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Winning Against Non-consumption

In the fourth quarter of 2013, mobile phone sales in mature regions fell due to weaker demand.”Mature markets face limited growth potentialis the markets are saturated with smartphone sales, leaving little room for growth with declining feature phone market and a longer replacement cycle,” said Anshul Gupta, principal research analyst at Gartner. “Lack of compelling hardware innovation has further exacerbated replacement cycles for high-end smartphones in 2013 because consumers don’t find enough reasons to upgrade.” – Gartner

Anshul Gupta’s assertion of market saturation was not the first. IDC also cited “a number of mature markets nearing smartphone saturation” in late 2013.

Shortchanging the smartphone market is nothing new. It was happening very early in the market’s formation when initial growth was not as rapid as expected. I recall Nokia managers disappointed with sales growth losing faith in smartphones in 2004.  Eleven years later, the market is still growing.

comScore reported that during the first quarter of 2015 the US market was adding over two million new smartphone users every month. These are not two million units sold every month but two million new users who began using smartphones for the first time ever, every month.

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Since the end of 2013 when both IDC and Gartner declared the onset of saturation in “mature regions”[1] 31.5 million new-to-smartphones Americans adopted the product. That’s an addition of 11% of the sampled market.

And the sampled market is just a subset of the addressable market. comScore only counts ‘primary phones’ in use and excludes company-purchased devices and any users below age 13.

So according to comScore’s data, the US market is at 77% smartphone usage. My assumption is that saturation would come at the earliest at 90% and could be 100%.[2] The fact that conversion to smartphones is still proceeding at roughly the same rate it has been for five years, makes this assumption pretty safe.

The pattern of growth fits a diffusion S curve (Logistic curve) as closely as ever: 

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Note that the curve continues to rise even into 2020, and that this is the US only.

The US is the most highly penetrated market but it’s not the biggest. That would be China. So it’s not surprising that two years after declaring US growth was over, IDC claims “China’s smartphone market has reached saturation“.

Chinese penetration is far below the US. It was estimated at 43% by the end of 2014. If we assume Chinese users are no less hungry for information than US consumers, then why should Chinese stop adopting the technology at less than half of US levels of use?

That would be risky.

This understanding of the maximum potential of a market — its highest level of user adoption — is crucial for product development. Paying attention to short term sales trends blinds you to the power of the job your product is hired to do. Your product’s purpose is not to be sold, but to be hired. If your product is powerful enough, it can be hired for universal jobs and it should be desired by all consumers, not just the fickle.

Being patient for growth means that you can release features when the majority of users can absorb them, not just when early adopters choose to play with them. Often, early adopters offer feedback which is off-putting to later, mainstream adopters. In engineering and design one has to always make compromises. The right balance at the right time avoids overshooting a market or under-performing against competitors.

There are plenty of examples of getting it wrong (see the graph on the right above).

At this stage in the US market, the iPhone has more than 80 million (sampled) users.  Android has about 100 million. It’s still a growing market so apart from BlackBerry,[3] the churn between the smartphone platforms is still minimal. The two main platforms are still harvesting non-consumers.

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This will change of course. And when it does, the competition will shift from winning against non-consumption to winning against other-consumption or over-consumption. That post-saturation competition will be decided by brand loyalty as much as anything else.

Update: comScore just published US Smartphone penetration by Age which offers some clues where smartphone hiring is still going on.  (Note: <13 ages are not shown).

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Notes:
  1. The US is the most mature by penetration data []
  2. Of the market comScore measures []
  3. Three million BlackBerry users in the US remain. []
  • http://www.isophist.com/ Emilio Orione

    “Being patient for growth means that you can release features when the majority of users can absorb them”
    I like this phrase a lot, great remark Horace.
    The phone market is moving so fast but it is still reproducing some of the PC use case at greater velocity.
    Phones’ features have traversed many eras, the list of features era at the beginning, the social era where having the latest social app was the feature, the photo era where the camera was the thing, the display era.
    The next era should be about external accessories, the phone as the hub for your smart gadgets. The most powerful accessory is the Apple Watch, more will come.

    • Mark Jones

      I like that phrase too. There are many analysts/critics out there who keep insisting iOS/iPhone moves too slowly (and thus, lags Android). Apple was probably too slow on larger screen size, but probably correct on most other capabilities.

    • Jared Porter

      Speaking of “absorbing features”, I believe Apple Watch rollout, (by online ordering ONLY and allowing it to be in limited quantities to Apple’s more fervent adopters ordering at 3 am), is to put Watch into the hands of users who will study Apple.com’s instruction videos, watch the Rollout Event video, and carefully read reviews, etc. Otherwise, if Watch were massively available in Stores, too many casual, uninitiated consumers would have waltzed in, tepidly purchased 2-3 units without proper fittings or use-experience only to TRY OUT or TEST the Watch out of curiosity for a couple of weeks, only to return 15-20% of all units sold, thus exploiting Apple’s return policy.

      Apple knew that Apple watch has a rather steep learning curve and needs a week or two to get comfortable and addicted to. Returns are very expensive for retailers to handle because they must be shipped back, checked out, repackaged and sold at a refurbished discount.

      This limited-availability, online-only rollout also managed complicated initial stock distribution among regions.

      Apple often gets criticized for occasionally ostensibly not being able to “meet demand” but I think Apple is purposely managing early-adopter (favorable) buzz to prep up for Apple Watch’s REAL “debut” which will be Holiday-2015. By then, there will be enough core-users singing its praises and extolling its virtues. Also, what else can one buy an iPhone lover for Christmas?

      Another time “delay/truncated rollout” benefitted Apple was with the “delayed” introduction of iPhone 6 and 6+ to China. Apple announced China would be a “first-tier Country” to receive the phone, but the introduced was “delayed” ( whether on purpose or not) due to the phone’s delay necessitated in getting official Governmental approval. Apple probably knew she didn’t have enough stock to satisfy both the U.S., China, and other key countries and needed a bit more production time, yet did not want to disparage the Chinese consumer by not a including China in the first wave rollout status of countries. This resulted in unbelievable black market purchase action, and lines around the block at all U.S. Stores, thus creating buzz that reverberated all the way back to China to more properly whet their appetite. Consumers hate to wait, and Apple doesn’t mind a black market. A sale is a sale. (Watch the video on Bloomberg TV now about the Apple Watch black market frenzy happening in Hong Kong.)

      • http://www.isophist.com/ Emilio Orione

        I believe there are more complex reasons for the watch rollout.
        It is true that scarcity is a selling factor and that the slow rollout has helped creating the hype, but for me there has also been a little of fear.
        The watch is new product complex product line with many possible orders’ configuration, entering a market (wearables) that has been very very small until now.
        Apple brand can not afford a drop off due to lack of sales like Microsoft did with surface or amazon with its phone or google with glass.
        So why not start with small inventory and build on demand? Why not hide watch data under the accessory category so to eventually disguise low results?
        I believe the watch is an great product, I want one, I think it will be a great success but Apple’s rollout is a sign of a prudent management that is going in uncharted territory.

    • SubstrateUndertow

      At some point the Apple Watch will probably become the hub and the phone will become the accessory ? ? ?

  • Mark Jones

    With the update, it looks like saturation is being reached for the 18-34 age brackets, with the 13-17 and 35-44 brackets only quarters behind.
    1. Is there a reason to believe saturation is going to be reached for the older brackets, 45+, at a percentage below 90%?
    2. Is iPhone share gain in the last year related to having more older (or at least, a larger percentage of older) new-smartphone-consumers; a group that tends to be wealthier and more tech-averse? (Note: I’ve making the probably incorrect assumption that there’s a fairly even distribution across age brackets – if someone has the distribution, please correct.)

    • http://www.asymco.com Horace Dediu

      People don’t buy these things because they are a certain age.

      • Mark Jones

        Not sure what you mean by that. The data shows that people at different ages are switching to smartphones at different rates. Couldn’t we expect a larger percentage of people born before 1950 to never switch due to having been accustomed to only voice calls, and not willing to put effort into using a phone for anything else (since they’ve never had the need to)? Isn’t PC ownership/usage also lower in the 65+ bracket?

      • http://www.asymco.com Horace Dediu

        You’re observing correlation not causation. If you use age as a cause for behavior then you’re suggesting that *because* you are a certain age then you will purchase a certain product. It’s exactly the wrong approach. The approach should be: how do we make smartphones as attractive to those who are older as to those who are younger? With the right improvements, they will be just as keen on the product, perhaps even more. This is how you compete with non-consumption.

      • Mark Jones

        Ah, got it. I was just looking at the data, and not from the POV of a smartphone maker improving the smartphone.

        Even though I see much use for both an iPhone and Apple Watch for my dad, it would be incredibly difficult for a smartphone maker to change his attitude, even if they offered it for free. Maybe if a doctor insisted…

      • http://www.asymco.com Horace Dediu

        HealthKit is aimed directly at this audience. See also the moves by IBM and Apple and Japan Post to address the needs of the elderly in Japan.

      • jinglesthula

        Put another way, HealthKit is aimed at a job many older users need to have done, and is therefore a reason they may hire the product.

      • Troy

        “job many older users need to have done”

        I’ve been finding our host’s terminology here . . . awkward.

        I just think the idea of ‘hiring’ a consumer good is overly cute I guess, and obfuscates the true economic mechanism of how consumers derive ‘utility’ from using products.

        The way I see it, ‘wealth’ is at its most basic the state of being ‘well’, of having no unmet needs and wants.

        ‘Indigent’ — the opposite of ‘wealthy’ — in the Latin is ‘to be in need’.

        Consumer goods are manufactured providers of services that meet our needs and wants.

        This service provision is the work of the ‘job’ in Horace’s terminology.

        So being ‘wealthy’ is enjoying access to these produced service providers — ‘products’ aka ‘consumer goods’.

        In modern society this normally involves private purchase and ownership, but that is orthogonal to the above dynamics.

        Though I suppose the ‘hiring’ terminology is useful for its obverse — ‘firing’ a possession that is no longer providing sufficient utility. ‘Employ & Dispose’ doesn’t have the same punch as Horace’s ‘Hire & Fire’ combo . . .

      • demodave

        One way to make the smartphone more attractive to the older set is to give it a camera and to give the older potential users grandbabies. My mom is approaching 70 and is very excited to FaceTime with my nephew. He is notably more adorable than I am, but that matters not. My mom is not really the technology type, but she is using technology. We aren’t on the same service providers, but both our phones are iPhones. My sister and brother-in-law’s, too. And the latter two on a common network, too!

  • Walt French

    I don’t have the inclination to do a full model but an interesting facet of the data as reported here, is that a significant part of the higher adoption rate in older age brackets is simply phone owners getting a year older between the two snapshots, so that one-tenth of the users in each bracket finding themselves in the next older bracket.

    I took the 35-44 average of ’14 and ’15 to get 82.9% ownership over the year and added a tenth of it—people who turned 45—to the 66.4 for the 45–54 bracket. The result is 74.7%, a good part of the way to the 45–54 bracket’s 77.1%. This is a bit of an over-estimate since the 44-year olds probably had fewer phones than the group average.

    I should also subtract people who turned 55 in the year. Presumably, since the 55–64 bracket is much lower, people who turned 55 owned a lower percentage; dropping them would raise the average, again without ANY net purchases of people in this approximate age range.

    Somebody who wanted to fit a year-by-year curve to the decadal averages could probably get finer estimates. But either way, the relatively high adoption rates at the upper age brackets seems substantially an artifact of the categorization, rather than geezers belatedly discovering iPhones. Adoption looks much more across-the-ages than the chart suggests.

  • Alex Gollner

    Marketing to older people isn’t based on their age bracket, but the life stage they have got to. This puts some people in their early 50s into the same group as some people who are in their late 70s and vice-versa. Life stage is based on individual situations not birth date.

  • Childermass

    Non-consumption can be seen as ‘lack of usefulness’. Whereas once the machine became useful when the sociological or economic circumstances changed now the machine itself can change. A dishwasher always has done the same work but affordability and the social need to not wash dishes affect consumption. An intimate computer can add the facility to read my insulin levels and now I am a consumer. Before I had no ‘need’ for a ‘wearable computer’, but I am diabetic and now I have a non-invasive insulin reading machine I ‘need’ one. I am not consuming the entire functionality of the machine, just the bit that matters to me.
    A machine with various functionalities, and expanding ones, is likely to be more useful and useful in more ways. Intimacy will lead more surely to consumption.
    And because I have no interest in ‘computers’, or multi-functional machines, I may well buy more than one and have each one doing the task I bought it for. ‘100%’ is not the end.