I believe we are in new territory for smartphone manufacturers. Although its true that there are still many people on the planet who do not yet have a smartphone, the reality is that the most mature markets are reaching the saturation point where most consumers–who want and value smartphones–have one. Which means that the battle for the bulk of mature market consumers are now for up-graders and no longer intenders. This changes things quite a bit.
This would explain the concerns over smartphone growth slowing in 2013. For several years the smartphone market was growing at over 50% a year. This year the growth is estimated to be around 30%. I think a better way to look at the growth is to look at the rate specific smartphone price ranges will grow. I think parts of the market may grow more than 30% this year. However, I am not convinced it will be the flagship top-tier devices that grow at faster paces this year but the more second tier devices. Of course this would seem logical given the growth in emerging market but I think this will even be the case in markets like the US and Europe.
If true this brings up an important observation about devices like the Galaxy S4, the next iPhone, and any other flagship device. And that observation leads me to the title of this column.
Good Enough
I think we are getting extremely close to a good enough sentiment by mass market consumers toward their current devices. The quality of most flagship phones and even many tier two phones has been continually raising to the point where they are lasting longer and meeting the simple needs for the mass market.
We have been living in a good enough paradigm in the PC industry for years now and consumers are consistently holding onto PCs longer because they meet their needs and they do not feel an urgency to upgrade their notebooks. I think the smartphone market may be in a similar situation.
The Burning Question
At an absolute fundamental level the biggest challenge smartphone makers face in 2013 is convincing consumers they need to upgrade their smartphones this year. The biggest part of the consumer market is not the early adopters but the early and late majority. These groups think very different about technology and what percentage of this market will routinely upgrade every year or even every two years is a big question mark.
When we talk with consumers and gather our market insights into this specific question, we continually get a sense that consumers are happy with even their later generation devices and don’t necessarily feel the need to rush out and upgrade their devices even if they are eligible. It appears that a growing majority believes their current devices are good enough. It doesn’t mean they won’t upgrade, just that there is no sense of urgency.
This brings up interesting implications for companies like Samsung and Apple. Both companies have garnered a large install base for their devices over the past few years. There will certainly be a significant number of customers who will be eligible in 2013 for upgrades but will they be compelled to upgrade at all? This, I think, is an interesting question.
With regards to the S4 I have my doubts. Samsung will no doubt sell a ton of these devices but will it sell better than the S3? I’m not convinced, and I am not convinced for one primary reason. The S4 runs the dangerous risk of over serving the market needs with the key innovations and features they added.
Horace Dediu tweeted out something I thought was very interesting last week.
Market over-service is a far more dangerous mistake than under-serving it.
Overserving the market means adding features and functions the mass market does not have a perceived need for or is not ready for. Often times when an offering is complex, it is hard to understand. This goes back to the point of what is good enough in today’s market and what is overkill. These are questions to wrestle with.
The S4 has some cool features. Once people get their hands on them we will see if they are just cool or actually useful. Cool and useful are often two very different things. What Samsung doesn’t need with the S4 is consumers hearing the pitch and wondering “why do I need that?” What if the S3 is good enough?
The S4’s biggest challenge will be to address the question in the minds of consumers as to “why should I upgrade?”
Of course Apple will face this question as well. We have seen Samsung’s flagship device and we are yet to see Apple’s. I think this is an interesting year for Apple. I’m not sure Apple has ever found themselves in a position in the past decade with such a strong competitor as Samsung, who is willing to spend more money than them on marketing to convince the world to buy into the Samsung brand.
This is perhaps the first year where I think Apple needs to do more with the next iPhone than the traditional strategy. For the primary reason that the iPhone 5 in its current form is good enough for the masses. If the next iteration of the iPhone does not offer either some entirely new innovation or feature not found on the iPhone 5 that provides an answer to the upgrade question, then I fear consumers who are in the market and eligible for the upgrade may just end up buying the iPhone 5 at a discounted price. Even if that happens it still means healthy sales for Apple but it begs the question about the necessity of a new flagship device it isn’t going to make a compelling upgrade case.
The question will be what features are worth a $100 premium in the good enough market that we find ourselves in. There are fascinating dynamics at play in the market right now from my viewpoint. I do believe that every smartphone maker is now entering uncharted waters due to the saturation and maturity of the smartphone market. It will be exciting to see how these new waters are navigated. I’m glad I have a seat to watch the show.
“Market over-service is a far more dangerous mistake than under-serving it.”
What does that mean?
It means packing features or functions into a device that the market does not need or is not ready for.
So if you’re under-serving the market, at least it will buy your product?
They will buy your current product and wish for your next product. Other way around, they just keep your old product and never mind your next one, next next one, etc. You’re doomed.
Its a statement about not packing too many unnecessary features into the product. Those products run the risk of doing worse on the market than ones that underserve because their value is not comprehended. Think about the Homer Simpson car for example.
That makes it sound like the smartphone and tablet could be setting itself up for the same kind of disruption the PC has suffered to these devices. How much of the things that tablet and smartphone makers are building into their devices are really best handled through these devices?
Before the smartphone and tablet we had nothing else but PCs, and then laptops, to do these things. Now these devices have undermined PCs’ value. What’s next? A “watch”? Glasses? Something else entirely?
Joe
A company has at least two paths. It can:
1) maintain the product’s price by adding features/functions, or
2) lower the product’s price but not add any features/functions
If it takes the path 1, and customers don’t value the added features/functions (which cost the company money to develop and/or adds to the bill of materials for the product), the company opens itself up to being disrupted by competitors with cheaper products that are good enough for the customer.
Apple, by introducing new models while selling older models at new, reduced prices, does both, and disrupts themselves.
I agree that for the built-in functions of a smartphone (email, web surfing, media playing, map/GPS navigation, etc), new hardware has become increasingly irrelevant.
But, for the smartphone app ecosystem, new hardware continues to be relevant. For Apple especially, their app store ecosystem has become a key selling point, and each year’s new hardware enables new, more powerful apps to be made and sold for their devices.
For instance, with games, if we look at ports rather than games original to IOS, many current titles on the app store are ports of cut down handheld console games, or ports of very old (90’s or early 00’s) full fledged games. Old, because the hardware can’t handle running more modern games. But, with every iteration of the hardware, it becomes possible to port more modern games on the platform, and eventually, after a few more years of hardware improvements, developers will be able to port, say, this year’s Xbox 360 games to IOS. Yes, ports are just a tiny portion of the app store’s game selection, but they clearly illustrate the point: that the hardware is not yet fast enough to run modern full-fledged games, but every year it’s getting a bit closer.
Sure, many customers are going to buy older, cheaper hardware this year. But I don’t think Apple is iterating its hardware for them. It’s iterating its hardware in order to ensure that when those customers’ current device eventually die (two or three or four years from now), their app store has so much awesome stuff in it (that will run on any of their then-current phones) that there is no reason whatsoever for those customers to even consider buying anyone else’s phone.
How this is going to play out on the Android side of the fence is an interesting question, though — I guess it comes down to whether or not buyers of flagship android phones are more like android buyers in general (tend not to install apps), or more like Iphone buyers (tend to install lots of apps).
Apple, make a iPod with sleek skinny form factor as the Touch with capability for text and data contract. Plastic’s fine. Killer world phone at $300. Make the iPhone Exec with waterproofing, sapphire and whatever for those that need the full works.
I agree with you that smartphone upgrades are one portion of the phone market, and that a new iPhone needs to have something that people value. But the late majority still has not fully transitioned from featurephones because they are looking for cheaper ways to get data, so there is still a big second portion of the phone market. In the US, the big 4 are pretty much forcing data plans by having fairly crappy phones for those who don’t want a data plan, so the movement of consumers from the big 4 to prepaid is an indication of this. T-Mobile’s plan to switch to unsubsidized and cheaper plans is another indication. This movement has already occurred internationally; the US is “late” because the big 4 networks have nationwide networks and are perceived to have better performance.
For this reason, I think the timing is right for Apple to get a $300-$350 unsubsidized phone on the market. Cricket has shown that the $300-400 gap between an unsubsidized iPhone and a good-enough phone is too large for this late majority. (I don’t think MetroPCS or VirginMobile is doing that much better.) Getting the gap down to $200 could make a big difference. ($200 is the difference today between a base iPhone 5 and a free phone in the subsidized market.) If Apple can find a way to sell an iPhone with 4/4S-performance for $300-$350 (or free subsidized) while achieving a 40% margin, it should.
Bravo!
In the US, since before smartphones, the driver for upgrading phones was “free with 2 year contract”. In the US, the real price of the phone is rolled into the monthly payment. When the contract expires, well you might as well get a new phone and a new contract. If you just let the old contract continue, you just keep paying for the phone you already paid off. It’s like continuing to pay the mortgage on a home you bought when you were young and live in for the rest of your life. It’s fraud, perpetrated by the carriers. They won’t offer you a cheaper plan to use with the phone you paid for.
I believe this behavior will carry over into the smartphone replacement market, especially for second tier phones. It’s free, so why not get a new one on a new contract? That’s good news for the manufacturers.
T-Mobile, StraightTalk, and the others separating the phone phone purchase from the service purchase are the ones to watch. What will their customers do as their phones get old?
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