Did you camp out overnight to buy the new iPhone? Did you rush to upgrade your Samsung Galaxy? The chances are that this year you didn't. Phone sales are slowing and it's worth exploring why this might be a long-term trend. It's possible we are at “peak-phone.”
Phones are generally part of our way of life now. No self-respecting teenager is without one, and they are the businessman's (and soccer mum's) most valuable tool. Most of us can't remember life before the cell-phone.
Our somewhat irrational desire for more and better led us to replacing the phone every two years. Telco contracts even encouraged that, with no replacement fee for a two-year old phone. All the hype and fireworks around Apple's biennial release of a new model drove the market. The phone makers loved it, especially Apple, who had translated their brand name into a substantially higher price.
Sadly, the days of massive improvements in features in a new release are behind us. Just think about some of the recently boasted new features on phones: rounded corners on screen icons, a phone that is is ½ mm thinner, or a gold-colored case.
The reality is that phone features are about capped out. There isn't a whole lot more they can do. Moreover, everything Apple can do, Android does too! (A secret here: It was never the hardware that mattered. It was always software, and the only reason for a hardware upgrade was to get the new software features and perhaps to have enough memory to run them.)
Meanwhile, phones have been getting tougher. Gorilla glass or a layer of sapphire protects the screen, and today's phones can take a lot more abuse than early flip-phones and smart-phones (no more thumb-balls to jam up!) Even their greatest vulnerability, immersion, has been addressed by Samsung in the Galaxy 6. Add this to the slowdown in delivery of meaningful features and the picture becomes one of longer useful life and replacement only when it breaks.
Add to this lost excitement in buying new phones is a sea-change, in the U.S. and Europe, towards directly purchased phones and unlocked units. A separate purchase contract brings home the cost of the phone to the user, making one think carefully about the need to replacing something that is usually working well, while unlocking from telcos means the freedom to get the lowest cost service without buying a new phone.
The numbers tell the story. China, with 800 million users, is seeing a 4% drop in smartphone sales with the market looking saturated. India, which was the fastest growing market a year ago, is down 14% in Q1 2015. Europe is down, too. The U.S. saw modest growth, mainly in iPhone sales. The bottom line is that sales are starting to come under pressure and the question of peaking is being asked more frequently.
If these factors are enough to top out phone sales, what happens in the supply chain? At the user end, we'll start to see supply chase dropping demand. As in the PC industry, pipelines will be slow to adjust and excess inventory will pile up. Given the long lengths of the pipeline from China, we'll see the same pattern as in the PC industry last year, with fire sales for older models and reduced prices for the rest.
Android phone vendors will start a price war, most likely escalating to corporate mergers and the exit of marginal suppliers. The big assembly shops in China will take a hit, which will ripple back to the component providers. Ironically, this will depress the component prices for other electronics, impacting revenue streams for TVs and computers, too.
What are the chances of a steep slump occurring? The less-developed nations are also prone to markets saturating. The economic stresses of the last few years are slowing the move out of poverty for a lot of citizens, limiting the phone user pool. Lowering prices may increase unit volumes, but the issue is the gap between the truly poor and the earning classes of the population, and few are crossing it.
China is potentially between a rock and a hard place. Declining demand will lead the likes of Apple to consider if on-shoring is a better manufacturing option, given the increasing costs of doing business in China, coupled with long inventory pipelines. The added agility of short pipes will prevent inventory disasters occurring. Robots cost much the same anywhere in the world, too.
In the light of the systemic decline in PC sales and what appears to be a similar phenomenon in phones and tablets, China's sabre rattling in the South China Sea may exacerbate problems and accelerate US subsidies for on-shoring, such as giving Apple tax relief on a large portion of its offshore billions. This could considerably speed up on-shoring trends.
Apple's situation is interesting, with share for a premium product that’s still growing. It is unusual to sustain a premium price in the electronics market for more than a short few years. In a decelerating market with this year's bling looking much like last year's, Apple is at some risk of demand collapse. A major quality recall or a supply side problem might be enough to dent that high credibility, as might a failure in another product line such as a wearable unit. If so, the market will be essentially split between faltering Korean and home-brand Chinese models, while Apple will find itself having to figure out how to win in a commoditizing market.