With the exception of Microsoft, most tech companies are posting somewhat disappointing results. Particularly when it comes to sales of tablets and smartphones. Now to some extent I think this is the result of overly aggressive projections by analysts. Or it could be some temporary fatigue amongst technology buyers. But it also feels like there are other factors at play and there is change in the wind.
The first factor at play is that the market for high-end smartphones is pretty saturated and it has largely turned into a replacement market. This impacts Apple more than anyone else, but on the positive side the “iPhone 6″ is going to launch to a very large base of customers who have come off contract. One financial analyst I heard the other day gave numbers that suggested at least 50% more off-contract iPhone users will be out there when the 6 launches than there were when the 5S launched. So good times for Apple in the $ sense, but no market share growth as a result.
Even the mid-range smartphone market is beginning to feel pretty saturated. The unit growth is in the low-end, but this doesn’t help Apple and probably hurts Samsung. Another dynamic in the U.S. is the move away from the subsidy model. For a few people this will let them update devices more rapidly, but for the majority it may lead to them holding on to their devices for longer periods of time. So assume replacement cycles will stretch out. That argues for even more attention to markets such as China and India where vast numbers of low-end smartphones will be sold.
Anyway the basic point is that Smartphones are yesterday’s story. They will continue to take over from basic and feature phones, and that will be good mostly for smaller players. Including perhaps Microsoft. And there are a bunch of interesting strategies one could imagine going forward. For example, how do you turn today’s low-end buyer into tomorrow’s mid-range buyer, and mid-range into high-end?
Tablet growth also slowed surprisingly last quarter. Are tablets like netbooks, a device category that actually had a built-in market share limit? Recall that at one point it was thought that netbooks would take over the world, but eventually they topped out (before tablets then came along and decimated them). Basically is there a natural limit on devices above phones but below full powered and sized PCs? Perhaps. And if there is then the big winner is Microsoft, because attention will turn from tablets to notebook and desktop replacement cycles.
But I think there may be a more interesting change afoot. As we settle into smartphone screen sizes in the 4.5-5″ range, and see an explosion of Phablets in the 5.5-6+” range, are many consumers deciding that they can buy one device that covers their Phone and Tablet needs? If so that cuts total mobile device sales potential way down! And again it plays into Microsoft’s hand because while a 6″ Phablet may eliminate the need to carry an 8″ Tablet (for watching video or moderate email, for example), it is far less suitable as a notebook replacement than 8-10″ tablets can be. This again leads to a notebook refresh cycle, or a heavier emphasis on 2-in-1 type devices over pure tablets.
My change of heart on Phablets is the result of observations over this last year. For one thing, mainstream smartphone screen sizes are already bumping up to 5″, making the leap to Phablet realm more of a hop. Another factor is the rise, and potentially impending explosion, in the smartwatch category. If I can leave the Phablet in my pocket, bag, or briefcase much of the time then its size becomes somewhat less of a factor for phone use yet it is handy for more tablet-like use. Samsung is already leading the charge here. Lastly come the stories I’ve gotten from people who actually are using Phablets.
The most recent story I heard was from a Microsoft employee who was carrying a Lumia 1520. He’d borrowed one to play with and fell in love with it to the point he found himself no longer taking his tablet with him. Yes it doesn’t fit his pocket that well, but eliminating the need to carry a tablet was something he found worth the tradeoff. Is he unique? I don’t think so. Is this a small niche, large niche, or significant trend? While it is too early to make that call I suspect it is at least a large niche and, when 5″ smartphones are included, a significant trend.
Does this mean that Tablets are “over”? No. It just means that they are going to settle into a space where the form factor makes the most sense rather than become the defacto computing device. It also means that the greatest potential market over the next few years will become the Enterprise, rather than Consumer. (Something I’m not going to explore here, but might address in a future post.) Again something that plays into Microsoft’s hand.
Of course I think Apple, Samsung, and virtually every large consumer electronics firm understands this. And understands that the next wave of consumer excitement is around wearables. I also think this is where we find out if Apple still has the magic. When I look at the Smartwatch space, for example, I see plenty of options all of which don’t quite cut it as mainstream products. It looks a lot like the pre-iPod MP3 world. Apple came in with a solution that just nailed the experience, completely dominated the market, and leveraged that position into high-end consumer smartphone domination as well. Can they do it again?
Wearables is also the place where Microsoft could either boost or sink its ability to succeed in the smartphone/Phablet market. Wearables are largely a peripheral for the smartphone or Phablet, and as consumer focus shifts to them it will also alter phone/Phablet buying behavior. Today’s startup solutions large ignore Windows and Windows Phone while supporting IOS and Android. Strike One for Microsoft. If we assume Apple does a great job on a watch and its linkage to IOS and their overall ecosystem that’s Strike Two. Microsoft has to hit a home run with their own smartwatch and its ties to Windows, Windows Phone, and the overall ecosystem or else the strikeout won’t just be on wearables. It will be on their smartphone/Phablet ambitions as well.
Over the next year the changes in the market should go from speculation to obvious direction. I could be right, completely wrong, or things could go in a totally different direction. But we shouldn’t have too long to wait to figure out which it is.