How Much Further Can Smartphones Propel Apple and Google?

Like all markets, Apple and Google can only ride the smartphone boom for so long.

Mar 1, 2014 at 10:00AM

Apple's (NASDAQ:AAPL) and Google's (NASDAQ:GOOGL) success in the smartphone market has been nothing short of astounding.

The two technology giants are far and away the most important players in this new tech paradigm, no matter how you slice it. For instance, Apple kick-started the modern smartphone movement when it famously introduced the iPhone on Jan. 9, 2007. Google followed up with Android in November 2007 and has seen its open-source operating system blossom into the world's default mobile OS, with 78% of the market share last quarter. And though Google has usurped Apple in terms of the number of smartphones that run its software, Apple still collects the majority of the smartphone industry's profits each quarter.

Like I said, any way you slice it.

However, all markets have their natural limits. Expansion slows. New buyers grow scarcer. So when will that sad day arrive for Apple and Google, and how should investors handle this major tech transition? Let's take a look.

New becomes old
Yesterday, research firm IDC released its estimates for the next several years of the smartphone market. According to IDC, 2014 should once again see strong, albeit increasingly skewed, smartphone growth with the overall market expanding around 20%.

However, as you should hopefully suspect by now, IDC's findings also predict that global smartphone growth will slow to single-digit expansion as soon as 2017, when it will each a tepid 8.3%. The 6.2% smartphone shipment growth expected in 2018 will be more reminiscent of the PC market than the searing growth we've come to expect from the smartphone market.

Thankfully among the various smartphone ecosystems, Apple's iOS and Google's Android should still fare quite well in the years ahead. IDC predicts that Android and iOS will see 10% average annual gains through 2018. And although Microsoft's Windows Phone has the most enticing growth profile during the period (29.5% CAGR), their respective growth rates should be enough to support Android's market share stranglehold and Apple's massive profit margins in the years ahead.

Either way, it's interesting to note just how quickly the smartphone market is heading toward maturity. What only years ago was the new thing in tech is now starting to be viewed as an aging standard, and it's important that investors take notice before it's too late.

Steve Jobs Product Launch

Source: Wikimedia Commons.

Could 2014 be a year to remember?
The implication for investors in all this is that they'll need to increasingly shift their focus from smartphones to new potential markets such as wearable tech, smart TVs, and the Internet of Things as areas of growth.

This isn't a new observation by any means. Companies large and small from Samsung to Qualcomm to Pebble have already launched smartwatches, with more likely to follow suit soon. Similarly, smart TVs are by no means a new or revolutionary concept.

The year 2007 will go down as a revolutionary one in technology -- one in which, thanks to Apple and Google, technology took a major leap forward. In the past 12 months, we've seen a number of products reach market in these aforementioned pockets of opportunity. However, many of these devices are more reminiscent of Palm or BlackBerry circa 2006, rather than Apple or Google back in 2007.

However, as is always the case in technology, that will of course change, and change quickly. Apple has promised at least one new product this year, and Google is busy buying its way into anything that vaguely represents an emerging technology. Investors who anticipated these sea changes have assuredly prospered since. And as we begin to see signals that the smartphone revolution might be cooling in front of our eyes, investors would be well suited to begin to do the same once more.

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Andrew Tonner owns shares of Apple. The Motley Fool recommends, Apple, and Google and owns shares of, Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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