What Mobile Can Learn from the PC Industry
The PC industries doldrums continue yet many seem to be scratching their head as to why. The common answer is to blame tablets. While there is truth to that statement, some important context is still missing from this puzzle. What many don’t initially observe is since about 2007, the PC market, specifically the notebook segment, began to over-index to the consumer segment. Meaning gradually since then, more annual worldwide notebooks sold were to the consumer segment rather than corporate. Note this chart from Benedict Evan’s slide deck Mobile is Eating the World.
During the PCs run when more PCs were shipped to corporate segments than consumer ones, the corporate buying cycle was like clockwork — every two to three years. Refresh cycles were predictable. As the PC and notebooks became more saturated in enterprise environments, the PC run continued as it bled over to the consumer segment. Consumers, who either used a desktop PC at work or had no PC at home started to bring PCs into the home. The observation that gets lost is the consumers who caused the PC to over-index to that segment were not early adopters. If you are familiar with the diffusion of innovations, you know the late adopter parts of the market are much larger in terms of volume than the early adopter parts of the market. As the late part of the early majority and the following segments started buying PCs, we saw growth but more consumer PCs were sold than corporate PCs as a part of the overall mix. The trouble with this, which the past few years of PC decline has evidenced, is the later part of these consumer markets behave much differently with electronics. Many in the early majority, late majority, and laggards, buy tech based more on needs not wants. More to the point, once a product is acquired they generally don’t replace it until it’s “beyond repair”. Technology products’ life cycles are extended when this very large part of the consumer segment gets into the market.
By this time, the market is to the point where it is fully mature and reaching “post maturity”. Around this time as well, costs for components also come down, become mature, and generally can and will last longer. The perfect storm hit the PC industry where a significant part of the install base bought their PCs, and the maturity of the hardware allowed them to last for quite some time, dramatically extending the life cycle of the product for customers who won’t replace it until it breaks. This is where we are today. The PC segment has reached a fully mature replacement market and growth is declining. So what observations from the fully mature PC segment can we glean for mobile?
While the PC is not a “one per person on the planet” product the smartphone, for the most part, is. The total addressable market is significantly larger. The PC install base will settle around 1-1.2 billion while the smartphone install base will settle around 4-4.5 billion.1 However, we have an install base of around 1.5-1.6 billion smartphones now with the bulk, 70% approximately, in full replacement markets. Because of this, I divide the smartphone market into two segments. There is a mature segment, rapidly going to post maturity, and there is an immature segment which is the quarter to half a billion first time smartphone owners coming on each year for the next few years. The two largest markets from an install base standpoint of smartphones are China (approx 525m currently) and the US (approx 225m currently. Per my PC observations I’ll focus on these two markets.
This market has been a defining one for mobile in many of the same ways it has for the PC. With smartphone penetration nearing 70% in the US, we are well into a mature replacement cycle market. But to get to where we are now, we have a huge install base of the late state early majority, late majority, and laggards who are in the market and will increasingly become so during 2014 as we drive saturation to 80-85%. As in the PC space, we are already seeing the “I’ll replace it when it dies” mentality impact smartphones. This is stalling YoY growth, and making it harder for the likes of Apple and Samsung to drive the masses to their latest devices. While the refresh rate of smartphones will remain approximately 24 months for a percentage of the market, I sense there is a growing percent who will wait a bit longer. Perhaps 2.5 years will be more common rather than two or less as it will be for some segments. The issue? Are there more people who will need to be persuaded to upgrade than there are those who will do it routinely because of their love of technology? This last bit is tricky but there is hope. For example, it is for the reasoning I just laid out that the time is right for Apple to release a larger screen iPhone. That, plus perhaps longer battery life, enhanced security thanks to 64-bit, and a few other simple features, could significantly move the needle for Apple in the US. Note this ChangeWave survey indicating nearly half of all smartphone buyers who are intending to purchase a smartphone plan want to buy one with a screen size around 5″.
The US is an iPhone dominated market with Samsung gaining ground, little bits at a time, with each new Galaxy release. Both need to start moving the needle or we will continue to see refresh rates extend. Every PC OEM we speak to regular beats to the mantra of “give them a reason to upgrade”. This is a key theme for consumer markets and applies to PCs, smartphones, and tablets, once they reach maturity.
China is crazy. It is unlike any market I study in depth. The swings of market share as a percentage of quarterly sales by different vendors is staggering. Xiaomi, in less than two years, is shipping more smartphones than Samsung each month. China is saturated with half a dozen and growing key Android OEMs all going after each other with new device releases every quarter or so. Could you imagine in the US having six to eight smartphone manufacturers releasing new devices every quarter or even twice year? It would seem like overkill but in China? It isn’t. Selling a few million each quarter is being fueled by rapidly releasing hardware. The average smartphone lifecycle in some parts of China is 11 months and in upscale areas it is seven months.2 While the smartphone market in China looks and feels mature, and in some cases even post mature, it really isn’t. While Xiaomi is all the rage, we have no solid data what Xiaomi’s loyalty rates are. Are consumers jumping to different brands just to try the hot thing every year? What are fads vs. what are sustainable trends is much harder to predict in China.
While I sense many of the same PC market observations apply to mobile in the US, they are not applying to China. Significantly, China has more smartphones than PCs and is largely now a mobile first (and for a growing percentage, mobile only) market. All of this is to say mobile can learn nothing from the PC segment for China, which is a point in itself. Perhaps the strategic dynamics of a mature market, and eventually smartphone saturated one like China will behave fundamentally different than the US. If this is true of China will it also be true of India (where PC penetration is less than 10%), Indonesia, and Brazil? I suspect this is the case but we are in such early days it is hard to tell. Which makes it fascinating.