2 Reasons Apple's iPhone Won't Take Two-Thirds of the U.S. Smartphone Market

Based on the current rate of smartphone adoption, and more specifically, the rate of adoption of Apple's (NASDAQ: AAPL  ) iPhone, analyst Horace Dediu at Asymco is projecting that, by the time the U.S. smartphone market nears total saturation (around 2017), the iPhone will account for about two-thirds of U.S. smartphones. In other words, Apple will have about 180 million loyal, U.S.-based iPhone users.

The rate of smartphone adoption in the U.S. has been fairly steady, and to his credit, Dediu has been able to successfully project adoption rates in recent years. At the same time, Apple's market share has stayed steady, while Apple's ecosystem keeps existing customers coming back.

Yet, there are factors at play that could spoil Dediu's projection: Carriers, like T-Mobile (NYSE: TMUS  ) , moving away from subsidies, and the hardware innovations produced by Google's (NASDAQ: GOOGL  ) Android partners.

Carriers could ditch subsidies
It's indisputable: In markets where smartphone subsidies are generous, Apple's iPhone does extremely well. Where they are nonexistent, it struggles. Right now, U.S. carriers are happy to subsidize the iPhone, but that might not always be the case.

T-Mobile (NYSE: TMUS  ) ditched smartphone subsidies earlier this year in favor of full retail pricing -- T-Mobile subscribers can buy their phone up front or pay for it in monthly installments, but either way, they're paying the full retail price of the phone. Although many thought T-Mobile would fall flat on its face (U.S. smartphone users were said to want subsidies), the carrier has found stunning success, and is now the nation's fastest-growing wireless provider.

T-Mobile's success has attracted the interest of other carriers. AT&T recently introduced a similar plan that allows subscribers to cut their monthly bill if they pay for their own handset while its CEO has been hinting that his company plans to ditch subsidies in the near future. If T-Mobile's policy becomes the standard, Apple could have a difficult time selling its expensive smartphones to U.S. customers (indeed, most T-Mobile subscribers are not Apple customers). Without subsidies, cheaper handsets appear more attractive.

Android's open model has produced far more innovation
Google's decentralized Android model has the potential to produce far more innovation than Apple's walled garden. The iPhone may have kicked off the mobile computing revolution, spawning numerous competitors (including, arguably, Google's Android), but in just the last year or two, Google's hardware partners have outpaced Apple.

In their quest to compete with both Apple and each other, Google's Android partners have introduced phones of every shape and size: Samsung introduced the first phablet in 2012; Sony's phones are waterproof; Asus' new phone can transform into a tablet; LG now has a phone that can heal itself.

While Apple can respond to these advancements -- it is widely expected to introduce a larger phone in 2014 -- it is only one company. Google's model may produce fragmentation, but it's inherently full of optionality. Bigger phones might not do it, or waterproof phones, or even self-repairing phones. But the nature of Google's ecosystem leaves the door open for something radical to emerge -- something that could steal many of Apple's customers one day.

The world in 2017
Of course, that might never happen -- Dediu's projection might play out perfectly. But I think investors should view it skeptically. Four years ago, Samsung's Galaxy lineup didn't even exist, and Apple was still fighting BlackBerry for dominance.

No doubt, times have changed, and the smartphone market is far more mature now than it was back then. But rapid advancements in technology are common occurrences -- trying to gauge the tech landscape four years from now is an exercise in futility.

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Read/Post Comments (11) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 17, 2013, at 10:11 AM, yogaman101a wrote:

    It's just perma-bear Sam Matters. Check out his other dire warnings.

  • Report this Comment On December 17, 2013, at 10:11 AM, yogaman101a wrote:

    It's just perma-bear Sam Matters. Check out his other dire warnings.

  • Report this Comment On December 17, 2013, at 10:15 AM, larryw101 wrote:

    This clown of a author, Sam Mattera, is at it again.

    This is his 3rd Apple bashing article just in the past week alone.

    He is clearly an attention seeker and clearly makes a fool of himself each time he does an article.

    This freckle faced kid has absolutely zero credentials and yet has written over 60 Apple hashing articles this past year alone. He's never been right yet with any predictions.

    BTW, he's long Blackberry ….. need I say more?

    Come on Motley, for the love of Pete, get some real talented writers to write for you instead of bozos like Mattera.

  • Report this Comment On December 17, 2013, at 10:26 AM, larryw101 wrote:

    Sam, you should check out Yahoo and some other investment message boards. You're a pretty popular guy it seems. I don't think you realize what a fool you are making of yourself, or maybe you do and feel the attention is worth more than your reputation.

    Trust me, you have little to no credibility left. Maybe you should concentrate on your schooling rather than pumping out one negative article after another on Apple.

    I swear you are obsessed in doing so.

  • Report this Comment On December 17, 2013, at 10:35 AM, melegross wrote:

    I don't see what's being said here. What hardware innovations? I don't see any. Larger size? Is that an innovation? If so, it was Apple that first did it, and it looks like we'll see larger iPhones next year. But, the iPhone is still the biggest selling model smartphone in the world, by far.

    Waterproof? Well, that's taking it a bit far. First of all, the US government doesn't allow the term "waterproof" for most devices, and these phones are not an exception. The proper, and legal tern is "water resistant". But even then, they are just splash resistant. They don't qualify for the term "water resistant".

    So, back to innovation.

    Retina screen

    Touch sensor (that actually works!)

    Lightning socket for far more adaptability then the USB plug other phones use.

    World phone capabilities lacking in other phones

    Vastly superior Eco-system

    First phone with usable, and useful voice control in Siri.

    Two color, self adjusting, flash for much better color flash pictures.

    Invented the nano sim, now the standard.

    First 64 bit CPU, which does, despite the critics, leads to much better performance in a number of areas. Leading to a completely 64 bit OS that still runs 32 bit apps. Plus all of Apple's apps themselves now being 64 bits as well. 64 bit SKU for third party developers, resulting in much better performance from apps that need high performance, such as Procreate, and others.

    IBeacons, which can already be used by more than 200 million iOS devices in the field, and which is considered to be much superior to the dying NFC we see Google promoting. Wallet, which is Google's NFc app now uses iBeacons as well. I see so e handwriting on that wall.

    I could go on. It's really not wanting to give Apple credit for much that permeates the field of tech writers in general that leads to the thinking in this article.

    The truth is that pretty much everything in mobile tech that we see today was spearheaded by Apple, and likely will continue to be.

    There is nothing that Android does that iOS can't do if Apple finds it to be of use. Heck, much of whT Google does with Android was taken from iOS.

  • Report this Comment On December 17, 2013, at 10:44 AM, larryw101 wrote:

    Het Sam, check out Yahoo. There is postings suggesting to boycott Motley because of your worthless and slanted journalism.

    Like I say, your credibility is zero.

  • Report this Comment On December 17, 2013, at 11:07 AM, joelferguson wrote:

    I don't understand your logic. You state that T-Mobile has found "stunning success" selling iPhones without subsidies, then conclude that when ATT and Verizon drops subsidies that iPhone sells will go down. I didn't even bother to read your second argument.

  • Report this Comment On December 17, 2013, at 11:15 AM, drax7 wrote:

    Sam somebody is paying you to write these articles, google or Samsung most likely.

  • Report this Comment On December 17, 2013, at 11:47 AM, gametv wrote:

    sam, it all comes down to the ecosystem. when i have all my music in an itunes library, do I want to switch to android? the bigger coming ecosystem element will be the wallet. apple is said to be working on a wallet based on ibeacons that will be a foundation of retail purchases. google has their own wallet. in the near future the company that gets people to leave their wallet at home and use their phone for payments is going to create a glue that binds people to that platform. i agree that 2/3 of the market will be difficult to reach, however, let's see how the new wearables, iphone 6 and ibeacons play out. your article lists reasons that apple could have difficulty increasing share, but those reasons are pretty speculative and weak. either way, apple is highly undervalued for a company that has alot of ammo up its sleeve. compare the p/e ratio of apple to google or amazon. apple's stock price is a merely an artifact of technical issues. the coming earnings will put that to rest.

  • Report this Comment On December 17, 2013, at 2:48 PM, Pj6308 wrote:

    sam, your profile says you have a love for all things finance. You should stick with finance as you obviously have no idea of anything technological. Unless you have real facts to base your predictions on, stop embarrassing the MF community.

  • Report this Comment On December 21, 2013, at 9:03 PM, CPA01 wrote:

    The peanut gallery just resorts to personal attacks rather than addressing his points.

    He's wrong because of what rational, fact based argument?

    FYI, Retina is a marketing term. High resolution screens have been out for decades.

    Touch sensors that work have been out for decades. Remember back in the late 90s when Airliners rolled out self check in? Working touch sensors.

    Lightning plug is a money grab and is in no way more adaptable than USB.

    World capabilities rely on frequencies. And if you want a truly globally phone, you get a satellite phone. Which predate the iPhone by at least a decade.

    Ecosystem superiority is an opinion. And when you look at apps, something like 90% aren't downloaded more than a few hundred times. More apps isn't better when almost all of them aren't being used.

    Palm had voice assistance before Apple did on palm digital assistants.

    Flash? Really? DSLRs have way better flash and flash settings than the iPhone does and have had for way before the iPhone was invented.

    Nano sim is hardly the standard. Many, many, many phones still ship with Micro, Mini or Standard.

    The 5s's speed almost entirely comes from ARMv8's changes and very little from 64 bit. Unless dumb iSheep want to argue that 10% > 90%, but math was never something that iSheep are good at.

    So what has Apple actually innovated?

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