2016: A Pivotal Year For The Smartphone Industry

Elad Natanson ,CONTRIBUTOR
I cover the evolution of the mobile marketplace and the app economy.
Opinions expressed by Forbes Contributors are their own.

A new Apple iPhone 7. (Credit: Stephen Lam/Getty Images)

It’s September, and in the mobile universe that means one thing: Apple’s big fall event and the announcement of the new iPhone. 2016 has been a rough year for Apple, which experienced its first decline in revenues in 13 years. iPhone revenue declined 18% year over year in the first quarter of 2016, and even more worrisome, iPhone revenue in China was down 26%. Some are wondering: is Apple’s staggering growth run — which has made it the world’s most valuable company — finally over? Have we reached “Peak Apple?” While considering this, it’s useful to look at the smartphone landscape to see where Apple’s current trajectory fits in to larger industry trends as a whole.

A Global Slowdown

The first half of the year has continued last year’s trend of slowing growth. Gartner predicts that with 1.5 billion units shipped in 2016, global growth in smartphone sales will slow this year to 7% after growing 14.4% last year. This slowdown is being caused by a combination of saturation in major developed markets, economic weakness in China, and lengthening upgrade cycles. Gartner, IDC and other analysts consider India, Indonesia and Sub-Saharan Africa to be the major growth markets going forward. Given the lower price points in these markets — half of all smartphones sold in India are less than $120 — these markets will favor value driven Android vendors like the emerging players in China over premium players like Apple and Samsung.

China: Maturation And The Rise Of New Value Players

A maturing smartphone market and a cooling economy meant that Chinese smartphone sales actually declined 5% yoy in Q1 2016. Despite this overall decline, two players almost doubled their market share in the last year: Oppo, which at 12.6% of the market in Q1 was second-largest behind Huawei, and VIVO, at 11.9% was in fourth place just a hair behind Xiaomi. Oppo and Vivo, along with OnePlus, are among the new wave of Chinese manufacturers offering premium Android-based phones at value prices.

These companies’ impressive growth has been due to selling in second tier cities and rural areas, using celebrities in marketing, and by competing on specific features to stand out from the pack. Vivo phones have hi-fi audio components and Oppo phones have advanced camera technology. OnePlus phones combine pleasing design with 90% of the features you would find in a top of the line Samsung at less than half the price.

how, as most middle class Chinese now have smartphones, that the value players will not continue to take market share by providing as much features and performance possible for as little cost. Such a scenario has Apple investors worried as China has been the largest growth driver for iPhone sales over the last several years. It’s interesting to note that Oppo, Vivo and OnePlus are all wholly or partially owned by the same company, consumer electronics giant BBK, based in Shenzen. The success of these three brands, which are all operated independently, has made BBK a major player in the global smartphone market.

India’s Continued Growth

As the market slows in China, it’s not surprising that the world’s smartphone makers have turned to India. eMarketer estimates that nearly 30% of mobile phone users in India, or more than 204 million individuals, will be smartphone users in 2016, a growth rate of 21.5% over the year prior. While Samsung is still the dominant player in India, with 25.1% of the market in 2Q, Oppo and Vivo have begun to make inroads, capturing 3.3% and 2.5% of the market respectively. Analysts have noted that, like in China, the success of Oppo and Vivo has cost Apple market share, as the iPhone SE failed to make a significant impact.

Apple And The Revenge Of Clay Christensen

In “The Innovator’s Dilemma, “ Harvard Business School professor and strategy guru Clay Christensen states that industries are usually disrupted by cheaper, lower-featured technologies. A good example of this was when Japanese cars entered the US auto market in the 1970’s. They broke the oligopoly of the decrepit Big 3 by providing small, no frills cars with small engines — the opposite of the kind US consumers had been conditioned to desire. But the cars were reliable and got great gas mileage, and people loved them. Only after decades of satisfied customers did Japanese makers move upmarket to create premium brands like Lexus.

The iPhone has been held up as the great refutation of Christensen’s ideas. The iPhone was a super-premium product that has sold a billion units and created an entire new tech ecosystem and market. Here disruption came from the top. But it’s important to note that the iPhone, at least in the US market, had its high cost subsidized by the carriers’ mandatory 2-year contracts. By tying customers into such long contracts and adding the cost of the phone to their monthly bills, the carriers could enable most Americans to buy iPhones.

In emerging markets like India, buyers usually purchase their phones outside a contract and are very price-sensitive. This is why some analysts think that Apple’s prospects in these markets are less than bright. So, has Apple peaked? Is cutthroat competition on features and price going to drive a “race to the bottom” in smartphones?

iOS is the Difference (For Now)

One defense Apple has against Samsung and the Chinese Android Players is iOS. Despite losing ground in features to Samsung’s newest offerings, Apple still has the best, most reliable software. Not only is iOS still faster, it’s more easily updated, more secure, and has better support. The Android ecosystem, especially with all the forked versions currently in use in China, remains fragmented and messy. As Steve Jobs maintained, it’s the combination of the hardware and the software together that creates the magic experience for the user. For the most part, Apple products just work. It will be interesting to see if the iPhone 7, with its incremental improvements, sparks a large upgrade cycle or if we have to wait for the 8 with its expected greater wow factor. When we see how the install base upgrades over the next two cycles, we’ll get a better idea of Apple’s fate in the near term. Regardless, Apple retains several hundred billion dollars in cash and can bide its time until it figures out the next big thing. Driverless cars? Who knows? Apple may never again create anything as transformative as the iPhone — but I wouldn’t bet against it.

This article was first featured on www.forbes.com

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