Can Apple Grow in a Saturated Smartphone Market?

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Is it time to stop getting excited about smartphones and turn our gaze to the next explosive growth catalyst instead?

You see, the writing's on the wall. Smartphones used to be something special, a gadget that set you apart from the hordes of feature phone users and let you do some amazing things on the go. But now, everybody who is anybody already owns an Apple (Nasdaq: AAPL  ) iPhone or something from the Google (Nasdaq: GOOG  ) Android family. Smartphones are the new feature phones, as commonplace as running water or potato chips.

Think I'm jumping ahead a little bit? Think again. A brand-new market report from Nielsen shows that 55% of mobile subscribers in America own a smartphone nowadays, up from 41% a year ago.

The saturation only grows thicker when you zoom in on the most important demographic groups: 74% of subscribers aged 25 to 34 own smartphones, and teenagers are adopting the new standard fastest of all, with a 61% year-over-year smartphone boost.

So yeah, I'd say that the low-hanging fruit has been picked clear off the smartphone tree.

How to build on fully developed land
That doesn't mean the industry will shut down overnight, of course. The largest platform -- which happens to be Android -- owns 52% of the market. There's plenty of room for smaller competitors like Apple to steal market share from Google, thereby growing the size of their own pie slices. If your name is Research In Motion (Nasdaq: RIMM  ) or Nokia (NYSE: NOK  ) , the growth opportunity is tremendous given the tiny market shares these platforms hold today.

But then, that would require heroic turnaround performances from the Finns and Canadians. The smartphone ship may have sailed for these guys, never to return again. If so, Apple and Android get to share the 14% of the smartphone market that they don't already own -- and then fight each other tooth and nail to steal the rival's customers and retain their own.

So yeah, I'd say that we're getting close to complete smartphone saturation here in America, Western Europe, and the more high-tech corners of Asia. The revolution will still continue rolling out in other markets over the years, but the most important territories have already been earmarked.

What this means for the iPhone 5
This conundrum feels especially important right now, since Apple is set to release the iPhone 5 tomorrow. Analysts and Apple investors expect great things from this device. iPhones form the core of Apple's record-breaking profits, and consumers are taking a break from buying the 4S version since this release is so close. Cupertino simply cannot afford the iPhone 5 to flop.

Of course, the pent-up iPhone demand from this summer's deferred purchases nearly guarantees that the launch will be as spectacular as always. That's why I wouldn't read too much into the reports of pre-order sales or a record-breaking first week. The new iPhone doesn't have to be amazing to hit these targets -- it just has to exist, and not be too strikingly similar to last year's model. That should be doable.

What matters here is, does the new iPhone have legs in the face of a shrinking easy-growth market? There's no easy answer until we've seen exactly what this handset can do.

Full steam ahead isn't the right thing to do
Either way, Apple must change as the competitive landscape goes through this tectonic shift. The iPad will have to shoulder more of Apple's financial growth in 2013 and beyond, and tablets might indeed be the next, next big thing that keeps Cupertino relevant for years to come.

But I wouldn't bet the house on that, either. This makes me an odd duck here at the Fool, where Apple is a current recommendation of five Foolish newsletters as well as an analysis service focused on Apple with a laserlike purity. Fellow Fool Evan Niu, for one, predicts another round of tremendous iPhone sales. I respect my colleagues but worry that they haven't considered how incredibly quickly the smartphone phenomenon caught on, or what the new trend implies for Apple's results. Grab that premium report on Apple to read a very bullish analysis, and then make up your own mind.

Fool contributor Anders Bylund owns shares of Google but holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and Google and creating a bull call spread position in Apple. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 11, 2012, at 10:42 PM, Jrdazzo wrote:

    What about China Mobile?

    How big is that subscriber base?

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