Mobile saturation means innovation will slow

Did someone’s foot get stuck on the accelerator? The worldwide smartphone market raced ahead at an astonishing growth rate of 38.8 percent in the third quarter, a number that reflected shipments of 467.9 million units, according to a report released this week by IDC. To put that number in perspective, the population of the United States is just 316.9 million. You could sell a smartphone to every single person in the United States, plus one to each of the 142 million people living in Russia, and have about 8.5 million left over.

That’s great news for the five leading smartphone vendors — Samsung, Apple, Huawei, Lenovo, and LG — not to mention all the suppliers and developers that live in their ecosystems. Great news for now, that is. But I threw those statistics at you to make a point: The smartphone market could well be approaching saturation. “That rate of growth can’t be supported, unless Verizon and AT&T start selling smartphones to extraterrestrials,” quipped columnist Carl Weinschenk.

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Indeed, there are already early signs that the market is running out of headroom. In South Korea, home to Samsung and one of the most connected places on Earth, each quarter of this year has seen about 1.35 million new smartphone subscriptions, compared to nearly twice that number a year ago, according to that country’s Ministry of Science. And smartphone sales in Australia and New Zealand actually shrank in the second quarter of the year. Meanwhile, profit growth at companies like Apple and LG Electronics is slowing as price competition takes hold.

The mobile industry is hardly on the edge of an abyss, and the sky is not falling. But all this reminds me of the PC market in the 1990s, which also grew at a phenomenal rate. When the PC market approached saturation, profits declined as vendors fought for market share, and innovation slowed to the point where PCs became commodities. We may be headed in that direction yet again.

The long upgrade cycle

There use to be a fairly regular PC upgrade cycle in business: Companies would upgrade their systems every three years or so, and individuals more or less followed suit. That’s been changing. Although I don’t have hard numbers on that, I suspect the cycle is moving closer to five years.

Maybe systems are somewhat sturdier these days. But more important is the lack of significant innovation. Laptops have gotten lighter and more powerful over the years, but until touchscreens and Windows 8 debuted, you could hardly tell one generation of PC from the other. (Not that Windows “Frankenstein,” aka Windows 8, will revive the market; in fact, Windows 8 is hurting the PC market.)

Computer buyers are no dummies. Why spend money on a new PC when the old one does everything you need quite well? PC makers reacted by cutting prices, a fratricidal strategy that resulted in shrinking margins for everybody and the deaths of major companies (remember Gateway?) up and down the supply chain. Now, even Mac sales are declining.

Why did that happen? It’s not because engineers got stupid. Tight budgets means less money for R&D. Once you get past Apple, IBM, and a few other giants, almost no one is doing original research. Look, for example, at the story of how Steve Jobs midwifed the birth of the iPhone: He spared no time, no expense, and no effort to develop a product that was as perfect as he could make it. Who can afford to do that now?

In the last for years, there’s been a stampede to mobile platforms, which seem to have further slowed PC sales. Just a few years after they debuted, tablets and even smartphones today do much of what you could only do on a PC just a few years ago. The rate of change in mobile technology has been extraordinary. Think of the leap from first-generation products like the Palm Pilot in 1997 to the iPod in 2001 and then the iPhone in 2007 and iPad in 2010.

Today’s Apple iPhone 5s and Samsung Galaxy S 4 are excellent products and offer some improvements over their predecessors. But does either device contain an innovation so compelling that it’s a must-buy for the tech-savvy? I don’t think so. There’s a limit to the advances we’re going to see in smartphone hardware, and as the market saturates, the pressure to compete on price is going to become extreme.

Profits are already shrinking

Apple is already feeling it. A year ago, the average iPhone sold (before subsidies) for $619; now it goes for $577, Apple reported this week. And despite a 4 percent increase in sales, Apple’s net income was down 8 percent. LG is being hit as well; the world’s third-largest smartphone maker posted earnings that missed analyst estimates as marketing costs for its new flagship handset eroded profit.

This trend will continue as sales in Europe and North America slow and vendors push harder in less affluent markets in the developing world. There are plenty of wealthy and middle-class people in Asia and the Middle East, but the average individual there is much poorer than his or her counterpart in the United States.

Some of the same forces are already showing up in the younger, still vigorous tablet market. Apple introduced the iPad Mini partly as a way to get customers who couldn’t afford a full-size iPad, as well as to be an affordable to wealthier families as an iPad for the kids or for use as a second tablet, such as in the living room. And it has sold well — but at a cost to Apple’s overall financial performance. The iPad Mini has a smaller profit margin than its more expensive cousins, and its high sales may be part of the reason behind a 13 percent decline in Apple’s overall iPad revenue.

There are going to be stronger quarters for both Apple and the mobile industry, and new capabilities will debut. But the hottest days of that market are likely gone unless someone makes a truly startling product breakthrough. That’s not terrible; it’s just the way markets work.

I welcome your comments, tips, and suggestions. Post them here (Add a comment) so that all our readers can share them, or reach me at bill@billsnyder.biz. Follow me on Twitter at BSnyderSF.

This article, “Mobile saturation means innovation will slow,” was originally published by InfoWorld.com. Read more of Bill Snyder’s Tech’s Bottom Line blog and follow the latest technology business developments at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.