The next billion phone users will be buying $10 smart feature phones, not $1000 iPhones

Smartphone sales plateaued in Q3, down 9% since Q3 2017’s peak of 1.55bn, as the chart shows.  But the bigger threat from smart feature phones – now retailing for as little as $11 – continues to grow as Reliance and Vodacom launch new models in India and Africa.

Smartphone sales are also seeing important shifts in market shares:

  • Samsung has never recovered its 32% share in 2013 and is now around 21%
  • Apple’s share has slid gently downwards from 18% in Q4 2016 to 12% today
  • Low-cost Chinese companies, particularly Huawei, have been the big winners

The Top 3 Chinese companies’ share has nearly trebled from 12% in 2013 to 34% today.  And Huawei has gone from just 5% in 2013 to 18% in the same period.

This has important consequences, and not just for the smartphone market.  President Trump has been attacking Huawei on grounds of national security, but consumers outside the USA – where Huawei has only a small presence – clearly like their phones. And it is hard for European or other governments to ban Huawei from major telecoms contracts, if their citizens are happily using Huawei phones.

This may, of course, change if Huawei continues to lose access to the latest Google versions of Android. But for the moment, at least, the US pressure has fired up nationalist support in China itself, where its market share reached 42% in Q3. Apple, meanwhile, saw its Chinese market share fall to just 5% in Q3 – a far cry from the days when it was the No 1 aspirational buy.

Apple’s issue remains its decision to focus only on the high end of the market. This worked well when it was perceived as having the “best phones”. But today, aside from Apple aficionados, it is hard to find many consumers who believe Apple offers features that other phones lack. And on that basis, it makes little sense to pay the vast premium being demanded for the brand image.

The writing has been on the wall for smartphone pricing for some time, as the Statista chart confirms.  The average global price peaked as long ago as 2011 at nearly $350 ($400 in $2019).  Since then, it has almost halved in inflation-adjusted terms to $215 today.

As I noted back in 2015, when Apple was riding high, it was inevitably going to have to introduce cheaper models to maintain market share.  But instead it chose to “double up” on the luxury end of the market, putting profit ahead of volume.  Last year’s decision to stop reporting unit sales for its key products was therefore no great surprise, given that no company wants to be always reporting bad news.

In turn, of course, this has driven a growing disconnect between the stock price and Apple’s revenue growth, as the chart shows. Between 2016-2018, they moved in line in terms of percentage change. Revenue has flatlined since Q3 2018’s peak of $266bn, whilst profit has fallen 3% due to declining iPhone sales.

But investors continue to bid up the stock price from its low of $142 at the start of the year to $260 today. Technical indicators confirm it as a ‘strong buy’, but as common sense would suggest, also warn that the stock is highly over-bought:

  • Of course, Apple might be able to repeat its iPhone success in its new target areas of wearables and services
  • But its decision to undercut the $1099 iPhone 11 Pro Max with a $699 version suggests volume is still important after all

One day, as I noted back in August, investors may start to realise that low cost smart feature phones with a 4G connection are the new growth area.  Reliance’s Jio service is now offering them in India for just Rs 800 ($11), half the original 2017 launch price, whilst Vodacom South Africa is also offering them att Zar 299 ( $20).

The next billion users are more likely to be buying these than iPhones. Suppliers to the industry might want to rethink their current strategies.  At some point, perhaps not too far away, consumers in western countries might also start to realise these can provide most – if not all – of the features that they really need.

 

Smartphone sales continue their decline, whilst $25 smart feature phones open up new markets

Global smartphone sales have now been falling for 8 consecutive quarters, since Q3 2017. They are now down 9% from their peak, as the chart shows, based on Strategy Analytics data.  As always in a falling market, Winners and Losers are staring to appear:

LOSERS

  • Apple’s market share fell to its lowest level for 10 years at just 11%; revenue and profit are falling
  • Samsung’s Q2 profits fell 56%, hit by Galaxy Fold problems plus Japan-Korea and US-China trade wars
  • Smartphones themselves are losing ground to smart feature phones that retail for just $25

WINNERS

  • China’s Huawei, Xiaomi and OPPO now have a combined 35% market share, double their Q2 2014 share
  • Huawei’s Operating System is being readied to compete with Android, as the US-China trade war continues
  • 85 million smart feature phones, developed for Reliance’s Jio telecom company will likely be sold this year

As discussed here before, the Western majors have failed to recognise this paradigm shift in the market.  Cash-strapped consumers are no longer prepared to pay $1000+ for the prestige of an up-market brand, as analysts IDC note:

“A key driver in Q2 was the availability of vastly improved mid-tier devices that offer premium designs and features while significantly undercutting the ultra-high-end in price”.

President Trump’s new China tariffs will, of course, create further problems for Apple and Google as these will:

  • Push up prices in the US domestic market and hit consumer demand in the critical Thanksgiving/Christmas period
  • Galvanise Huawei’s development of its new Operating System – helping it to become a major competitor in the global market

COMPANIES ARE FOCUSING ON THE WRONG MARKETS

But the really critical issue for most smartphone sellers is their continued focus on the Wealth Creator 25 – 54 age group. This was a great strategy during the Boomer-led SuperCycle, as there were vast numbers of Western Boomers with money to spend and a liking for innovative products. But not today, as the chart above confirms:

  • Increasing life expectancy means the Perennials 55+ generation is now the fastest growing segment
  • There were 500m Perennials in the Top 10 economies in 2000, and their numbers will double by 2030
  • And they represent an entirely different market opportunity

Perennials don’t need ever-more complicated “bells and whistles” on their phones.  They just want the basic features, clearly laid out. And they need their phones to be affordable, as their incomes decline as they move into retirement.

Equally important is the other major untapped market for growth –  the 3.4bn people in the world who currently don’t own a smartphone and can’t afford one.  As the Wall Street Journal has reported:

“Smart feature phones aren’t only inexpensive, but they also have physical keypads that are less intimidating than touch screens for those new to the technology. Meanwhile, their batteries last for days, a bonus in places where electricity is unreliable”.

These phones represent a major threat to smartphone sellers, and their supply chains around the world:

  •  As Reliance’s Jio network found after launching in 2016, millions of Indians could afford its ultra-cheap data plan, but couldn’t afford a smartphone
  • Many people in the developed world, old and young, would happily swap an over-complicated smartphone selling for an average $300+ for a more basic feature phone selling for $25

Already apps such as Facebook and WhatsApp have been modified to work on feature phones, further extending their appeal.  Google has also invested in Hong Kong’s KaiOS, which makes the operating system most widely used in feature phones.

The Orange network is also starting to realise the potential. It is rolling out cheap data services on the Jio model in the Ivory Coast, and plans to extend service elsewhere in Africa and the Middle East. Meanwhile Indonesia’s WizPhone is about to offer a phone for $7, and is planning a launch in Brazil.

As the world moves into recession, losing companies will stick their heads in the sand. They will hope central banks somehow find a way out of the debt mess they have created. Winning companies, however, will go back to first base and focus on unmet market needs, such as for smart feature phones, and figure out a way to supply them profitably.