I am still in vacation mode but I will start to post a lot more thematic content over the next two weeks. This post will concentrate on the mobile handset market and is based largely on a recent market analysis by Gartner.
Earlier in the month I wrote about the last IDC report on the mobile market as a watershed event. The leap in Android market share is alarming for Apple because it is starting to approach Windows-level dominance of the smartphone market. Android had a 68.2% market share in 2012 through Q3, with that number surging to 75.% in Q3 on the back of the Samsung Galaxy S3. Gartner has confirmed the IDC numbers, putting Android’s Q3 2012 market share at 72%. Meanwhile overall sales of mobile handsets declined 3% from the same quarter in 2011 to 428 million units. Of that number, smartphone sales totalled 169 million units in Q3, which is up 47% in the last year.
Here’s what I think this means.
First, we should look at the total handset volume worldwide. Here the number of units sold is in decline. And this suggest a level of market saturation that cannot be fully counteracted by the upgrade cycle. The decline in the sale of mobile units suggests that we now past the adoption growth phase for mobile as a sector and that the sector will become increasingly reliant on existing users for transaction and sales volume. The dynamics of this kind of market are different than the dynamics of a adoption growth market because it favors a strategy of customer retention and focus on usage volume and upsales over one of acquisition.
By contrast, the smartphone market is still very much in the adoption growth phase with unit volumes growing at an almost 50% clip year-on-year. Clearly, the upgrade from non-smartphone handsets is driving the majority of this volume since the overall mobile market sales volume is shrinking. So what is happening within the mobile market is a phase transition technologically from feature phones to smartphones, driven increasingly by mobile Internet use more than any other application since feature phones can email and text as well install dedicated apps.
Within any market like the mobile handset market, there are always going to be early adopters and high-end users that will want the latest and greatest. However, in mobile, increasingly, the transition from feature phones to smartphones is being driven by the masses, where price is always a differentiating factor. Take China for instance. There handset sales are increasing but average unit price is declining as more and more people get into the market.
As a result, Android has come to dominate the smartphone handset market in China with over 90% market share by sales volume in Q3 2012 from less than 50% in Q2 2011.
This remarkable rise reflects both the switch from feature phones and the cost-sensitive nature of the marketplace. Kevin Tofel at GigaOm writes for example:
Analysis International also tracked the average selling price of handsets by platform and that helps explain the situation. While costs for all smartphones have been decreasing in China, the average Android handset costs about one-third that of an iPhone. In the most recent quarter, for example, an Android handset costs 1393 Yuan (US $223.36) on average. The average price for an iPhone is 4523 Yuan (US $725.25), or roughly three times the cost.
I wouldn’t expect most of the Android devices in the Chinese market to be flagship smartphones or high-end devices, but that may not matter as Chinese consumers migrate to their first smartphone. A low- to mid-end Android model is surely more capable than the phone its replacing.
Bottom line: the mobile market place is slowing. Growth is increasingly driven by the move from feature phone to smartphone. But because the mobile adoption rate is slowing, increasingly the dynamics of the marketplace will be driven by price and market participants will focus less on customer acquisition and more on retention and upgrades. In my view, this heavily favors Android over any other operating system and I expect to see Android solidify its place as the dominant smartphone operating system over time.
Apple should concentrate on the high end and increasingly move into the tablet and corporate arena to minimize share erosion. But because market growth is slowing, unless Apple plays the share game, its earnings growth will slow dramatically over the next few years. My view of Android’s long-term advantages are the same now as they have been for a few years. The big shift in my view of the mobile market place now is that with declining growth, Apple will actively suffer earnings disappointments starting in 2013. And this will negatively impact shares.