August 1, 2013 – Mobile Devices: The PC-ification of the Smartphone
Smartphone demand is decelerating at the high-end, as the slowing pace of innovation, carrier pushback on subsidies, and the weak economy dampen replacement, and as fears of market saturation begin to play out. At the same time, the emerging market demand for sub-$200 smartphones is nearly insatiable, but product specs are homogenous and rivalry is fierce. In this, the smartphone market is becoming astonishingly PC-like, with device margins squeezed by increasingly dominant chip, display and software suppliers, and little differentiation in the primary functions and form factor of the product. At the high-end, the large, high resolution displays and fast processors, that had pushed Samsung to the market lead, have reached a threshold of diminishing returns and are now available to all competitors, killing price premiums and opening the door to share shifts and market entry. Mobile device history shows that game changing innovation usually takes an unexpected form and comes from an unexpected source. This time, we believe the threats will come from below, where aggressive Chinese and Indian brands, armed with inexpensive turnkey reference design chipsets, good enough displays, and stock Android are delivering surprising quality at even more surprising price points. As these players gain scale, experience and ambition, they may challenge Samsung and Apple at the high end as well. QCOM and GOOG are particularly well positioned, with display makers and low-end device players looking to break out.
High-end smartphone demand is decelerating. The growth of high-end smartphones, selling at wholesale prices of $400 and up, is slowing, albeit from very high rates, evident in the relatively slow growth of high-end brands like Apple and falling smartphone ASPs. One issue is saturation, 61% of U.S. adults now own smartphones, up from 47% a year ago. Arguably, the cohort able to front the $200-300 upfront subsidized cost of a top-tier model is near-on all-in, with economic woes compounding the issue, particularly in Europe. International markets, where subsidies are lower and affordability is a bigger issue, are likely even closer to saturation at the high end.
Smartphone replacement may be peaking. The other issue is replacement rates, which have been accelerating over the past few years. Carrier subsidies are in flux, with T-Mobile innovating in both directions, with its “no subsidy, service discount” and “annual upgrade” plans pressuring rivals. Historically, falling subsidy rates have driven longer replacement intervals. With big hi-rez screens, 4G connectivity and zippy processors becoming commonplace at lower price points, it is also likely that replacement activity may see falling ASPs as well. This may be evident in the negative iPhone mix shift and in the relatively weak demand for Samsung’s Galaxy S4 and HTC’s One flagships.
Low-end smartphone demand is surging. Despite high-end deceleration, overall unit sales are up more than 50% YoY. Old guard competitors like Nokia, Blackberry, HTC, Apple and even Samsung lagged market growth in 2Q13, while upstarts like China’s Lenovo, ZTE, and Huawei, and India’s Karbonn, Micromax and Spice, grabbed big market share on devices offering a high-end experience at a big discount. Cheap turnkey silicon reference designs, inexpensive touchscreens and free Android software, allow sub-$100 3G smartphones with specs akin to top-of-the-line products from 3 years ago, and sub-$175 smartphones comparable to devices selling for more than twice the price in developed markets. Forecasts of Apple and Samsung reaping market share in emerging markets may need to be replaced by the reality of low-cost emerging market competition coming west.
The PC market all over again. Arguably, display size and resolution or processor speeds are no longer a viable point of differentiation for smartphones. “Retinal” pixel density panels are available to all manufacturers in many sizes at comparable prices from multiple suppliers. QCOM dominates smartphone system-on-a-chip solutions, including low-end turn-key reference designs. Android is still free, easy to implement, and, now, nearly ubiquitous at the low end. With this, the primary factors in Samsung’s move to leadership have been blunted, leaving the top brands to push style, materials, camera functionality and proprietary software tweaks/apps of questionable value in their flagship devices, while uniformity washes over the faster growing mid-range and low-end lines. This is eerily reminiscent of the PC market a generation ago, down to the rise of low cost emerging market competitors.
Meanwhile, component makers and platform owners will prosper. QCOM has now taken 49% of the smartphone SoC market, 65% if you exclude Apple and Samsung’s internally designed efforts, with even stronger design-in activity with its newest chips, including a potentially game-changing RF solution. The display market is concentrated, with rivals Japan Display, Sharp, LG Display, and AU Optronics closing the technology gap that had given Samsung’s smartphones advantage over the past few years. Google continues to supply its Android OS for free, monetizing its investment through the cloud-based apps that it bundles into its platform. This strategy has allowed Google to take a dominant 57.4% global share of smartphones, a critical asset in that company’s strategy to exploit the flow of information on the web. For merchant device makers the only Android alternative is MSFT Windows Phone which is less flexible for product differentiation, but may offer less intense competition at the device level and a platform to address the nascent enterprise market.
Innovation from left field. Assuming that innovation can re-enervate the high end smartphone market, the source and direction of that innovation is far from apparent. Previous disruptions in high-end cell phones – e.g. Motorola’s RAZR thinness, the Blackberry keyboard, the original iPhone’s touch screen GUI and Samsung’s big displays – were abrupt changes to the design status quo that brought new market leaders to the fore. If today’s high smartphone market is not commoditized from below, it is likely that it will be sideswiped by an unexpected innovation from an unanticipated rival, in either case, adding to the problems for the likes of Samsung and Apple
Smartphone ASPS and margins to fall, market share to shift. We are concerned for high-end smartphone market leaders Apple, Samsung. HTC, Nokia and Blackberry. All have been losing market share, and none have delivered truly differentiated product with recent introductions. We expect the shift to low-end smartphones to continue, squeezing ASPS and device margins, and emboldening emerging market competitors, like Lenovo, ZTE, Huawei, Coolpad, Karbonn, Micromax and Spice, to move up into higher price points and developed markets. In this environment, the transfer of value technology suppliers is likely to accelerate, with QCOM, ARM and GOOG perhaps emerging as the “Wintel” of the new era, and Japan Display, LPL, and AUO pressing Samsung for display market leadership.
For our full research notes, please visit our published research site.