Mallinson: How to succeed in smartphones as ASPs decrease

Keith Mallinson

This article on smartphones is the first in a three-part series examining market growth in the face of what I expect will be declining global average selling prices (ASPs) for devices and mobile operator services. These developments are coming after the boom in smartphones and mobile broadband, which was led by consumers with relatively high incomes in developed nations.

With smartphone saturation approaching in developed markets, global growth will continue to be substantial, but at lower prices for smartphones in developing nations and with additional new types of devices including wearables, and those providing machine-to-machine connections worldwide. New adopters and additional devices will also tend to generate less in service revenue than existing connections.

Fundamental changes in demand will be very disruptive to smartphone suppliers. Smartphone vendors that want to succeed will need to make significant cost reductions while also adapting with new product offerings, changes in supply chains and product distribution.

Subsequent columns will focus on new types of devices and resulting developments in use of operator services.

Golden age as expected
As I predicted four years ago, the mobile phone market is enjoying its golden age with value growth as consumers replace their basic phones and feature phones with smartphones including mobile broadband. After decades of steady declines in mobile phone global average selling prices from thousands of dollars for the first analogue handsets in the early 1980s down to around $130 (€102) by 2009, global handset ASPs have surged by more than 35 per cent to $180 since then. This increase is due to the much higher proportion of smartphones in the mix of devices sold. As I explained in my column here last month, while this product revolution has taken a heavy toll on leading incumbents including Nokia, Ericsson and Motorola that have exited the market, handset revenues have doubled from $172 billion to $326 billion and profits have tripled to $51 billion in the five years to 2013, according to Credit Suisse.

Strong growth in unit sales will continue, but revenue growth will be less pronounced and pressures on profit margins will intensify because ASPs are set to resume a downward trajectory within the next year. This is because in the future a rapidly increasing proportion of smartphone sales will be to relatively low-income consumers in developing markets. They will be supplied with significantly lower-priced smartphones from highly cost-focused manufacturers.

From twin peaks to single
Chipset vendor MediaTek describes the mobile phone market as has having had a two-humped profile, with a relatively large number of people paying low prices for their basic phones and feature phones, and a rather smaller number of people paying high prices for smartphones.

In developed countries, smartphone saturation is starting to occur in markets where consumers are largely replacing existing smartphones. Therefore, the major growth opportunities lie elsewhere in developing regions where income levels are much lower but rising. Market research from Gartner reveals that the majority of handset sales--around one billion of them per year--are already smartphones. Most people in many developed nations and increasing proportions of people in developing nations--where the vast majority of the world's population live--are also buying smartphones instead of more basic handsets. Citing OECD and Yankee Group sources, MediaTek forecasts a middle class increasing from 1.9 billion people in 2009 to 4.9 billion in 2030 on the basis of rising disposable incomes. Accordingly, MediaTek predicts massive growth for a "super-mid market" of smartphones selling at much lower prices than on average today.

 

 

 

 

 

 

 

 

 

Yet more new challengers
New market entrants are exploiting this opportunity by taking market share from incumbents and eroding their profit margins by driving down prices. Chinese vendor Xiaomi offers high-specification smartphones, such as its Mi 4 including a Qualcomm chip implementing LTE and with a 2.5 GHz quad-core processor, at between half and two-thirds the price of smartphones with similar specifications from Apple and Samsung Electronics. Xiaomi has minimised costs by various means including extensive use of the online sales channel.  

Android One helps manufacturers, in India for example, to produce smartphones for around $100. In comparison, the market for basic phones for the masses in developing nations was created one decade ago by slashing manufacturing costs and pricing at around $50, and then even less for entry-level devices. However, whereas it was mostly large incumbents such as Nokia and Motorola who benefited a decade ago, it is relatively new entrants including Micromax, Karbonn and Spice who are now first to market with Android One smartphones. Google's Android One team is working closely with component suppliers to offer reference designs which enable any smartphone manufacturer to produce high-performance products at low cost. 

Apple is no longer a newcomer and Samsung is also under particularly severe competitive pressure as an incumbent. Apple's smartphone market share peaked above 20 per cent in 2012 and has fallen to below 15 per cent in 2014. Market leader Samsung is also suffering similar market share losses as unit sales have decreased for the first time and Samsung's profit plunged 60 per cent year-over-year in the latest quarter as a result of declining performance in smartphones.

Long-term success and survival
The highly-differentiated and proprietary nature of Apple's smartphone ecosystem will enable it to continue to flourish for a while with strong profit margins despite a withering smartphone market share. However, if it aims to continue to grow revenues, profits and increase shareholder value, Apple must significantly expand the range of its products downwards to lower price points, as it is already doing at the high end where it is plugging gaps in its product portfolio by adding larger screen iPhones and smaller screen tablets in response to competitors' successes.

Samsung is in a much more difficult position because it is so hard to differentiate in the standardised world of smartphones and the Android ecosystem. Samsung's internal supply chain is still beneficial, but the trend toward vertical disintegration, availability of reference designs and the commonality in component supply, as well as operating system and apps store promoted by Google, is lowering entry barriers, and squeezing margins by ensuring lower smartphone prices all around.

With the rise of the super-mid market, the changing nature of competition, Android's dominance increasing from 66.4% in 2012 to 78.4% in 2013, and rising higher in 2014, success or even survival will increasingly be cost-based for smartphone manufacturers.

Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. Find WiseHarbor on Twitter @WiseHarbor.

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