Smartphones have reached an interesting point in their history. When I say this is now a mature market, I mean two separate things: first, the technology has matured to the point where devices are “good enough” and second, the market is becoming fairly saturated in developed economies. Though it is clear these two forces will have an impact, it’s not yet clear exactly what that impact will look like. However, it might be useful to look at the adoption curve for another technology which saw a rapid ascent about thirty years earlier – the CD.
CD adoption was rapid but misleading
What’s interesting about CDs is growth in unit sales was very rapid from their arrival on the market but it was also misleading. The chart below shows US unit sales for various music media from 1984 to 2012, based on RIAA data. I’ve included cassette tapes, CDs (both albums and singles), and downloaded albums and singles, but not vinyl (which was in sharp decline by 1984):
Cassette sales didn’t peak until around 1990 (years after CDs first came on the market) but they peaked at around 450 million sales per year, compared with around a billion sales per year for CD albums and singles combined. Vinyl sales had earlier peaked at around 500-600 million sales per year for singles and EPs/LPs combined. CD sales were measurably higher at their peak than either of the two predecessor media. Why? I’d argue it was a combination of two things: the music industry saw a resurgence of sorts during the 1980s and 1990s, thanks to the rise of MTV and a variety of other factors, so there was some underlying growth; but secondarily, CDs sales benefited from the large number of people who upgraded their existing music collections to CD in a way they didn’t when migrating from vinyl to cassettes.
This is important because it artificially inflated expectations of how large the music industry would be going forward. I’d argue there was a bulge in sales in the 1990s caused by this media migration and lots of re-buying of the same music on a new format. Of course, the next medium to come along was digital sales and, although total unit sales were actually larger than CDs, the vast majority of those sales were of individual songs at 99 cents rather than albums at $10 or more. Why the dive in album sales? Simple – the new format was compatible in an unprecedented way with the old format – computers with CD drives could “rip” the contents of CDs and create digital files that could be played on those computers, iPods, and MP3 players. And of course, first piracy and then music downloads quickly eroded CD sales too, leaving the music industry at significantly lower revenue levels than in the peak of the CD boom.
The smartphone parallel
So far, so straightforward. But what does this have to do with smartphones? The parallels clearly aren’t perfect, but I believe there are some similarities between the two markets and their behavior which are worth drawing out. Critically, I’d argue the inflated expectations of the size of the music market that were created by the CD boom have a parallel in today’s smartphone market.
The reality is that smartphone sales each year are composed of two components: those buying their first smartphone and those upgrading from an existing device. We’ve seen very healthy smartphone sales globally for many years now and, for much of the last 15 years, we’ve seen very healthy year on year growth as well. In some ways, though, we’ve been in the CD era here and the past may well be a pretty poor predictor of the future.
What’s critical at this point is the maturity I mentioned at the outset is beginning to affect the pace of sales among both groups of smartphone buyers. In the early years of the smartphone market, first-time buyers far outweighed upgraders and were a very healthy source of growth. Lately though, this source of sales has slowed to a trickle as the vast majority of people who will ever buy a smartphone in markets like the US, Western Europe, Japan, and South Korea already have one. However, the second source of sales is also showing signs of slowing, as people hold onto their perfectly adequate phones rather than upgrading them every two years as they once did.
As this happens, we’re entering a period analogous to the early 2000s in the music industry. The major drivers of growth in the smartphone market to date have been essentially temporary in nature, Now we’re in an era characterized by dramatically slower growth, even declines. This will be particularly felt at the high end of the market, where penetration is nearer saturation on a global scale, and where the financial incentives to hold onto phones longer are that much stronger. We may well already have seen the peak for annual smartphone sales and almost certainly have for premium smartphones. That presents interesting challenges for companies like Apple or Samsung, who target the high end of the market either heavily or exclusively. As we approach Apple’s iPhone launch event next week, Apple should be thinking very hard about how to ensure existing iPhone owners see compelling reasons to upgrade and non-iPhone owners are convinced to switch.
Counterintuitively, around me Premium buyers update more than Midrange buyers, whether for fashion (need the latest) or functional (need the best) reasons. Low/mid range buyers don’t care about either I guess, and will run their phones into the ground.
That’s anecdote though, is there data either way ?
Also, I’m a bit doubtful about 2 things about the CD vs Phones analogy:
1- the analogy between media and a device. I’d even question that analogy for apps vs media, even though both are, broadly, content: I’m guessing apps remain useful and relevant and are a lot less fadish than music.
2- CDs got superseded by Downloads and then Streaming. I’m not seeing anything about to disrupt phones ?
I’m still sticking to handbags for now :-p
First, the music buying population was a lot bigger in the late 90s compared to the late 70s. At the very least you should have done a bit of math and given figures as purchases per capita.
But even more importantly, There were massive changes in the music retail and radio businesses between those two eras that made the market for vinyl in its heyday very different than the market for CDs in their heyday (speaking here, as the article does, only of the US music market). The most obvious transformation between peak vinyl and peak CD was how Indie radio stations that played a variety of music selected by individual DJs were bought out by conglomerates, and the human DJs were replaced by pre canned sets of top 40 tracks selected by a committee of suits at corporate HQ. Once all the radio stations started to sound the same, the only way to get access to new and interesting music was to buy it. So CDs became more popular than vinyl.
But the biggest mistake seems to me that you try to draw lessons about phones (a non-consumable good) from the sales history of music (a consumable good).
We buy new phones when the old ones cease to serve the purposes we expect of them (they break, don’t have a desired feature, or become displeasing/worn and ratty). We buy new media (music, video, books, magazines) because as humans we have a hunger to hear new songs and be told new stories. Re-experiencing an old song or an old story gives us pleasure, but it is of a different kind than the pleasure given by hearing a new song.
Music for sale, as opposed to performed, is an odd duck. It looks nonconsumable, but in practice it’s usually consumable with rare exceptions. Yes, we put the new music in our permanent library of songs. But after the first few listens, how often do we replay it? Usually only a tiny fraction of music purchases are truly permanent, and the rest get listened to for a while and then sit on the shelf, neglected, until it’s time to make room for new purchases by selling some of the old stuff that has lost its appeal.
Given all that, I am very dubious about this article’s foundational comparison.
I’m not sure this non-consumable vs consumable distinction you point out between phones and music is valid. The same reasoning you use to point out that music is really consumable can be modified to argue that phones are consumable too. With smartphones though, the analog to losing interest in music that one has purchased is the technology falling into obsolescence. It is obsolescence that ‘consumes’ the phone and eventually triggers the next smartphone purchase.
The comparing CDs and smartphones are actually quite valid in that both products start out with an extended bang (CDs replacing vinyl/cassette catalogs, smartphone ownership building out) that will eventually subside and level out to more stable levels.
The difference I think is that CDs were eventually superseded by downloads but I’m not sure something out there will replace smartphones (i.e. pocket sized computers) anytime soon.
Media devices became a commodity. A distribution platform for the services will become a commodity in the future. Why not luxuriously pattern/augment media for conglomerates and centigrade/VR for a conscientious public to wide the margins?
Certain consumer products, the ones that people invest their identities in such as clothes, cars, fashion accessories, bifurcate into a commoditized segment and a premium segment. So far, by all indications, smartphones fall into this category.
It’s starting to become clear what’s happening. Whether it’s Google Glass, smart watches, or driverless cars, Silicon Valley is desperately seeking some new reason to justify all of the investment dollars and bloat that it’s been swimming in, because existing hardware and software have reached saturation and are leveling off.
I think there is a major correction coming to tech, if not a crash. All of these new products have flopped. All of the low-hanging fruit of smartphones and apps has been picked clean, and at some point all of the unprofitable ventures sustained by massive investments in vapor are going to have to pay the piper.
and 640k is enough for everyone 🙂
Sure, Silicon Valley these days is running as much on the promise of devices, services, sales and profits to come as on current business. That doesn’t mean that some of it won’t actually happen, though nodoby knows which.
What’s coming, or underway, is a shakeout not a crash. As the technology matures, large-scale execution, not innovation becomes the critical skill needed for a company to survive.