The once often discussed smartphone market has certainly lost its luster in the recent months. There aren’t too many interesting observations to make at the moment, but there is still one major theme I think is worth letting sink in as we may see this same movie play out again in the future.
As an analyst, one of the things I constantly watch for is consistent patterns in business, a market, or within an industry. The observable and repeatable pattern of a market shift from hardware, to software, then to services (which I’ve written about before) remains a baseline understanding. Related to the smartphone market, I think another set of fundamental observations have emerged that are likely going to keep repeating for the foreseeable future.
Thanks to the PC/Mac market, we have been able to observe the patterns from that categories maturity and now see similar patterns in the smartphone market. One of the patterns we hypothesized was the smartphone would follow a similar pattern as the PC market primarily, that the smartphone market would see a bit of a slowdown just after its peak year. As you can see from the chart below, the patterns were quite similar, and both markets had a slight dip after their peak and then began to stabilize.
What was predictable in both markets, was when the hardware reached a certain point and innovation slowed down, refresh cycles began to elongate. That is the sole reason for the decline as it shows up in the trend lines once consumers en masse start upgrading their devices more slowly. Some refer to this as the good enough phase of a product cycle which merely means the product is perceived as good enough and the newest features are not as much of a draw. We are entirely in this phase with both PCs and smartphones.
Another observation, I found particularly interesting, is in both the case of the PC and the smartphone markets ASPs began to rise at about the same time they both peaked and then stabilized. Meaning, an ASP rise is an early predictor that a category is near its peak. Having studied markets in their mature and post-mature phases this ASP rise coinciding with the maturity of a market makes a great deal of sense. In mature markets, consumers become acutely aware of their needs and wants, and this mindset is the basis for their decision making filter.
This refining of their needs and wants causes them to be much more aware of what draws them to a new product. This is the primary reason why when we survey consumers on what causes them to start to look to upgrade a PC or Smartphone the dominant response is “when it is old and/or slow.” The mature consumer mindset becomes harder to attract to the newest innovations because what they currently own is good enough for their needs.
In the case of both PCs and Smartphones, it took a good many years for the mature market mindset to set in. In the early phase of the market’s growth, new innovations remain highly attractive to new and existing customers. The ramp in said categories growth is due to both more frequent replacement of devices and the acquisition of new users.
This cycle can be long or short depending on competition and the pace of innovation, but the inevitability of predicting the category slowdown comes when the observable pace of innovation slows down and becomes more incremental. One of my favorite sayings, when I explain this in presentations on the market, is the purpose of innovation is to shake off the crust of contentment in the eyes of consumers. Consumers easily fall into a content mindset which puts the burden on the innovator to keep pushing limits if they want to maintain a growth cycle and acquire as many customers as possible.
In both the PC and Smartphone markets innovation has become incremental. The PC market stabilized after the initial decline, and it’s reasonable to assume the smartphone market will do the same. Even as we come to the cusp of things like foldable displays, and other new form factors, I don’t believe we will see the market turn to growth overall. There will be pockets of growth, but the market itself will remain likely flat.
My advice to device makers in this phase is always to focus on pain points. It is much easier to keep solving pain points than try to focus on pure innovation/invention. The latter may happen as a result of solving a pain point, and in that case, it will make rapid adoption much easier.
I call out these observations to both make points about these two markets, the PC and the smartphone, but also to lay a foundation for a set of observations that help us become more knowledgeable about whatever next new thing may come to market. For example, let’s say augmented reality glasses become a thing. If so, we can expect the market cycle to be similar to both what we observed in PCs and smartphones and will, therefore, be more aware of the opportunities and traps related to the market. We will also be on the lookout for the different developmental phases of the market and be much more informed about what to watch for as it reaches maturity.
The nature of competition changes dramatically at these different market phases, which is why the observations become important from a strategic perspective. While we can’t predict the future, we can see the patterns in history that give us the blueprint for future market directions.