Smartphone Trends in the US

Every quarter, I talk with the major US carriers to understand the trends they’re seeing in smartphone purchasing and upgrade behavior among their customers. These conversations are on background, so I can’t share what individual carriers tell me but it enables me to build up a picture of trends that are happening with regard to devices, which helps to know what to expect during earnings season. Today, I thought I’d share some of that with Tech.pinions Insiders.

A big Q4 for upgrades is sucking the wind out of 2015

One of the key things I’m hearing – and which was somewhat evident already in the Q1 2015 results the carriers announced – is that the huge upgrade cycle which happened in 2014, and especially in Q4, is somewhat sucking the wind out of sales in 2015 so far. Though that upgrade cycle was partly driven by massive iPhone sales, and is therefore good news for Apple, it seems to be somewhat depressing Android device sales in the first half of 2015, despite the new device launches from major vendors including Samsung, LG, and HTC. In general, I suspect we’ll see somewhat lower rates of upgrading this year than we did last year, as there were a number of factors that drove higher than usual rates in 2014 and many of those customers will now not be upgrade-eligible until late 2015 or even 2016.

Some factors will mitigate all this, not the least of which is T-Mobile’s introduction of its “Jump On Demand” program, the company’s first leasing program. Sprint has seen very rapid uptake of its leasing plans and T-Mobile should also see good traction with this program and more rapid upgrades from the customers who switch to it. Those customers will be eligible for much more frequent upgrades and I’d expect this plan to become the default option for many customers over the next couple of years, with the exception of those that want to own their devices outright rather than trading them in periodically. AT&T’s Next 18 plan, which was launched in late 2013, was very popular and began to mature right at the end of Q2 and many customers will become upgrade-eligible in the second half of 2015, which should drive higher upgrades. With new iPhones launching in the fall, however, I wonder if some customers who have been on Android for the last couple of years may just wait a while and make the switch.

Android seems to be faring poorly

In general, as I alluded to briefly above, Android seems to be faring relatively poorly, despite the flagship device launches from some of the big names. HTC’s launch seems to have fizzled very quickly, with hardly any sales activity compared to previous launches and likely suffering, at least in part, from the fact the HTC One form factor hasn’t changed much over the last couple of iterations – it’s a less obvious upgrade than some of the other devices out there. Samsung’s launch likely performed the best, thanks largely to the combination of its great brand awareness and promotions alongside the new design, though that hasn’t provided as big a bump as some of the carriers were expecting. LG’s flagship launch went moderately well, benefiting from the significant investment LG made in promotions of various kinds, though even that seems to have done less well than last year’s, according to the carriers I’ve spoken to.

A continuing bifurcation of the market

One huge impact of the shift to installment billing and lease plans for devices has been a dramatic bifurcation of the market, with many postpaid customers moving to higher priced devices and even the higher tiers of these premium devices (greater storage and larger screen sizes for devices such as the iPhone), and the mid-tier of the market emptying out rapidly. The low end has seen an uptick, as the devices in this part of the market have become more appealing and as customers who don’t qualify for installment and lease plans look to buy smartphones outright. The same trend is also helping the prepaid market, which was sluggish at first in its adoption of smartphones but is now rapidly catching up, as devices in the $150 and below segment become far more compelling. As I’ve written previously, this is the part of the market where Windows Phone has enjoyed modest success in the US, even as the rest of the market has largely ignored it for the last couple of years. But Android continues to do very well here and some of the Chinese vendors continue to make their best advances in this segment, even as they continue to struggle in the postpaid market. Over time, some of them will be able to parlay this success into the postpaid market as their brand awareness improves though we’re likely still 12-18 months from that outcome.

Tablets continue to be a major focus

I’ve also written before about the importance of tablets as carriers attempt to drive overall gross and net subscriber additions. As phone growth slows, tablets provide an important additional source of growth. All four major carriers are investing in this space and the major Android vendors have been well aligned with this strategy, heavily discounting tablets sold in combination with smartphones on two year contracts and, as a result, dominating device sales at several of the carriers. The iPad continues to make up the vast majority of premium tablet sales, but these dirt cheap Android tablets are accounting for a lot of overall sales, with many priced at 99 cents or free under certain bundles. AT&T now sells its own tablet, something Verizon has relied on heavily for tablet net adds for some time now and both carriers are seeing decent usage and surprisingly low churn on these fairly low-end tablets, especially on shared data plans.

Q2 earnings will provide stronger signals

The carriers’ Q2 earnings reports are just weeks away at this point and they should provide much more direct signals of how individual carriers and their OEM partners fared in Q2. But I’d expect the trends I outlined above to broadly play out this quarter and then we’ll head into Q3, traditionally a relatively slow quarter for iPhone sales in the lull before the new device lands at the end of the quarter, an opportunity for Android devices to play catch-up. Overall though, we’re seeing a slowing of growth in the US smartphone market and an opportunity for the iPhone to gain share as the overall market stagnates, especially as more and more users are drawn to premium devices by installment and lease options.

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Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

13 thoughts on “Smartphone Trends in the US”

  1. It seems one of the major driver for the past 6 months and the next 6 is Qualcomm’s major overheating issues with the 810. Qualcomm have always supplied the chips for the flagships, so OEMs are currently high and dry (and hot !), except Samsung with the GS6 (sporting their Exynos 7420 which luckily marks Samsung’s return to top performance+features), and LG who went for the 808 (810 two-core cooler sibling) for the G4.
    Since the GS6 has other issues (Apple-like battery life for the regular version, very manly design for the GS6 Active and its 50% bigger battery, random camera sensor), that leaves Android’s flagships lineup for 2015 very weak: G4, or GS6-Active if you’re OK with looking butch.
    It’s frightening to see how a single miss from a single cog in the machine can have such a huge impact. I’m not sure how that impacts things in terms of delayed purchases (Qualcom’s 820 is around the corner, but will it be good this time ?), switch to iOS, or move towards the middle.

    1. This may be a small factor, but the vast majority of the Android OEMs’ challenges at the moment have nothing to do with Qualcomm chips and everything to do with Apple’s resurgence off the back of the iPhone 6es, the rise of installment billing (which enables people to move to more expensive phones), and Android OEMs’ continued struggle to differentiate themselves.

      1. Well, we do regularly get lots of hooplah bout Apple’s SoCs and ARM’s advances, so one might think SoCs do matter.
        Apple’s resurgence is not happening in a vacuum. There’s a dynamic between what Apple’s offering and what others are, and some of that is decided is on the technical (performance/features) side.
        I’m still curious about the correlation between flagships sales in general (Apple’s in particular) and subsidies/financing/overall mobile costs. One guy did it a while back, but this needs validation.
        As for differentiation, I’m tired of hearing that bandied about. It’s a pointless ersatz for lock-in; OEMs are OEMs: they make devices, not apps, not cloud services… and when they try to differentiate in HW and OS where their skill is, they mostly flunk it: it seems some are circling back to glass phones with barely-a-day batteries, OS tweaks and custom launchers/apps are mostly delaying OS updates… The way to bigger sales is to make better devices, and that’s going to be a ongoing struggle on the basics: features and quality (and consistency about that mix so you don’t jettison existing customers when updating lines). I understand that’s a product designer’s field not an analyst’s focus, but no one has ever asked me “how is it different” about a phone. They ask me what’s good about it, what’s bad about it, comment on their experiences with the brand, on its looks/size/weight…

        1. I think you misunderstand. “Differentiation” is largely about “what’s good about it, what’s bad about it, comment on their experiences with the brand, on its looks/size/weight…” The point being that Android phones don’t differ on the OS, and most don’t have much difference in their brands, nor on their phones looks/size/weight.

          1. Defining the exact product mix is a routine part of product design. It’s not differentiation per se because each of the individual items is widely available, it’s only how you match them up that changes, and any other OEM can do the same. There’s no exclusivity to it, it’s only differentiation in the same sense that we’re all unique.
            One example: make the phone 2mm thicker and with “only” an HD screen instead of Full/Quad HD, so that those hellish days you’ve got to get up a 4 with no hope of laying back down before midnight aren’t further complicated by your phone dying on you + a permanent hunt for a power outlet. Other example: give it a SD slot so you can have tens of films/series and thousands of songs to choose from on long plane rides, instead of having to guess what you’ll want beforehand + load it up as part of your trip preparations.

            Android phones *can* differ on the OS, some do: Samsung’s multiwindows, Huawei’s post-install per-app permissions and Apple-like “all apps must be on a home page”, everyone’s custom UIs. The branding does matter too, for some reason people think Sony has better service and support, and it certainly has more brand recognition than Asus Archos and Alcatel (who make this season’s best entry/mid-rangers). Ditto the design, glass phones are still a thing, Samsung chose to bling it up with the S6…

          2. I would say Brand matters the most in the minds of most consumers.

            Isn’t this exemplified in the case of Android handsets in the US? From your account, the S6 is nowhere near being the best android flagship at the moment (performance issues, lack of SD slot, non removable battery etc) yet the S6 is currently the most popular Android flagship.

            To me that makes it obvious that consumers favour brand above specs.

          3. You misread
            – the part about performance: the GS6 is the only flagship not dependent on Qualcomm’s problematic current lineup, it uses Samsung’s own SoC. It mostly leads benchmarks, including iDevices ( http://www.anandtech.com/show/9146/the-samsung-galaxy-s6-and-s6-edge-review/5 )
            – the part about battery, The issue is not so much that it is non-removable, but that it won’t last a big day of intensive use. Most phones have the same issue, so users are probably just dealing with it.

            Features-wise, the GS6 does sport the best screen and arguably the best camera currently in mobile devices…

            I’m sure branding plays a role. Design too, and though not to my own taste the GS6’s is mostly liked, and even more so GS6 Edge overpriced curves.

            I’m not sure which of the above drives/prevents purchases, I’m sure it varies by market segment though. Plus the competition plays a role, and on the Android side of things the current line is mostly weak, sellers are probably fighting against “do nothing”.

    2. “I’m not going to buy a flagship android phone because of the overheating Qualcomm 810 chip” is not something that 99.9% of US consumers will ever contemplate saying, let alone comprehend.

      1. Let’s put it this way: all reviews point out that this year’s 810 flagships don’t perform any better than last year’s.
        Sure, the peripherals (screen, camera…) haven’t stopped improving, but for gamers for example, upgrading this year makes no sense.

  2. Interesting observations Jan – do you think the slowdown in the first two quarters is great enough to actually represent a shrink in U.S. Smartphone sales? Or is that unlikely?

    1. As I pointed out above, at least some of the carriers have a good chance of seeing a bigger second half, as a chunk of their subscribers on 18-month upgrade plans become eligible to get new phones. But I wouldn’t expect 2015 to be bigger than 2014, which was an unusually big year. We might see a slight decline, but it’s too early to tell.

  3. Wondering about consumer appetite for on-demand upgrades. How often does one really need to upgrade their phone and all the hassle associated with it? In this recent Fierce Wireless article Chetan Sharma believes upgrade cycles are lengthening. http://www.fiercewireless.com/story/analysts-samsung-htc-and-oems-general-are-losers-shift-equipment-installmen/2015-06-30?utm_content=buffer38912&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

    “When people spend $600 to $700, they are
    not in the mood to upgrade every year,” independent wireless analyst
    Chetan Sharma told Bloomberg. He said that some price-conscious consumers
    are starting to buy new phones every 20 to 24 months instead of every 15 months
    when carriers subsidized phones. Moving to EIP programs lets carriers cut subsidy
    costs from their balance sheets and book more equipment revenue, even if they
    are discounting service revenue.

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