It appears that Apple has dodged a bullet. As the Cupertino-based tech giant’s latest financial results suggest, the iPhone X – the company’s hero phone – has been selling better than many analysts expected. Still, questions linger whether CEO Tim Cook was too bullish when on Tuesday he brushed away concerns about soft demand for smartphones. After all, a string of the company’s parts suppliers have – privately or publicly – let it be known that order volumes for key components of Apple’s bezel-less phone have been cut back sharply.
In the broader smartphone market, however, the situation looks dire. Last week, Sony flagged a poor outlook for its smartphones; its shares suffered their biggest slump for nearly two years. Sony used to be one of the smartphone big boys, just like HTC, which continues to see its market share plummet. LG, another would-be giant of the smartphone world, has also seen successive quarters of declining sales.
Even the mighty Samsung is struggling. According to Korean media, sales of its flagship phone, the Galaxy S9, are much softer in South Korea than its predecessor, the S8. Since March, the company reportedly sold a mere 707,000 S9s; a year ago, the S8 chalked up nearly 1 million sales over the same period. Apple’s flagship, the iPhone X, apparently had a similarly lukewarm response in South Korea, selling only 475,000 units in the first four months since its November release.
For analysts, there can be only one conclusion: the smartphone upgrade cycle – which is crucial to the growth of technology companies – is rapidly getting longer. “It’s a very big worry for the overall mobile industry that people are slowing down buying handsets,” says Ovum senior analyst Daniel Gleeson.
So is this just a rough patch, or are consumers suffering smartphone fatigue? In many markets, the upgrade cycle was driven by the mobile phone networks, where the end of an 18 or 24 months contract was the automatic trigger for an upgrade to the newest, shiniest phone. Not anymore. There is a “very definite and real” change in consumer behaviour, says Gleeson, who sees smartphone owners clinging to their devices for close to three years.
If this is not a blip but a trend, it could hurt the much-talked about arrival of the next driver for the technology industry: the roll-out of high-speed 5G mobile networks. “It’s something that operators need to be very wary of – as people are upgrading handsets slower, it obviously means that 5G won’t take off as quickly, and that’s a big problem for operators who are investing billions into the buying spectrum, into building new networks, and so on,” says Gleeson.
There is enormous pressure on the R&D departments of mobile phone manufacturers to get consumers excited again. When smartphones first arrived on the market a decade ago, each new generation of devices came with massive technology leaps, from network speed to screen size and quality to the amount of data storage available. Today, it’s difficult to spot the difference between phones from different manufacturers; innovation has become incremental. “The impact of new innovation is becoming smaller and smaller,” says Gleeson. Consumers have become ambivalent to the promises of marketers, and seem to be quite happy with their old phone when their two-year contract runs out. Why should they get a new device, if the old one works perfectly, and the new one doesn’t seem to be that different?
Samsung’s ‘upgrade’ from the S8 to the S9 is a perfect example of this trend, says Ben Wood, mobile market analyst at CCS Insight. “They’ve taken a really great product and made it slightly better,” he says.
The marketers are right: mobile phones are now much more powerful, durable and reliable than just a few years ago. Handsets last longer. Smartphone cameras are now so good that they easily outperform point-and-shoot-cameras and at times rival entry-level DSLRs. Overall, the value of the phone is now in the software, says Carolina Milanesi, principal analyst at Creative Strategies. When manufacturers give you a software upgrade that enhances your experience, you’ll stay with the same phone, because you’re getting the value. That’s true even if you have a cracked screen, she adds, “unless it’s totally shattered”.
It’s not just the upgrade cycle that is stretching manufacturers. Increasingly, consumers seem to have decided that they may not need a top-of-the-range phone anymore. Instead, many now opt for cheaper models. “The difference between a mid-range and a high-end, or a mid-range and a low-end phone has shrunk,” says Gleeson. “That’s particularly why the mid-range Android brands – HTC, Sony, LG – are suffering hugely, because it’s their sales that are being carved out.”
Take the $400 handset market, “where Sony, LG, Motorola, HTC, tended to be very strong – that segment is in decline because the $200 handset [from brands such as Huawei, Oppo, Xiaomi…] is as good in almost any circumstance nowadays.”
And premium phones aren’t getting any cheaper: Apple’s top device, the iPhone X, now costs around £1,000. “Even if you don’t pay out of pocket in one go for your iPhone X, you’re thinking about it in that way – that you have a phone worth $1,000. So when the next phone comes out, you then think, do I really need to upgrade, or maybe what I have is good enough?” says Milanesi.
Of course, brand loyalists and those in search of the latest technology will still be making purchases, says Gleeson – which explains why Apple and Samsung are suffering less than, say, Sony or HTC. These mid-range brands are unlikely to outprice Huawei and Xiaomi; instead, they are hoping to grab a share of the premium market controlled by Samsung and Apple – but it’s “very tough,” says Gleeson. “One of the big difficulties is that Sony, HTC and LG don’t have a very strong defining technology that makes them very different to what Samsung offers. Samsung has its own camera technology, its own display technology – a very well defined offer for Android customers.”
Then there is the ‘decoupling’ of devices and contracts, especially in the US, where giving a user a new contract and a new device every two years is no longer standard practice among operators. As a result, more customers are buying their phones unlocked and choose a SIM provider later – which also reduces the incentive for regular upgrades.
So what might revive the market? Carriers will have to “incentivise contracts and upgrades,” says Rupert Bateman, an analyst at market research firm GfK. As for manufacturers, a catalyst would be “a major, massive technology disruption, like the first iPhone was,” says Wood.
The most promising feature right now is perhaps artificial intelligence (AI) – with Apple and Huawei banking on their own AI chipsets. They are built slightly differently, but both promise to use machine-learning to enhance the device’s capabilities, such as image recognition and translation techniques. Huawei released its Kirin 970 at IFA last year, while Apple followed with its A11 Bionic chip that powers the iPhone 8, 8Plus and X. The A11 Bionic, Apple says, sports a neural engine that is purpose-built for machine-learning. “It’s very much early stages of AI technology and application, but the fact that Apple and Huawei have their own chipsets gives them a huge advantage, whereas all other brands are waiting on Qualcomm to come up with something,” says Gleeson. So far, Qualcomm announced the Snapdragon 845, which claims to send tasks to those microprocessor cores that can deal with them best.
AI could be a panacea for phone makers; if executed and marketed in the right way, it could persuade consumers to upgrade sooner, says Gleeson. One potential use case might be augmented reality apps powered by AI. “It’s on manufacturers and handset operators to show people that there is a massive difference, there’s a strong usability difference between new phones and old phones,” he says. It’s not an easy task though: AI is a tricky element to explain, and often, the user will only really understand what value AI can give them after the purchase. “The value is not immediate,” says Milanesi. “AI is hard to sell in store – it’s a very sticky thing afterwards if it’s done right, machine learning in particular, but it’s hard from a sale’s point of view to try and explain to consumers what you get out of it.”
If consumers don’t start upgrading their phones more often, though, it may undermine the development of 5G, the ultra-fast mobile streaming that’s supposed to arrive over the next several months. Network providers around the world are testing 5G networks, and the first 5G-ready smartphones are expected to be released in early 2019. There is “no question” that 5G will be a key marketing tool for mobile phone vendors, who will hope to persuade consumers to bring forward their next upgrade, says Milanesi. “Apple is already being criticised for bringing out what they call the next-generation of the iPhone and it’s not 5G-ready,” she says.
But for consumers, it’s not that straightforward to see the added value in 5G – especially if network coverage is patchy. “If I’m somewhere in the countryside and there is no 5G coverage, why am I buying a 5G phone?” says Milanesi. Maybe in a couple of years the 5G advantage will become less hazy for consumers, says Wood. Today, it’s a dubious promise, which is unlikely to drive consumer appetite for upgrades.