Smart phones: how to stay clever in a downturn
Growth in demand for smart phones - devices boasting powerful processors, abundant memories, large screens and open operating systems1 - has outpaced the rest of the mobile phone market for several years.
During 2008, smart phone sales increased by almost 35 percent, while the market as a whole grew 10 percent2. By year-end, smart phones had taken 13 percent of the total handset market3.
But a continued economic downturn during 2009 may buffet the fortunes of smart phones. While sales growth for all mobile phones may decline to around 4 percent, smart phone growth could fall by more than 15 percentage points, to under 20 percent4. Smart phones' market share may increase by no more than 2 percentage points.
While double digit growth is likely to be the envy of many other sectors in 2009, smart phones had been regarded as a means of materially raising the usage and profitability of mobile telephony. The smart phone also represented, at last, a way for the mobile industry to make its users embrace data, as well as voice; it enabled average selling prices of devices to rise.
Mobile operators, the main channel to market for smart phones, are likely to contribute to the decline in smart phone growth. Responding to the economic downturn, operators are expected to make strenuous efforts - which in a few cases may be over-reactions - to reduce costs. Handset subsidies, which cost the industry tens of billions of dollars each year, are likely to come under intense scrutiny. Already credited with reducing operator profitability, smart phones, which may cost twice as much as regular feature phones, may be a prime target5.
Operators may try to reduce subsidies by replacing smart phones with feature phones on many consumer tariffs6. Some may even offer consumers a discount on their monthly bills in lieu of a new handset. Consumers keen to control their spending may find such offers increasingly appealing.
The contracts for some existing smart phone users may also slow demand in 2009. The high price of smart phones, relative to average selling prices (ASPs), mean that many contracts for higher end phones are based on 18-month periods or longer. Smart phone users that took out subscriptions in 2008 may not be able to replace their handsets until 2010.
Operators may take a similar approach in the enterprise market. Subsidized smart phones may be offered only to companies prepared to pay for additional services such as mobile email. Companies seeking to reduce their monthly mobile voice expenditure may be offered only feature phones.
In response to slackening demand, handset manufacturers may shift new product development from feature-rich devices to simpler phones. Such devices may also offer greater reliability, and thus suffer fewer expensive returns, as they would be based on more stable functionality7.
The subsidy model or the smart phone is unlikely to end in 2009. But it may be the year in which operators start to make smarter use of smart phone subsidies to preserve margins.
Bottom line
While 2009 is likely to be a tougher year for smart phones than in recent years8, the mobile industry should keep its faith in the smart phone.
The most important challenge for mobile phone manufacturers is to show how their smart phone products can provide a superior return on investment compared with their competitors, even if they have a higher list price, and require a higher subsidy. Manufacturers may need to argue the case for their products not just with operators, but also their shareholders.
Manufacturers should therefore focus on developing smart phones with features that consumers want to use and are willing to pay for. Manufacturers should work closely with operators to create easy-to-use services based on specific functionality that users value.
Handset manufacturers should also consider increasing their marketing to consumers that may increasingly be losing confidence. Consumers in many markets are likely to cut spending but may want occasional treats. Advertisers need to convince them that smart phones are indispensable rather than indulgent.
Smart phone manufacturers could sell their devices as price-competitive replacements for laptops. For some workers a smart phone may address all their communications, connectivity and applications requirements.
Mobile component manufacturers should look at ways of reducing their costs; it is likely that handset manufacturers will want to pass on some of the downward pricing pressure.
Mobile operators should reduce smart phone subsidies with care: this is not a guaranteed route to improved margins. Operators in countries where subsidies are prohibited do not always enjoy higher margins.
In markets where subsidies exist and are reduced, consumers may expect monthly charges to fall. Operators should ensure that cost reductions from lower subsidies exceed any accompanying drop in service revenue.
They should bear in mind that smart phones generate over 25 percent of mobile data traffic9. Operators need data traffic growth to offset declining margins for voice and SMS services10. They should work with handset makers to ensure that feature phones do not compromise data usage.
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