Categories

Smartphones: the end of the beginning or the beginning of the end?

The smartphone market grew to about 100 million phones last quarter. The volumes grew sequentially and as a result reached a new record share of 27% of total phones shipped. The chart on the left shows how this market evolved over the last few years.

I’ve added each platform’s contribution.

While much of the focus will be on who had what share, the better question might be who has the better chance to beat smartphone non-consumption? Non-smart devices are still the dominant competitors. Though it’s getting easier to win against them, they still have some compelling competitive advantages.

What the chart shows is that Android (and phone versions of iOS) have taken share from direct competitors but have taken more from non-consumption. Rather than focusing on rivalry between platforms, minds should be focused on the shape of the smartphone adoption curve.

The market is largely un-penetrated and yet some argue that “it’s too late” to enter or that “the game is over” and winners have already been decided. This is an argument that we are at the beginning of the end. Once the market is predictable it’s discountable. Once it’s discountable it becomes economically uninteresting.

I’ve argued that this is far from certain. In a short span of a few years, a decades old business has been re-defined. But that was just the device side of a larger business. Smartphones have been, so far, sustaining to the telcos who capture the vast majority of revenues and are thus the true incumbents.

If and how they will be affected by further evolution of smart devices and new business models around them remains to be determined.

  • Omar

    I’m not so sure the telcos can be unseated by new comers, the providers all share the same business model and continue to adhere to it without fail despite new hardware/software evolutions.

    • http://www.noisetech-software.com/Y.A.S.C..html Steven Noyes

      The cost of entry to the telcos is measured in the many billions of dollars. The cost of generating a compelling platform (Android, iOS, WP7…), however, is substantially less. I would argue that a small group of top level programming talent could pull it off in a year or so. This is based on the assumption that top programming talent can be 10's to 100's of times more productive than the average talent.

      I think this is what Horace has in mind here.

      • Sander van der Wal

        I do not see anybody new with the expertise to create a new smartphone platform that is capable of taking over from Google and Apple at all. And even if there was a capable organization, by the time they are ready in a year or two (being very optimistic here), they aren't going to find an ecosystem, as by then smartphone penetration will be around 50%.

        Looking at the usual suspects, Microsoft might be able to pull it off if they spend money by the truckload. HP with WebOS? Web apps at a time when operators are seriously contemplating making 3G networking more expensive? Nope.

        The only possibilities I see are the Chinese creating their own platform for China only, for state security reasons, and maybe India, if China does it.

      • http://www.noisetech-software.com/Perspectives.html Steven Noyes

        You don't have to take over.

        Apple has 5% of the handset market world wide and makes how much money? Since when can there be only a single company making profit?

        All you have to do is make a compelling product that enough people will buy to allow you to make a profit. This concept of you either "win" or you "loose" is a funny one. There are many different ways to actually play.

      • Sander van der Wal

        If the smartphone market behave the same as the PC market (a big if), then one will be predicting that the number one smartphone platform will be an order of magnitude bigger than number two, number three will be an order of magnitude smaller still and the rest is peanuts. This is important for people committing to a platform as long-time users.

        By the time business started to use PC's in great numbers, the IMB PC, which became the Windows PC, very quickly became dominant, forcing everybody but Apple out (Atari, Amiga, Archimedes, MSX and whatnot). There might be room in the consumer market for multiple platforms, but there isn't such room in the business computer markets, the mainframe, mini and PC markets behaved identical, winner took most of it.

        We are now seeing business to take a real interest in smartphone/tablet platforms as computing platforms, not just phones as communication devices. Given that the participants (businesses) are the same, it is reasonable to extrapolate past behaviour, and the platform that wins the business platform war will also win the consumer platform war.

        Note that Apple knows this too, and they should be very happy that business is liking the iPad a lot.

      • petpeeve

        It's "lose" not "loose". "loose" means it should be tightened before it falls off.

      • FalKirk

        Did you foresee the iOS platform emerging in 2007? Did you foresee the Android platform emerging in 2008?

        The leaders of tomorrow may not even exist today. They may come at the problem from a totally different and from a totally unforeseen perspective.

        Apple is a serial disruptor. It's even possible that Apple could, once again, create a new product that would disrupt itself and disrupt the phone markets.

        Let's keep an open mind. There's a lot more out there that we don't know than what we do know.

      • capnbob66

        You say that but actually both were somewhat predictable. Apple was adding more features to iPods and had dabbled in phones via Moto. Google was responding to Apple to avoid being cut out of mobile ad revenue. MS responded to take on the other 2 and try to regain some of its former glory. I know it's hindsight but not rocket science.

        The issue here is that none of those are some garden shed startup. If you look around the world for major companies who might have an interest we begin to struggle. Facebook? Quite possibly. Chinese players (baidu or renren) – maybe but they will just fork Android and let Google do the hard work. HP? They are trying but phones are not their endgame. Carriers like vodaphone might have a chance but not the skills. With the sale of Palm, their chances of crashing this party were over plus they are making pots of $s as it is.

        The last startup to disrupt phones was RIM and that was a long time ago in a much more naive time. The rules have been set for success (massive distribution, large app store) and they kinda exclude new entrants. Look how hard it is for MS with all it's power and $s to break back in.

      • FalKirk

        "both were somewhat predictable"

        The iPhone was predictable? The success of Android was predictable? Oh, please.

        It's not germane to the topic at had, so I'll just leave it at that.

      • capnbob66

        It is not obvious as to who would be successful and in what dimensions (units, profit, revenue, mindshare, etc.) in advance of their entry but it was known that Apple wanted to develop the next big thing after the iPod and they'd been playing with further convergence with Moto products. That there would be an iPhone was not surprising. After the disaster of the ROKR et al, the surprise was how good the iPhone was.

        What we have learned from Apple's disruption and those by Palm and RIM before it, are the skills, talents and assets and the objectives that potential entrants might have. Whether they will be successful is another game entirely. I agree that we cannot predict winners but we can do a decent job of predicting the players.

        I am not saying that it is impossible that the next phone disruption will come from an unknown source but just that it is unlikely.

      • Sander van der Wal

        No, I did not.

        But Apple has the knowledge to create and run ecosystems, and Google should had it too, with all the people they hired.

        And now there are few companies left which are capable of doing it. If you think otherwise, name one (Microsoft and HP I already mentioned so they are out).

      • http://twitter.com/sdbryan @sdbryan

        If Apple managed to ship an iPod touch with the same low friction 3G option that the iPad has that could be huge. For $15 per month you would have VoIP and internet access 'everywhere'. Since this could dwarf (and cannibalize) the smartphone market that pays about $100 per month, I doubt Verizon or AT&T would play along, but how about Sprint? Apple managed to transform the cellphone market (though Android has eroded some of the gains) by its exclusivity deal with AT&T, why not blow the doors off by making a deal with Sprint and like minded carriers in other markets?

      • CCFF

        The problem is that Apple has a higher profit margin on iPhone and they definitely should try to sell more iPhone than iPod touch. As a business, it is ill-advised to cannibalize their own profit margin.

      • asymco

        Ill-advised? Who's doing the advising? Why should you take the advice? The only rule in business strategy is that there are no rules.

      • Marcos_El_Malo

        I'm not sure what you mean by "cannibalize their own profit margin", but Apple has been pretty fearless about cannibalizing their own product lines, before someone else does. Doing this has certainly risked hurting their bottom line.

        Remember folks, disruption starts at home!

  • OldGuy

    My wife and I share a single vehicle and a single prepaid dumb phone for which we buy 1,000 minutes PER YEAR for $100. We use a bit less than that annually. We could each have one, but there's no solid justification. On the other hand, we recycle extensively and forego garbage collection to fund $25/month for 3G for the iPad, which is MUCH easier for us to use than a tiny smartphone. When she has the phone, I can make Skype calls from the iPad. Despite me being in IT, but close to retirement, we'll likely never have a smartphone.

    • http://twitter.com/gassee @gassee

      Great example of a) conservation and, b) resource allocation: inexepensive dumbphone + iPad. This said, one ownders if dumbphones won't all become smartphones. Why? Android and mutant derivatives from China, using the open source code but not getting an Android license/compatibility testing/name will become entry-level "free" smartphone with a contract, or very inexpensive with pre-paid minutes.

    • famousringo

      Nice anecdote. It's clear that the expensive part of the smartphone is the data contract, not the device itself. Voice-only cell plans also used to be too expensive for most consumers.

      But prices came down, value went up as the network got larger and more reliable, and new pricing models like pre-paid and family bundles made it easier for more people to get cellphones. Now cell penetration covers the vast majority of people in developed countries.

      The same thing will eventually happen with smartphones, whether the carriers allow it themselves or somebody like Apple does it with iPods and ubiquitous WiFi.

  • M.O.D.

    I don't see how anyone can call the game when 75% still needs to played. And it is likely to go into overtime.

  • http://twitter.com/ShashNanda @ShashNanda

    how do you ensure the completeness of your data? I don't think you would have gone through each and every phone manufacturer's 10-K/ 10-Q to get the total figure sold (or have u?)

    and is this units sold %s for that quarter? or total market share (i.e.total units in circulation)?

    for the latter and to really care it "share" – you would need an army of analysts would be my guess? like what other market research companies have.

    • asymco

      I collect all the public information for eight major competitors and back out the others based on third party estimates of entire market. The data in this post is quarterly units shipped. There is no public data on installed base of devices or platforms but comScore surveys the US and perhaps other countries in isolation.

  • timnash

    Telcos will start losing out to WiFi when Skype / FaceTime etc. route though a service like GoogleVoice, which has a first preference set to VoIP, and cellphone 3G etc are second preference. Since many have WiFi at home, at work and in the cafe this can't be too far away. In that case most people will need much smaller texting and minutes plans which will reduce Average Revenue Per User. So the telcos will reduce phone subsidies and more people will go pre-purchase of 3G/ LTE bandwidth and buy their own phones. We are still in the early rounds of this.

    • http://twitter.com/gassee @gassee

      Yes, I wonder what happens as Wifi access points keep sprouting everywhere. I live in Silicon Valley, in Palo Alto, where there are many AT&T "white spots", unbelievable, but plenty of "courtesy" wifi. The I went to Vietnam and Cambodia: good cell coverage (I found a map of cells I connected to stored in my iPhone…) and plenty of WiFi.

    • Ted_T

      I don't think that WiFi (outside the home/some work places) will be that big a factor. Even free WiFI hotspots tend to have disclaimer/login screens, making use for a quick phone call untenable.

      Governments fear the use completely open WiFi, and corporations fear potential liability. Indeed the powers that be are campaigning heavily to have home owners secure their private WiFis — it used to be that a good 50% of residential WiFi in NYC was open. Now 95+% is secured.

      The route around the telcos there needs to an alternative, secure, wireless network to the one offered by the telcos. Not an impossibility, but not easy to envision or implement.

  • Sacto Joe

    Don't discount 4G! The telco's know that they're in a battle to preserve their monopoly. Making free video calls with FaceTime, Gmail or Skype, on the other hand, is here to stay. Of course, even those "free" calls depend on a fast internet connection that someone has to pay for….

  • Ted_T

    "What's most interesting to me is that Apple has taken ALL its share from competitors (when you include non-smart devices among competitors) whereas the Android suppliers appear to have taken nearly all their share of the smartphone market from non-consumption."

    Your logic/facts are faulty — if you include non-smart devices among competitors, Android has also taken big share from competitors. Who do you think the Android users on Verizon/T-Mobile/Sprint etc. are — people who've never owned a cell phone?

    It is an interesting question as to whether more former (RIM/WinMO/Palm/Symbian) smartphone owners switched to iPhone or Android, but I certainly don't have any way of knowing, nor do I think this can easily be answered via publicly available data — only the telcos know for sure, and none of them has the full picture either.

    • poke

      I'm talking about the manufacturers using Android NOT Android itself. Android has seen, as I said, astronomical growth. The manufacturers using Android have not. Many of them are losing market share. They're selling more smart phones than before but they haven't expanded their share of the overall phone industry or taken share from competitors.

  • Dick Applebaum

    The Air Waves and Bandwidth.

    Thinking out loud here. I grew up i the LA area (Pasadena), and most of the TV and Radio stations would Broadcast their main signals from Mount Wilson a 7,000 foot peak overlooking the LA basin and the San Gabriel Valley. Signals were relayed to sub-stations, Glendale, Hollywood, etc. that were not in line-of-sight to Mt, Wilson.

    The greater San Francisco Bay Area, including Silicon Valley, has a similar topology to the LA Basin — with intervening hills and peaks blocking signals to some areas (requiring relay stations).

    As more and more of TV (in particular) is delivered via Satellite and Direct Cable — it seems to me that the Radio/TV bands will fall into disuse.

    In it's infinite wisdom, the Federal Government (who controls the Air Waves) could auction these unused bands to enterprises/utilities for the public good.

    My assumption is that the "public good" would, by definition include, quality, availability, ubiquity, high-bandwidth and low/reasonable/predictable costs.

    My Question: When mobile data usage reaches some tipping point vs Broadcast Radio/TV — wouldn't it be practical to use these bands for mobile data/content?

  • Rob Scott

    This is false meaningless comparison. People buy brands not operating systems. Samsung customers buy Samsung devices and people who love Apple products buy the iPhone. To the end Android has done very little for its licensees in terms of unit grown and I would argue in profits as well. Lastly, the smartphone ARPU argument is needs to be qualified, that is, smartphone have "high"ARPU because a huge chunk of the revenue covers the phone. I would argue that in most instances dumb and feature phones generate a higher AMPU than smartphones, meaning if carriers and OEM were to get a clue they will be very careful of the entire smartphone hype.

    Lastly, the winners in this entire thing has been Apple and RIM, they have taken customers from the incumbents. Everyone else is upgrading the existing base, and that is completely uninteresting!

  • Martin Knestrick

    Have seen this movie before. Ran successive enterprise S/W companies dealing with European mobile telcos. My thoughts below.

    Telcos will be telcos. They are still managed by the guys who spun out from the wireline parents … and their DNA is still that of a monopolist, which most of them were (are?). For them … they stole their customers fair and square … and despite providing little value add and much hassle … are dead set against anything which makes them into the bit pipes they really are. Let them be telcos and they'll lose this battle soon enough

    The market space in play here is defined in many ways … my favorite is … mobile digital lifestyle … user centric environments and tools which are … always on, any task, any time, any place, any device, any network. The piece of that value chain still in the wrong hands is the "any network" piece. So let's change that.

    Apple and Google are the disruptors. They compete to some serious degree, but they are still more aligned than not. Their real opposition are the incumbents … mobile telcos today, and cable & satellite ooperators tomorrow. The next market ripe for disruption is also timely … video to hi-res large format screens in the living room. A $80-100 billion business in user spend and ad revs to cable and satellite operators in the US alone.

    So … Apple and Google form ALLIANCE to become an ISP … to build and operate a nationwide broadband or "superband" mesh network in the US. $20-30 billion will build it … another $3-4 billion annually will manage and upgarde it. Cash returns from taking the data charges now levied by the moile operators … plus a piece of the $80 billion above. Apple and Google have the cash on hand to finance it all if they want to. They could invite Microsoft into ALLIANCE if they want. They could get passive investor partners if they want … sovereign wealth funds from China and elsewhere and private equity funds. Wuawei and Cisco would fight hard for the construction and outfitting … and might want to join the funding as well. One of the global telcos, perhaps British Telecom, with no real presence in the US, might be the Prime and Integrator.

    Is this back integration a bridge too far ?? Too far from the core businesses for ALLIANCE members ?? I think not. It unblocks the Thermopolae which restricts the market potential as defined above and the profits of the Great Disruptors.

    The question I'm still pondering is how to keep their business going thru telcos elsewhere while the disintermediate the US mobile, cable and satellite guys. The answer relates entirely to China … maybe the government directly or through the three great Chinese mobile operators … simultaneously implement a plan similar in concept … modified for the Chinese market which have little incumbency in video-to-anywhere.

    What think thee all ??

    Best
    Marty

    • sve

      You are probably right. When the computer industry comes to town, the incumbents are destroyed. Evidence: music delivery, video stores, book publishing, newsprint, film photography. Now mobile phones. Soon telecom, radio, sat/cable television.

  • stefn

    Horace, you are a hard working guy. So this is a working smart suggestion. When an article get X number of comments, why not publish an update to your first version that indicates what you learned from commenters. Or what you think they missed the first time? Great way to compliment and encourage high quality comments. And get more use and value from your work.

  • NangKa

    I like the term "non-consumption", which leads me to think how many of the so-called "smart" users remain non-consumption even though they are using smart phones now.

    With that, it'll be interesting to find out from the current point of time in the graph, which point in the Android region separates the "smarts" and the "non-consumption" smart phone users. Would this support the theory that Google makes more money from iPhone clicks than Android. (Add the rest of the iOS devices and this is really a no-brainer.)

    Also, while the smart phones have seemingly fast taking over the mobile world, is it more of a case where manufacturers just have to jump on to the bandwagon and sell more "feature" smart phones where in many cases the buyer (user) doesn't even understand or realize, and continues to use the smart phones as feature phones.

    Google's claims of activation numbers should then be taken with some amount of salt..

  • R_N

    I find this comparison confusing. Why do you compare smartphone with just other mobile phones? To me, the smartphone's competitors are the netbooks, iPad-style tablets, laptops and PCs – i.e. all the various other browser- and open app-platforms.

    "Non-smart" [mobile] devices are competitors only for voice comms, which they are still remarkably good at. But if you want to looks at the voice comms device market you need to include fixed line phones (traditional and VoIP) as well – that would actually be a sensible comparison.

    Personally I use a smartphone as a very useful tool in many situations. But I also usually avoid it (other than for telephony) whenever I have available a larger screen device.

    Comparing just smartphones with other mobile phones as you do might be interesting from a narrow mobile device vendor perspective, but from an end-user perspective it is largely irrelevant.

    • asymco

      The comparison between smartphones and non-smartphones is useful because of the premise that most buyers of smartphones are first buyers of regular phones. That being the case it's easier to estimate the addressable market and hence the opportunity for growth for smartphones. I find it useful to develop this consuming/non-consuming dichotomy in addition to the share-of-a-limited-pie point of view.

  • R_N

    Thanks!
    However, I still am confused as what the issue is about. Surely, given the technology advances, the average mobile device (i.e the pocketable or purseable always-with-you thing) will continue to get more features ( i.e. be "smartphonized") until the marginal value of an additional feature ceases to be worth its marginal drawbacks? The interesting thing is the end state of smartphone vs non-smartphone share and the time to reach it. Just as wristwatches have survived the onslaught of watches in mobile phones and good cameras have survived the onslaught of phone cameras, the non-smartphones are not set to get extinct anytime soon IMHO, although their share will surely decline. ;-)

    • capablanca

      I have not worn a wristwatch since '07. And yesterday when I asked a stranger for the time, he responded (bare-wristed) by looking at a phone.

      Think also about the difference between carrying a jackknife and a Swiss Army knife. Or a money clip and a wallet. Not directly parallel to be sure. But they highlight the important fact that what we carry daily is very personal. And, of course, few who have no need for a jackknife find the need for a SAK.

  • Nate

    "Smartphones have been, so far, sustaining to the telcos who capture the vast majority of revenues and are thus the true incumbents."

    Horace, based on that concluding thought, here's an idea/request for a chart: We've seen many charts showing the revenue and profit shares of the device makers, but nothing demonstrating the point you've succinctly made there… Is there a way to compare (for example) device maker profits vs. the corresponding service providers? Is there a point at which more profits flowing to the device makers instead would induce a change in behavior from the telcos (particularly in the US, with its lack of effective competition)?

    Thanks for the great article!

    • Martin Knestrick

      Great suggestion Nate. It's been rattling around my head, but you got it on the boards.

      Martin K

  • Phone Guy

    I seriously doubt that the best smart phone that will ever be invented has yet been invented.

    Just like autos, golf clubs, etc. there is always room for innovation and new products. Just look around you — how many of the products of all categories existed ten years ago.

    If Microsoft doesn’t come up SOON with cloud-based products, Theri entire product line will end up on the trash heat of once dominate prouducts that withered through slow/little innovation.

    No, we are not at the end of anything — we haven’t scratch the surface of what will be.

    Personally, I’m waiting for the one terebyte wrist watch!
    First there was Visicalc then Lotus 123 then Excel. Now even the mighty Microsoft is under serious challenge by Open Office, google Docs, etc.

  • debugger

    Wonderful chart. Thanks very much for the work.
    I agree with your observation that android have mostly taken share from non-consumptions. The fact that android grew faster is a manifestation of their power to penetrate into non-consumption, imo through vendor proliferation and lower price points. I suspect that trend will continue.
    Apple does compete with the android but only a very small subset of it. When I think about iPhone's competition, I think of devices like the HTC Thunderbolt and Samsung Galaxy S, which are the highest end products in the android universe. The same chart but with each OS universe broken down to the vendor level will reveal more insights into what's going on, and I would group the vendors next to their closest competitors, and tier them based on price point/quality etc. What's in my mind will be Apple on the top, then HTC, Samsung, RIM, Motorla, etc, and then the dumbphones. Without the android, Apple probably would have penetrated deeper into the market but would not have reached the combined level of iOS+Android we see now. The android did steal some share from Apple, but had been much more disruptive to the lower tier vendors like RIM and the non-consumptions.

    • junz

      What will also be very interesting to see is what's happening in the android world. My guess is that most of the growth came from vendor proliferation. The earliest adoptors such as HTC, Motorola and Samsung did not grow as fast as the overall android universe, and had been losing share within that segment. I also suspect that most of that growth came from old feature phone manufactures (the branded vendors like Samsung/Motorola/LG and also tons of no-name vendors) jumping onto the android ship and taking their old customers with them (motorola was an example of this, their overall phone shipment didnt grow much, but smartphone penetrated deeper into their overall shipment).