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Get Telecoms Smart - The evolution of the handset market

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It has only been twelve years since the launch of the very first iPhone, yet the smartphone market has already undergone a huge evolution. We look at the current state of the handset market and what is likely to come.

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Get Telecoms Smart - The evolution of the handset market

  1. 1. GET TELECOMS SMART The evolution of the handset market
  2. 2. GET TELECOMS SMART The evolution of the handset market It has only been twelve years since the launch of the very first iPhone, yet the smartphone market has already undergone multiple technology upgrades, rapid feature evolution and has managed to reach saturation levels in most developed markets. As the whole telecommunications sector is entering a new phase of its evolution and gearing up for the big changes associated with the imminent launches of 5G, we spoke to Daniel Gleeson, Ovum’s Senior Consumer Technology Analyst, about the current state of the handset market and what is to come. “The smartphone segment has been experiencing an ongoing decline in sales growth … there simply isn’t much organic growth left," particularly in developed markets. — Daniel Gleeson, Senior Analyst, Consumer Technology, OVUM In fact, analysts consider North America and Western Europe to be already saturated, with Eastern Europe and China approaching full saturation1 . “By 2023 only Africa and some parts of Asia will remain under-penetrated”2 . The levels of saturation in the developed world are having the strongest impact on Apple and Samsung – brands that have thus far been heavily focused on these markets and the premium handset segment. Beyond saturation, a few other factors are slowing down the growth of the smartphone sales worldwide. THE END OF OPERATOR SUBSIDIES When 4G was launched nearly a decade ago, compatible smartphones were subsidised by the connectivity providers willing to drive new technology uptake. This made premium handsets significantly more accessible to customers. But a lot has changed. As operators struggle to achieve revenue growth, they have been cutting costs including those associated with handset subsidies. Increasingly we see subsidies being cancelled and customers having to pay full price for their devices, split over the contract period. As a result, a significant share of customers are discouraged from buying premium devices due to their high price tag. OVUM analysts do not expect connectivity providers to push 5G devices as much as they did with 4G, which is likely to be an important factor in the speed of 5G adoption3 . 1 OVUM analyst interview, April 2, 2019 2 OVUM analyst interview, April 2, 2019 3 OVUM analyst interview, April 2, 2019
  3. 3. GET TELECOMS SMART The evolution of the handset market THE SLOWING DEVICE REPLACEMENT CYCLE Gone are the days of excitement over every new release, handsets are increasingly only replaced when the old one stops working. Smartphone replacement cycles have been consistently lengthening worldwide, growing from 23.8 months in 2014 to 32.3 in 2018, and are expected to reach 33.6 months by next year4 . Cost, in particular in the absence of subsidies, has been the main driving force behind the slowdown: “Increased smartphone prices at the high end of the spectrum has led to many consumers holding on to their phones longer than expected.”5 But there are a few other factors contributing to the trend. 1) Manufacturers have made significant progress in improving smartphone battery life – optimising both hardware and software in terms of battery use. 2) There has been a shift towards more consistent software upgrades, which means more devices are up-to-date and encounter fewer performance issues. 3) People are increasingly informed on how to protect their devices and hence tend to take better care of them. For instance, the majority today use protective cases –79% of smartphone owners in the US said they were using one6 . As a result, people keep their devices for longer than they used to, which is of course bad news for manufacturers interested in driving more frequent upgrades. A secondary, yet important, effect of the extended smartphone life has been the growth of the second- hand market, which was estimated to be worth $19 billion at the end of 2017 and predicted to grow 10% a year until 20227 . It means that used devices will take a growing share of the handset market, particularly at the premium end, offering “cheaper access to the status symbol”8 (e.g. Apple or Samsung – these two brands account for three quarters of the used smartphone market9 ). THE COMPETITIVE THREAT FROM THE EAST Analysts are unanimous in their agreement that an increasing number of Chinese handset brands, like OnePlus, Xiaomi and Oppo, will continue their growth worldwide, often at the 4 Statista 5 IDC, Worldwide Used Smartphone Forecast, 2018–2022 6 Statista, 2017 7 IDC, Worldwide Used Smartphone Forecast, 2018–2022 8 OVUM analyst interview, April 2, 2019 9 Counter Point Research, The Surprising Growth of Used Smartphones
  4. 4. GET TELECOMS SMART The evolution of the handset market expense of Apple and Samsung. “Chinese players Huawei, Oppo, Vivo and Xiaomi are all delivering high-spec devices at cheaper prices”10 , thus putting pressure on established premium players. Smartphones are no longer the status symbol they used to be, and customers increasingly choose value over prestigious brand names, as more mid-range options packed with premium features become available to them. Until recently being a Chinese brand came with a “perception baggage”, but Huawei has broken down certain perception barriers and paved the way for the likes of OnePlus, Oppo and Xiaomi in the European market, particularly in more value conscious Southern Europe. In Spain, Italy and Greece, Xiaomi now has up to 15% market share, whilst the UK, Germany and Scandinavia have thus far been tougher markets for Chinese brands11 . Hardware manufacturers operate with notoriously tight margins and Chinese players tend to have an advantage due to lower production costs. However, further success of these manufacturers in Europe will depend on their ability to deliver on device quality as well as to build operator relationships, which they are struggling to do at the moment. WILL 5G DELIVER THE MUCH-NEEDED SALES PUSH? Despite the high hopes placed on 5G to deliver a strong push for a new device replacement cycle, Ovum analysts do not expect the new technology to change the macro trends of slowing growth and the shift towards second-hand and mid-range options. In fact, Xiaomi’s Mi Mix 5G smartphone has been described as “the most important 5G device announced so far due to its price - just €599”12 which significantly undercuts all competitive options expected to cost around €900. Other Chinese brands are expected to announce 5G devices at this price point or lower in the second half of 2019. As the use cases of the new technology remain unclear and general consumer interest in 5G is still low, handsets with lower price tags are likely to see faster uptake. IMPLICATIONS FOR THE MARKET LEADERS After a booming first decade, market leaders are now facing new competition and more value conscious customers that result in slow growth and bleak future forecasts. As Ovum’s Daniel Gleeson put it “Apple has reached everyone who has the disposable income to buy an iPhone”. Whilst both Apple and Samsung are not likely to lose their 10 CNBC, Samsung is packing more tech into its mid-priced smartphones to appeal to millennials 11 OVUM analyst interview, April 2, 2019 12 OVUM analyst interview, April 2, 2019
  5. 5. GET TELECOMS SMART The evolution of the handset market leadership position in some of their key markets, the global picture will require a new approach. Last year, Samsung expressed their intention to focus on the mid-range, as the company’s CEO DJ Koh explained to CNBC news: “In the past, I brought the new technology and differentiation to the flagship model and then moved to the mid-end. But I have changed my strategy from this year to bring technology and differentiation points starting from the mid-end… we are very much focusing on millennials who cannot afford the flagship. But how can I deliver meaningful innovation to our millennials? That’s the reason I’m trying to differentiate the mid-section”13 . In 2019 the brand has already announced and released a few mid-range devices including Galaxy A30, A50, A70 and M20. Apple, at the same time, is diversifying its revenue streams and investing in content with the recent announcement of the Apple TV Plus service. 5G technology is expected to make smartphones central to the entertainment ecosystem and video content is one of the key current growth areas in the wider consumer telecommunications and media sector. Content services will allow Apple to monetise not just the direct iPhone customers, but also the second-hand device owners throughout their phone’s lifetime. Which of the players will get it right is as yet unclear, but one thing is certain – as technology becomes more complex and ubiquitous, winners will need to deliver relevance to their customers both in terms technology use cases, overall user experience and perceived value. 13 CNBC, Samsung is packing more tech into its mid-priced smartphones to appeal to millennials
  6. 6. GET TELECOMS SMART The evolution of the handset market If you are interested in learning more about the subject of this article, please contact Melanie Norris, Global Planning Director, norrism@bbdoknows.com ABOUT BBDO KNOWS BBDO KNOWS is a planning resource for the BBDO network. BBDO KNOWS offers thinking, strategy, insights and inspiration on key categories, key themes and consumer segments. If you are interested in learning more about the way BBDO thinks please contact Melanie Norris, Global Planning Director, norrism@bbdoknows.com. DISCLAIMER The information and materials in this article are for general information purposes only. Whilst we try to ensure that all information and data in this article is accurate, complete and up to date, this article should not be relied upon and you should seek advice if you intend to use or rely upon any of the insights or data contained in this article. This article must not be shared, downloaded, copied or distributed for commercial purposes without the prior approval of BBDO. © BBDO 2019 All rights reserved.

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