It looks like the decade-long smartphone party is over
Device and parts makers look to diversify with cars and appliances “You couldn’t help but wonder how long the party could go”
After almost a decade of turbocharged sales, the $423 billion smartphone industry can no longer count on consumers to upgrade every two years. Warning signs of a sputtering market spilled into the open at the end of April, when Apple announced its first quarterly sales decline in 13 years, and research company Strategy Analytics reported the first drop in quarterly smartphone shipments, by 3 percent. “You couldn’t help but wonder how
long the party could go,” says Wharton management professor David Hsu.
The industry says smartphone sales could revive, given that people will eventually need to replace their phones and most consumers will need new ones to enjoy the benefits of highspeed data; only 16 percent of smartphones can tap into these fast LTE connections. But don’t bet on a comeback, says Neil Campling, an analyst at Aviate Global, who expects smartphone makers to start squeezing component producers to shore up margins. “The end of the Apple supercycle is upon us,” he says.
As the market matures, phonemakers and their suppliers have reason to worry about the kind of yearslong decline facing the PC industry. This time, there isn’t an obvious successor in consumer electronics. Developers are hard at work on virtual-reality headsets, driverless cars, and the grab bag of connected gadgets and software known as the Internet of Things (IoT). Yet it may be years before these technologies enter the mainstream.
Sales at Qualcomm, the leading mobile chipmaker, fell 19 percent last quarter from the year before, to $5.5 billion. The company has been delving into drones, cars, and Internetconnected appliances—so-called adjacent businesses it predicts will generate more than $2.5 billion in sales this year. Those growth prospects, however, make up just 11 percent of the company’s total expected revenue. That explains in part why Qualcomm has lost 26 percent of its market value in the past year, compared with a 3 percent decline for the IT sector as a whole.
Apple is trying to offset declining iPhone sales with revenue from services such as the App Store, iCloud, and—as you may have read—Apple Music. Profit margins are fatter in these businesses, and revenue from them grew 20 percent in the latest quarter. Still, services account for just 12 percent of sales at Apple, where shares have fallen 27 percent in the past 12 months.
Apple, too, is exploring the automobile industry. Automated-driving features and advanced entertainment and information systems are creating opportunities to sell components and software now commonplace in smartphones. Still, an Apple car is probably years away, and some analysts wonder whether it will hit the streets at all.
Samsung reported solid sales of the Galaxy S7 in its latest earnings, but it’s looking beyond the smartphone as investors worry whether they can expect another hit soon. “The lingering market question about what could replace smartphones has not been fully addressed,” says Lee Seung Woo, an analyst at IBK Securities. Samsung is selling VR gadgets and pushing hard into the Internet of Things, building Web-connected kitchens and cloud services to manage them.
Flex, a longtime assembler of smartphones for the likes of BlackBerry and Motorola, is among the companies branching out the furthest. Along with car components, medical devices, and Fitbits, Flex has started making clothes and custom sneakers for Nike.
It’s hard to imagine one single thing replacing the smartphone, says Neil Mawston, an analyst at Strategy Analytics. His company estimates that by 2020 there will be 5 billion Internet of Things devices in use, compared with 4 billion smartphones. But most IoT devices will cost $1 or $2 and won’t need replacing for 5 to 10 years. So companies must dabble widely—in drones, consumer robots, wearables, smart homes, cars, and elsewhere. “That cocktail is the next big wave beyond phones, rather than one big new segment,” Mawston says.
In the short term, even aggressive diversification won’t necessarily protect smartphone suppliers. Texas
Instruments’ first-quarter revenue fell 4.5 percent despite growing demand for components from makers of cars, industrial equipment, and phone networks. According to a Bloomberg supply-chain analysis, TI’s biggest customer is Apple.
The bottom line With smartphone shipments falling for the first time, there's more urgency behind suppliers' diversification efforts.
“It was absolutely bias. We were doing it subjectively. It just depends on who the curator is and what time of day.”