The great smartphone boom is about to end. That’s according to one savvy tech prognosticator, Bill Whyman, head of the investment research firm International Strategy & Investment‘s tech strategy research team, who tends to look more than a couple quarters ahead.
Whyman contends that as smartphone penetration reaches 50% sometime next year, the market will start to slow for the first time. That will put pressure on all the players, from struggling RIM to to Google‘s newly acquired Motorola and even to so-not-struggling Apple. Assuming Whyman’s right, here’s what he thinks happens next:
* Growth slows: Emerging-market demand means it won’t fall off a cliff, but as market share of smartphones reaches 50%, Whyman says, the current 45% growth slows as that second 50% becomes much harder to get. Over time, much of the new demand will be replacing older models, further driven by upgrades to faster 4G networks.
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* Competition intensifies. It’s hard to imagine the smartphone battle getting more heated than it already is, but Whyman says this will be an inevitable outcome of a slowing market.
Still, he thinks Apple, especially with its iPhone 5 still likely to ignite another boom in purchases when it debuts this fall, will be fine and, with Samsung, will dominate the high end of the market–especially the profits. That’s thanks to their brands, wide distribution by the carriers, low component purchasing costs and, especially in Apple’s case, a thriving app ecosystem. Chinese companies such as Huawei will own the low end, he believes, leaving RIM, Nokia, Sony (Sony?), Google’s Motorola unit, and even HTC struggling.
* Content and services will be where growth and market value happens. As Whyman writes:
The hardware gap between iPhone and next best competitor narrows over time. It is increasingly less about processor speed, storage, and other specs, but about the customer experience. It’s well understood now that software is key to the integration that enables a seamless customer experience. Yet, increasingly, it’s the applications, Internet (cloud) based services, and content that will drive the customer experience. It’s not just the device, but how effective is the device in enabling applications and experiences that tap resources in the cloud. Of course not all devices are the same in this capability, so AAPL still has advantages even as the direct importance of the device narrowly conceived declines in relative terms.
In this world, value growth moves up the stack to a new set of location based apps, mobile commerce, and web-based services. It’s not clear exactly what they will be, but GOOG’s effort to geo-tag all kinds of information (business locations, traffic, demographics) and build a massive geo-economic-demographic database provides early clues.
* Wireless carriers try to capture more mobile revenues. Whyman says Verizon’s recent shift to a “share everything” data plan is a sign of things to come, an attempt by carriers to make more money even if they don’t manage to avoid becoming a “dumb pipe.” This will have a mixed impact on device makers, a negative impact on data-intensive services such as Netflix, and a positive impact, of sorts, on regulators looking to make a mark on the fast-changing business.
* Open systems will start to win. Apple’s dominance to date has been its successful bet that the emerging smartphone market needed a consistent package of devices and services that simply work–not just for consumers but for app developers. That’s why Google’s Android, while becoming the strong No. 2 to Apple’s iOS, continues to struggle with developer support because it can’t control the operating-system version and thus the consumer experience.
Apple has been right for so long that I wouldn’t bet against its ability to keep thriving with its generally closed approach–for years to come. But Whyman is probably correct that in later-stage markets like the smartphone may become starting next year, open systems tend to win, for several reasons:
1) Consumers become more willing to manage complexity/want
choice; 2) performance advantage from end-to-end vendor narrows; and 3) scale and standards of open ecosystem drive lower cost.
That would seem to favor Google’s approach, though Google itself has been trying to corral Android itself lately. However the timing of the market shifts plays out, it seems pretty clear there’s going to be a two-horse race between Apple and Google, with the rest straggling behind. But even the winners in that race may find that their victories won’t be quite as profitable as they are today.