In what seemed impossible a few years ago, it now appears that the smartphone industry has met its maturity moment. The smartphone industry is rapidly cooling. IDC now expects worldwide smartphone shipment growth to slow to 3.1% this year, down from the torrid 27.8% growth rate the industry produced in 2014.
Smartphone giant Apple has now reported its second-consecutive quarter of year-on-year iPhone shipment declines. Leading Android handset maker Samsung (NASDAQOTH:SSNLF) has produced erratic performance as it attempts to compete with Apple in the high-end markets, and other Android makers in the lower-cost developed markets.
A hallmark of a mature and declining market is the shakeout, where weaker participants leave the industry. If Microsoft (NASDAQ: MSFT) and Sony (NYSE:SNE) are any indication, the smartphone industry may be in the initial phases of a shakeout.
Smartphones are no longer a point of emphasis for Sony
Tech website The Verge reports how quickly Sony has pivoted away from smartphones. In Sony's recently reported first fiscal quarter, the company reported a slim profit in smartphones of $4 million versus losses in prior quarters. However, Sony accomplished this rare profit not by selling more phones; it was mostly accomplished on cost cuts in the division.
The Verge notes the company only sold 3.1 million smartphones in the quarter versus 7.2 million in the comparable quarter. As a result, mobile-division revenue dropped 34%. In fiscal 2016, the company expects to sell only 19 million handsets, and appears to be positioning itself to no longer grow market share in smartphones, but merely to service existing demand.
Microsoft continues to cut from its Nokia Division
New Microsoft CEO Satya Nadella continues to dismantle former CEO Steve Ballmer's decision to buy Nokia's smartphone business. Last year, the company took a $7.5 billion writedown -- essentially the entire purchase price -- and announced 7,800 job cuts, most in the mobile business.
Then in May, the company took further steps away from phone manufacturing. First, Microsoft later agreed to sell its feature-phone (read: non-smartphone) business, including 4,500 employees, to Foxconn, for $350 million. A week later, the company announced approximately 1,850 job cuts, most related to the smartphone business.
It appears that Nadella wasn't finished cutting employees from Microsoft's payroll. A new report from Bloomberg states Microsoft is eliminating an additional 2,850 jobs in fiscal 2017. Between these aforementioned transactions, the company will have shed nearly 17,000 employees, or nearly 70% of the 25,000 it gained through the Nokia purchase. The vast majority of these employees were in its mobile division.
It's important to note that both Microsoft and Sony are still technically in the smartphone business. However, their actions are more in line with companies looking to exit the industry versus companies looking to compete and expand their market share.
A mixed bag for Apple and Samsung
For market leaders Apple and Samsung, a mature, slowing market is sort of a mixed bag. As seen above, a slowing market tends to depress competition as companies exit the business altogether, or stop actively investing in research and development. These two factors allow stronger companies to consolidate remaining market demand while potentially spending less themselves on research and development.
On the other hand, slowing demand in a mature industry requires increased market share in order to continue growing at a level investors are accustomed to. If IDC is right, a 3.1% shipment increase will require price increases, or increased market share, for substantive smartphone-revenue growth for Apple and Samsung.
Jamal Carnette owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Microsoft and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.