Have we reached peak smartphone?
The International Monetary Fund’s latest report on the world’s economic outlook indicated that the global market may be saturated.
While smartphone sales totaled 1.5 billion units last year, shipments declined for the first time ever on record, according to the IMF’s report released Tuesday.
Global shipments last year slipped 0.1%. While that’s a tiny number, it still represents the first ever decline. And in the US, smartphone shipments grew just 1.6%, the smallest increase on record.
Smartphone sales and production amounted to $3.6 trillion of the global economy in 2017, and represented 5.7% of Chinese exports. In Ireland, where Apple’s (NASDAQ: AAPL) European operations are headquartered, iPhone exports alone made up a quarter of the country’s economic growth.
The pocket-sized handsets have become the primary computing platform for billions around the world, and have completely supplanted personal computers.
Many in the smartphone business saw in last year’s release of Apple’s tenth-anniversary iPhone X and Samsung’s Galaxy S8 the beginning of a new “super cycle” of upgrades. However, consumers have indicated that they don’t need to upgrade their smartphones every year as they are no longer locked into two-year contracts and because phones are sturdier than they used to be. And beyond that, the new updates to these gadgets haven’t been as tantalizing to consumers as the industry anticipated.
In 2015, consumers in the US replaced their phones—on average—after 23.6 months, according to research firm Kantar Worldpanel. By the end of 2017, we were holding onto our smartphones for 25.3 months. And it’s expected that people will continue to hold onto their phones for longer, never mind the edge-to-edge screens and better cameras with each new release.
On Thursday, Apple reported its first-ever holiday quarter decline in sales of its iPhone despite the debut of its buzzy iPhone X, dipping from 78.3 million units to 77.3 million. This could just be a reflection of the fact that the company had one less week—13 weeks vs. last year’s 14 weeks—to market its latest models. But Apple’s results clearly communicate that the “super cycle” in phone upgrades isn’t going all that super.
Tim Cook, Apple’s CEO, said on the call with analysts Thursday, said that the company doesn’t “overly fixate” on how long consumers go between new smartphone purchases. “We’re thrilled with the reception of the iPhone X,” he added.
Even if some investors aren’t thrilled about it, a longer phone life cycle is a compliment to Apple and Samsung as it is a sign that their products are reliable and have become increasingly less susceptible to wear and tear.
And a slowing upgrade cycle doesn’t necessarily spell disaster for these two dominant smartphone producers. For one, the companies are now charging more for their phones. Apple’s $1,000 iPhone X is a good example. Higher prices are exactly why Apple’s iPhone sales figures were still up in the company’s earnings report despite fewer units sold.
The companies are also selling more accessories for their phones like Samsung’s Gear VR and Apple’s HomePod. And Apple is investing heavily in services, like Apple Music, that consumers will pay for over time. Apple also just announced that they are working on a new subscription-based news service.
And as consumers hold onto their phones for longer, they will require “tune up” services that these companies can charge for. Just like cars, phones need hardware and software services as they age. Apple offers tune-ups at its Apple Stores, and Samsung is experimenting with service trucks.
While the upgrade cycle is getting longer, and making the industry look much more like the laptops and PCs sector, there’s likely a limit to how long people will hang on to their phones. There’s room for innovation in the space, and with each groundbreaking new feature—say a major leap in battery performance or phones capable of 5G service—there will be wild surges in the replacement cycle.
For Samsung and Apple, smartphones will continue to be a major market for years to come. But as sales slow, the success of these companies will rely more and more on the services they offer rather than on the hardware they produce.