Apple and Samsung feel the sting of plateauing smartphones - The Verge

If there’s one thing we’ve learned from Samsung’s soft sales of the Galaxy S9 through 2018 and Apple’s dramatically reduced forecast of iPhone revenues for the end of that year, it’s that most people who want a great smartphone already have one. In his letter to investors yesterday, Apple CEO Tim Cook spelled out the reasons why his company sold (many) fewer iPhones than it had anticipated in the final quarter of 2018, and a large chunk of them can be summed up as “too many good phones already out there.” This statement from the boss of the iPhone company is merely the crowning punctuation to a market stagnation that’s been apparent to phone makers for well over a year.

Smartphones, and the iPhone especially, have been on a constant growth trajectory for so long that we’ve come to expect them to keep perpetually expanding as a category. But, just as desktop PCs eventually reached a saturation point where almost every home that could afford a computer had a decent one, smartphone shipments had to eventually hit a level at which demand for them tapered off. That point was reached sometime over the past couple of years, driven by three major long-term factors: the shrinking benefit when upgrading from a recent phone to the latest model, the increasing average price of new devices, and the concordant reluctance to treat smartphones as things to be disposed of every year or two.

This was the first year in five that I didn’t upgrade my iPhone. Two reasons:
- iPhone X was really, really good, and battery life is still great
- The 2018 models were functionally identical to the iPhone X
So: not just China
https://t.co/e2dB1PfLTu
— Casey Newton (@CaseyNewton) January 2, 2019

In July, the market analysts at IDC said “the combination of market saturation, increased smartphone penetration rates, and climbing [average selling prices] continue to dampen the growth of the overall market. Consumers remain willing to pay more for premium offerings in numerous markets and they now expect their device to outlast and outperform previous generations of that device which cost considerably less a few years ago.”

Phone innovation has hit a plateau — one of great quality and maturity in most aspects of performance and design — and until we get another groundbreaking, must-have upgrade, we’re set to watch a smartphone market without meaningful additional growth. Prior to 2018, there were successive waves of major upgrades worth having: from 4G and the annual increase in display size and battery efficiency to the additions of secondary zoom cameras, biometric ID systems, wireless charging, and waterproofing. But now that all the keenest upgraders have the full set of discrete features on their device, research is showing people are holding on to their phones longer. Simply because they’re mostly satisfied with what they already have.

The two premium brands, Apple and Samsung, have tried to offset the reduction in units sold each year by raising the price per device, but that’s only compounded their problem. Yes, Apple can sell a $1,000+ iPhone, however the owner of that iPhone will be far less likely to rush to replace it the way someone who’d previously spent a fraction of that price might have done. Tim Cook himself said that cheap iPhone battery replacements in 2018 played into a tendency toward refurbishing existing phones rather than buying new ones.

The greatest innovation in the mobile world during the past year was Google’s Night Sight camera mode. A piece of software. Google distributed Night Sight as an update to every Google Pixel model, effectively diluting the most compelling reason to buy a new phone. This is a trend that looks to be just getting started: the smartphone user experience growing better through software improvements in bigger steps than through hardware augmentations. Apple’s gesture-based interface on the iPhone X is another example where the new software design was more instrumental to the sense of an upgrade than the hardware updates.

After all, there’s a limit to how color-accurate a Samsung OLED display can get, or how many modules of RAM a chipmaker can stack inside a phone, but, as Google has shown, those physical limitations don’t constrain the possibilities of what can be done with the smart application of machine learning and computation.

As the world’s biggest smartphone market, China is singled out for special attention in Cook’s investor letter. He argues that China’s broader economic slowdown is to blame for Apple’s underperformance, and there’s certainly an element of truth to that. The original iPhone was released in 2007, and after the financial market maelstrom of 2008, Apple and its competitors have been selling their devices into a world economy that’s been getting progressively better — so their performance until now has been buoyed by macroeconomic growth, just as it’s now suffering from the effects of changing market conditions in China.

But Samsung and Apple have deeper issues in China than just the overall market, with both global companies struggling to establish themselves as the dominant players that they are in other countries. WeChat is effectively the operating system in China, so Apple’s iOS and App Store lock-in isn’t a thing, whereas Samsung’s generally being outpaced at its own spec race by nimbler local rivals.

The Chinese consumer is well served by companies like Huawei, Oppo, and Vivo, each of which delivers a great deal of spec-laden value for a shopper’s yuan. As China’s appetite for the very latest smartphone also diminishes, those same companies are transitioning into India, the last remaining bastion of rapid smartphone sales growth, and retreading their strategy of garnering market share through aggressive pricing.

It’s fascinating to observe how, even as the overall smartphone market has been in gentle decline for a couple of years, the share of it held by each company and the geographies dominated by various brands keep shifting and changing. Within the span of the past decade, we’ve witnessed Nokia and BlackBerry supplanted by Apple and Samsung, and now we’re watching the likes of Huawei and Xiaomi ascending to offer a fresh challenge. Competition is likely to only intensify in the coming years as every manufacturer competes for a slice of a finite pie.

As to what might bring smartphone sales back to growth, Qualcomm would tell you 5G will trigger a new wave of upgrades, IDC anticipates Latin America and Africa showing greater demand, and Samsung, Huawei, and others are working on zany foldable devices. Every avenue for hardware differentiation and leadership will be explored, which, from a consumer’s perspective, bodes well for a future of devices that are at the very least more interesting than the current crop we have today.

Smartphone markets are slowing down in large part because they’ve served their purpose. We wanted phones with great displays, fast connectivity, all-day battery life, and a few extra luxuries thrown in, and now we’ve got them in abundance. The system works. When the next truly compelling upgrade shows up on the horizon, consumers will once again throw money at the latest and greatest products. But until then, all this competition makes for a bumpy ride for any company venturous enough to be in the phone-selling business, including those at the very top.

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