Why U.S. Smartphone Sales Fell in the First Quarter

American consumers just aren't buying as many smartphones as they used to.

Aggregate data from the four major wireless carriers in the United States -- Verizon (VZ -0.37%), AT&T (T -1.23%), T-Mobile (TMUS 0.34%), and Sprint (S) -- show a year-over-year drop in smartphone sales. That's something Apple (AAPL 0.18%) investors are already too familiar with after the iPhone maker saw unit sales decline 16% year over year last quarter.

Let's take a look at what's going on at the carriers and how that impacts them and manufacturers like Apple.

Fewer upgrades

We've been hearing about elongated upgrade cycles for several quarters now, and last quarter once again showed fewer customers upgrading their smartphones than the year before. The trend was carrier agnostic, as you can see in the table below.

AT&T and Sprint were hit hardest by American consumers' penchant to hold onto their devices longer, but it wasn't a walk in the park for T-Mobile or Verizon, either.

Most analysts point to the move away from smartphone subsidies as the reason for the elongated upgrade cycle. But T-Mobile, which started the move away from subsidies, has consistently gotten its customers to upgrade their devices at a higher percentage than its competitors since launching its Un-carrier initiatives at the beginning of 2013.

T-Mobile's upgrade rate is bolstered by its JUMP! Programs. Enrollment for the early upgrade programs increased 29% year over year to 13.3 million -- more than 20% of its total customer base. Even so, fewer customers upgraded their phone last quarter than the year before.

Fewer new customers

But it's not just that fewer subscribers are upgrading their phones. There are just fewer new phone subscribers in general. In the 12 months ending in February, carriers added 12.6 million new smartphone subscribers, according to data from comScore. That's a 24% decline from the prior 12 months when the industry added 23.1 million new smartphone subscribers.

The number of smartphone subscribers in the U.S. is approaching 200 million. With an adult population of about 250 million, the market is already near saturation. Carriers are now largely competing to attract smartphone customers away from one another. Considering the additional value of a smartphone subscriber over a feature phone subscriber, revenue growth will have to come mostly from other sources (tablets, connected devices, other services) going forward.

What this means for manufacturers

With smartphone sales in the U.S. nearing saturation and the upgrade cycle slowing, smartphone manufacturers are also vying for market share. Apple, in fact, has done better than most smartphone manufacturers, growing its industry-leading U.S. market share 2.2 percentage points over the past year to reach 43.9%. Samsung (NASDAQOTH: SSNLF), comparatively, has seen its market share decline 20 basis points over the same period to 28.4%

Apple cleverly introduced its own early upgrade program for iPhones last autumn, which offers a deal similar to the 0% interest installment pricing offered by carriers. The only difference is Apple allows upgrades every year, whereas most upgrade programs from carriers have longer upgrade limitations. Samsung introduced a similar program, and some carriers responded by shortening the limits on upgrades.

Additionally, manufacturers are focusing on markets outside of the United States where smartphone adoption is still growing rapidly. After a lot of success in China, for example, Apple is now focusing more on India.

There's still plenty of room for growth outside of the United States. Meanwhile, manufacturers need to focus on taking market share in the more saturated markets like the U.S. Carriers, which are mostly confined to the United States, will have to duke it out for the fewer number of new smartphone users while convincing their existing subscribers to upgrade more often.