Smartphone Sales Just Fell for the First Time Ever (Premium)

With Gartner and IDC now both weighing in on smartphone marketshare in 2017, we are confronted by a troubling, if long-awaited milestone. Smartphone sales actually fell in the final quarter of 2017. That’s a first.

Worse, smartphone sales for calendar year 2017 almost fell year-over-year as well.

Before considering what this means, let’s look at the numbers. As I do with PC sales, these numbers are an average of figures provided by both Gartner and IDC.

In 2017, hardware makers sold 1.5 billion smartphones worldwide. This compares to 1.48 billion in 2016, a gain of just 1.4 percent. As a reference point, I consider any sales difference that can round to 1 percent to be “flat.”

Smartphone sales leveling off year-over-year is a troubling trend, but a bigger milestone happened in the fourth quarter. For the first time ever, worldwide smartphone sales fell year-over-year in Q4 2017.

That is, hardware makers sold 405.65 million smartphones in the quarter, down from 431.4 million units in the same quarter a year earlier. That drop is fairly significant, at 6 percent. That it came in the holiday quarter is particularly troubling, especially when you consider that that is when Apple launched three new iPhones.

The timing is interesting. Exactly ten years earlier, Apple launched the first iPhone, kicking off the modern smartphone era. Since that time, smartphone sales have risen every year, often dramatically, and in every quarter.

Granted, this milestone has been a long time coming. Thanks to saturation in mature markets and the rapid maturation of what used to be emerging markets, smartphone sales growth has slowed in recent years. In 2015, for example, hardware makers shipped 1.43 billion units worldwide. So the sales gain from 2015 to 2016 was just 3.5 percent. It’s reasonable to assume that 2018 will be the first full down year for smartphone sales. Or, that it will be flat at best.

Two things stand out here.

First, the smartphone market rose to dominance, crested, and then matured much more quickly than that for the PC. In just ten years, we’ve reached peak smartphone. Meanwhile, the PC’s biggest year was in 2011, when PC makers sold 365.4 million unit. That occurred exactly 30 years after the release of the first IBM PC. (And if you consider earlier personal computers, the “PC era” took even longer to crest.) The smartphone isn’t just bigger than the PC ever was, it also rocketed to that success much more quickly.

Second, the reason for this maturity is quite different than that for the PC. When the PC crested in 2011, the smartphone had already emerged as its replacement: PC makers sell fewer PCs today largely because customers have moved to more personal and mobile devices like smartphones for most tasks. As I wrote a few years back, the iPhone is the asteroid that killed the Windows (PC) dinosaur. The smartphone is the PC’s potential extinction moment.

But the smartphone doesn’t face such a foe. Potential “next wave” technologies like digital personal assistants haven’t replaced the smartphone, not yet at least. And they don’t appear poised to do so, though that might change.

Looking ahead, hardware makers will need to adapt to a new competitive playing field that does not include any obvious emerging markets to pad unit sales. And that means it will need to mature in a way that is familiar to PC makers. Replacement sales, which are sales of new devices to existing customers, will push aside truly new handset sales as the prime driver of this market going forward.

That’s not a good recipe for growth. Yes, smartphone buyers are accustomed to purchasing (or leasing) new devices every 1-3 years already, a heady pace compared to that for PC replacements. But hardware makers will have to try harder to maintain that schedule. As with PCs, gains in smartphone capabilities are slowing down and starting to level off too. It’s getting harder for consumers to justify the churn of the current upgrade cycle.

My guess is that phone makers will adapt in the same ways that PC makers did. In fact, I am arguing that they have already started down this path.

For example, we know that companies like HP, in particular, have been very successful finding and exploiting profitable sub-markets within the PC market: Premium and gaming PCs. Just making great products may seem obvious, but very few PC makers are as consistently good as HP, as the strategy worked: It is now profitable and the number one maker of PCs.

So what about smartphones? In 2017, we saw an escalation of flagship pricing in the smartphone market, matching the move to premium PCs in that market. With Apple, Google, and Samsung all flirting (and exceeding) the $1000 price barrier, smartphone makers are looking for ways to entice their most valuable customers. And the premium feature they’re always touting, not coincidentally, is the camera.

In other words, the camera has emerged as the gaming PC of the smartphone world. Every phone has a camera, just like every PC can play games. But if you want the best functionality, the best performance, you have to pay more. You have to go premium.

The problem for Apple, Google, and Samsung, of course, is the speed at which the smartphone market moves. It won’t take handset makers that are locked out of the premium segment of the market to release devices with truly excellent cameras. And that will force the biggest players to keep seeking new features to exploit. AR, perhaps. Assistants and other AI-backed advances. Advanced technologies, like folding screens, that they can temporarily keep out of the hands of less powerful companies. Whatever. It’s the reason the big players are turning more and more to their own unique hardware components: To gain an edge that they can keep.

But it’s a treadmill. And at some point, even Apple and Samsung’s advantages will evaporate. These companies, now dominant, are poised to lose market share in the years ahead. That’s bad in a growth market, but doubly bad in a market that is flat or even declining.

So grab the popcorn, folks. The next few years are going to be really interesting.