others.
“Subsidies are kind of a cycle,” said Sui. The prior ending of subsidies “is not a trend forever; it is a cycle.”
However, Jackdaw Research’s Jan Dawson is unconvinced despite Sui’s optimism that U.S. smartphone sales could rebound next year.
“Even if a vendor finds something big to do, they’ll have to do something big again in two years,” so the need to innovate and seek big sales successes never ends, he said. “There’s just not an obvious feature out there to drive big sales hikes again in the near future. It’s just hard to see us going back to the rapid upgrades that we’ve seen in the past.”