Have Smartphone Sales Peaked?

Germany Apple iPhone
Frank Augstein/APA customer smiles while leaving an Apple store in Germany with a bag of iPhones last fall.
As the entire tech and investing worlds know by now, Apple (AAPL) had a record-smashing Q1. The company notched an all-time high for quarterly net profit ($18 billion) not only for itself, but for any publicly traded company in history.

A big part of this success was the company's iconic iPhone: With a pair of new models recently released, Apple sold over 74 million units of its popular product -- a nearly 50 percent rise from the same quarter the previous year.

So market observers can be forgiven for thinking that smartphones as a category are continuing their long upward trajectory of increasing sales. But according to a prominent industry researcher, that's not the case.

Smart Slowdown

That researcher, IDC, predicts that the momentum of sales growth will not only drop this year, but will do so considerably. After what it estimates to have been a 26 percent year-over-year increase in smartphone shipments in 2014 (to a total of roughly 1.3 billion), the increase for this year is projected to end up at less than half that rate -- 12 percent.

Zooming out to a five-year period, IDC believes that the compound annual growth rate for shipments will barely hit 10 percent for the years 2014 to 2018.

The chief culprit is that old tech market bugaboo, saturation. At the end of the previous decade, smartphones were the aspirational, gotta-have device for a great many people. But consumer wallets quickly caught up to the technology, even in economically disadvantaged countries. According to a survey conducted late last year by market researcher GlobalWebIndex, 80 percent of the world's Internet users ages 16 to 64 now owns a smartphone.

Of the seven tech devices covered in the survey (PCs/laptops, smartphones, tablets, gaming consoles, smart TVs, smart watches, and smart wristbands), smartphones had the second-highest tally behind PCs/laptops, which came in at 91 percent.

Top-Line Plateau

For manufacturers, lower shipment growth might not be the biggest challenge they'll face in the immediate future -- revenues look set to be the No. 1 worry. According to IDC's estimate, they're expected to creep up by only around 4 percent in that 2014 to 2018 time span.

That's because up-and-coming smartphone makers are edging their way into the market, and their wares are significantly cheaper. For example, ambitious Chinese firm Xiaomi -- founded in 2010, in sharp contrast to decades-old titans Apple and Samsung -- became its home country's top smartphone manufacturer in Q2 2014.

It did this largely through pricing: Its flagship model, the Mi4, lists for around half as much ($320 or so) as current-generation offerings from Apple and Samsung... and that's cutting the latter two some slack, as their products often cost much more than list price when sold on the Chinese market.

Meanwhile, there is a host of other Asian brands, such as Coolpad and Smartfren, very ready and extremely willing to sell budget-priced smartphones to the world.

The rise of such bargain manufacturers will be a key factor driving down average selling prices. IDC's data puts the global ASP of smartphones at $297 for 2014, projecting that this will fall to $241 by 2018. That's a drop of nearly 20 percent.

Sticky Status Quo

Another factor slowing down sales is the lack of novelty. In 2007, when the iPhone was released to great hoopla, the "computer in your pocket" concept of smartphones was still quite fresh.

But now that they're the standard rather than the push-the-envelope technology of yesteryear, they haven't leaped too far ahead in terms of functionality. Yes, the iPhone 6 and 6 Plus have bigger screens, a wider feature set for their cameras, and a built-in app that monitors your health. But they're essentially just beefed-up versions of their predecessors.

So the need to buy the latest and greatest smartphone has diminished. Models dating from several years ago -- eons, in tech gadget time -- are good enough for many users. After all, they make phone calls, send texts, surf the Web, and provide driving directions just like their newer, snazzier brethren. What's the rush to upgrade?

Winners and Losers

With saturation, the market will likely segment more sharply into high- and low-end layers, with the price differences between the two widening. Apple, which has distinctly and effectively positioned itself as a maker of premium phones, will likely continue to dominate the former.

The lower end is anybody's game; we should expect a scramble of numerous budget handset manufacturers jockeying for share.

They'd better hurry, though. Before long, there will be almost no growth to speak of at all, and the world will move on to the next hot new gadget.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. Check out our free report on the Apple Watch to learn where the real money is to be made for early investors.​
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