Updated: June 3, 2017
This narrative was the subject of the Weekly Narrative Video the week of May 29-June 2, 2017. You can see the video on YouTube here, or embedded at the bottom of this essay.
The modern smartphone market came into existence with the iPhone in 2007, and has rapidly expanded since then thanks to both the growth of the iPhone itself and the rapid rise of Android starting shortly afterwards. However, that market is now beginning to mature in at least a couple of different ways, making life more difficult for the major vendors, especially those targeting mostly mature markets.
The smartphone market is maturing in two main ways. Firstly, it’s reaching saturation in major mature markets, where penetration rates are in the 80s or 90s among the addressable population and growth has slowed or even stopped. Secondly, the devices themselves are maturing, in that the underlying technologies are very solid at this point, with most innovation occurring at an incremental level at the edges rather than pushing the devices from unacceptable to acceptable performance in core areas. Both of these factors are causing slowing and even declining sales of smartphones, as there are fewer first time buyers and existing owners feel less of a need to upgrade their devices rapidly. The shift from subsidy to installment models for buying smartphones through carriers in markets like the US is another driver of slower upgrade cycles.
In this context, major vendors, especially those targeting the premium segment, are faced with a significant challenge: there simply aren’t as many smartphone sales as there were, and so growing sales requires growing share. Obviously, every vendor can’t grow share, so this means increasing power in the hands of a few big vendors while others gradually get squeezed out. In mature markets, that means Apple and Samsung snapping up much of the premium market between them while other players fight over table scraps at medium and low price points.
This in turn forces a bifurcation between those smartphone brands able to command a premium and take meaningful share at the high end through strong differentiation, and those who are forced to differentiate largely through price or value at the lower end of the market. Companies that attempt to straddle these two or which try to fall somewhere in the middle won’t last long, and even many of those that pursue one or other of those opportunities will fail. Most of the big Android vendors from five to seven years ago are now faced with this quandary, and few are finding a way out of it. Samsung is the main exception, while Sony appears to be finding a smaller but potentially profitable niche as a fairly low scale premium vendor. LG, HTC, Lenovo/Motorola, and others are still struggling to find a place in the market, while newer Chinese vendors gobble up share and leave less and less market for them to fight over. A shakeout is likely coming, though few of the struggling vendors seems willing to give up the fight just yet. I wouldn’t be surprised if we see some bankruptcies, exits, and/or acquisitions in the next couple of years among these mid-tier vendors.
Meanwhile, at the high end, we’re likely to see more diversification, as premium vendors seek to fill every available niche within their addressable markets. We’ve already seen Apple pursue this strategy with its iPhone line, which has gone from a single model to three in recent years and promises to split even further in 2017, while Samsung has split its Galaxy S line in two while also pursuing the Note strategy. Modular approaches from Motorola and LG have attempted to solve the same problem in a different way and fallen short, while Google’s ill-fated Ara experiment never even made it off the ground. We’ll see more experimentation with new form factors, displays, and other features, but ultimately the companies with the best ecosystems and not the most gimmicky hardware, will win out.