Smartphones notched a whopping $239.9 billion in worldwide sales last year. That's pretty hefty number, but what's really interesting is that only 31% of the world's population is currently using smartphones -- leaving a huge amount of potential future growth.
For tech investors trying to figure out the smartphone market, there are two things you should keep in mind: smartphone prices are falling, but high-end devices can't be counted out.
It's not just about low-end smartphones
At the beginning of 2012, the average cost of a smartphone was $450, and now it's just $375, according to IDC. ABI Research expects shipments of smartphones under $250 will increase from 259 million this year to 788 million in 2018. In places like the U.S., the drop in prices comes as a result of smartphone saturation. Right now, the U.S. smartphone penetration has reached 51% to 55% saturation, and will hit 80% by 2017, according to eMarketer.
iPhone 5 with iOS 7. Source: Apple.
But mid-range and high-end smartphones aren't even close to being out of the game -- and Apple (AAPL +3.26%) CEO Tim Cook definitely doesn't believe so. In a conference call last week he said, "I don't subscribe to the common view that the higher-end, if you will, of the smartphone market is at its peak."
Depending on what analysts and research you read, Cook is either being overconfident or right on target. ABI Research seems to suggest the latter: "Mid- and high-cost smartphones will continue to play an important role for operators looking to seed their customer base with the most advanced smartphones." Apple has its own research to back up its confidence, considering it just sold 31.2 million iPhones in the fiscal third quarter of this year -- a record for the company.
It appears that Google (GOOG +0.20%) is siding with Apple's strategy. The company will spend $500 million to market its forthcoming mid-range to high-end Moto X phone -- more than Apple or Samsung's entire mobile marketing budget. Some think Google's launching the phone to set a high standard for phones using Android mobile operating system, but with a budget like that, it's more likely the company is getting serious about its role in the smartphone device segment.
Motorola Mobility's new logo. Source: Motorola.
One thing the majority of the research and analysts agree on is that smartphone prices will continue to drop, and that as prices trend down it will eat into revenue and profits.
A recent report by Citigroup's Glen Yeung stated, "In order to achieve the steep rate of adoption associated with such expansion, we assert that smartphone ASPs will need to fall, further moderating industry revenue growth." Gartner Research echoed a similar sentiment recently: "The challenge in the smartphone market is also that, as penetration moves more and more to the mass market, price points are lowering and in most cases so do margins."
As smartphone prices are dropping, it's harder for larger companies to keep up with smaller vendors in emerging markets, which can put out phones with decent specifications for lower prices. That may be why Apple is reportedly going to launch a cheaper iPhone in the fall, and why Nokia (NOK +3.02%) is releasing the new Lumia 625 in Asia, Africa and Latin America.
Nokia Lumia 625. Source: Nokia.
As BGR pointed out, the new 625 will sell for about $300 greater than local vendor phones in Asia, but will come with specifications close to many Asian-made smartphones and will rely on its brand recognition to help sell the phone. While the 625 is on the higher end of low-priced smartphones, Nokia is also focusing on emerging markets with its Asha 501 smartphone -- a $99 device that started shipping in 90 countries last month.
While high-end phones are still selling well in some markets, the shift toward cheaper phones is definitely in full swing. Investors looking for future gains from tech companies would be wise to look into which companies have a solid global strategy for smartphone sales. Despite strong iPhone sales this past quarter, Apple still needs to work harder to succeed in emerging markets. Meanwhile, Nokia is firmly in emerging markets but has to prove to potential customers that it's worth considering among a growing number of smartphone options.
No smartphone maker is impervious to the changing mobile landscape, and I'd be cautious to assume that any device maker out there knows exactly how to tackle growing markets. As we've seen in Asia, smaller vendors are giving the big guns a run for their money -- and the same story may play out in other emerging markets as well.
