Smartphone sale growth declined significantly last year, and consumer-electronics retailers such as Best Buy as well as parts manufacturers in China are all feeling the burn. While the sector is still growing, its growth has dropped to the lowest point the market has ever seen.

In this clip, Dylan Lewis and Sean O'Reilly go over the many reasons why, in a year when it seemed like everyone either already had or was getting a new smartphone, the product's growth dropped so low, and when we'll probably see it pick up speed again.

A full transcript follows the video.

 

This podcast was recorded on Jan. 15, 2016.

Sean O'Reilly: What do you think is going on here?

Dylan Lewis: It's kind of crazy, right?

O'Reilly: This seems like something out of The Onion. There's no way.

Lewis: Yeah. When you look at Best Buy, there are a whole bunch of competitive issues at play there, where someone like [Amazon.com] creeps in or something like that --

O'Reilly: That was a bad example; only 50,000 Fires sold ...

Lewis: But, to be clear, these are still growing markets. The growth rates just aren't what they were. IDC estimates that the global smartphone market in 2015 grew 9.8%. Growth was over 20% in 2014 year over year. So this is actually the first year of single-digit percentage growth year over year for the smartphone market globally.

O'Reilly: Ever.

Lewis: So I think there's a couple things you can look at here as reasons for why this is happening. One of the big things, as you alluded to in our intro here, is saturation with the market. Like we talked about, everyone you know has a smartphone at this point, for the most part.

O'Reilly: Yeah. I've had one since ... when did you get your first one?

Lewis: Probably four years ago.

O'Reilly: I think I got mine about five, and I actually got it because of my co-workers at ... yeah, I kind of had to because everybody else had it.

Lewis: And the market is much more developed here in the U.S., but part of the reason why we saw such explosive growth in 2014, 2013, was some of that developing parts of the world, China in particular, there were a lot of first-time buyers that were getting these devices. So you think about the typical refresh cycle, the particular upgrade cycle for a lot of these devices, it's usually two and a half, three years.

And so, knowing that 2014 was a particularly big year for sales, it's not surprising that 2015's a little weak. So that's one of the things. I think one of the other big trends is, obviously, we're in the mid-upgrade wave for Apple (NASDAQ:AAPL) products. Like you said, the most recent product release was in the fall with 6s. We will be expecting the iPhone 7 to be coming out this year in the fall. So that's keeping with the typical calendar that Apple releases a new major upgrade to its line every two years.

O'Reilly: Isn't it funny, that that's where I immediately went when you were talking about lackluster sales in smartphones? It was like, "Wait a minute, when did the iPhone ... "

Lewis: Yeah, it's the major barometer. Granted, the 6s had some cool new features: 3D touch, live photo, stuff like that. But consumers know that the big changes come when the number changes on the device. So I think maybe the second half of 2016 will bode a little better for this market.

O'Reilly: My mother just got the 6s, and there was some debate. She really wanted the newer one, but there was some, "OK, should we wait for the 7?"

Lewis: I couldn't wait.

O'Reilly: I know you couldn't. You were so happy that day, too.

Lewis: I was giddy, yeah. And lastly, these are tough comps to be going up against. Like I talked about. The iPhone 6 and the iPhone 6 Plus, which was Apple's first foray into the phablet market, did remarkably well. Just, awesome products, they sold tons of devices. And so, you're going up against really tough year-over-year comparisons in 2016. So, that's particularly difficult. All that said, I think there are a few things to watch here.

Most of the pessimism that I've seen, particularly that coming from Apple suppliers, is really confined to the first half of 2016, which isn't surprising, because, like I said, the iPhone update will be coming out in the second half of 2016. So the second half should be much stronger. We'll get some insight from Apple as to what they expect for the year in terms of guidance at the end of this month when they report earnings. So we'll get some color there in addition to what they've done in the past with the holiday season and everything like that.

But I think one of the most interesting things, Apple trying to get ahead of some of these trends and trying to push the upgrade cycle faster than the two and a half to three years that some consumers seem to be on is the Apple iPhone upgrade program, where you pay the monthly $30 or so and you can upgrade yearly.

O'Reilly: Do you think that's a good deal?

Lewis: We did the math on it. If you're someone who actively wants the best model, and you are divorced from a carrier subsidy model, then it's not bad. And that's one other thing that also comes into play with a lot of these numbers. You look at some of the major carriers. You know this space a little bit better than I do. But most of them are moving away from allowing new customers to sign up for subsidy plans.

O'Reilly: It was a big deal when Verizon did it. I knew that big things were happening, because a little over a year ago, when I was doing this same show with Nathan Hamilton, he started talking to me about T-Mobile (NASDAQ:TMUS), and I was like, "I should switch to T-Mobile." I switched to T-Mobile from Verizon because of the show. And then, I didn't realize how big of a deal or how quickly it had happened, because now they're all like that. Sprint's begging for my mother-in-law to stay with them, all kinds of stuff.

Lewis: Yeah. Before we started doing the show, before we came in the studio, talking with Kristine Harjes, the healthcare editor --

O'Reilly: That's right, folks. We do talk to each other.

Lewis: She'd said, "You guys are talking about iPhone update rates, I've had the same --" she has an iPhone 5, "-- iPhone for three years." And I was like, "Do you not have subsidies through your carrier?" She was like, "No. So I don't really want to pay the $650 or so it would cost to get a new phone."

And I think that's one of the issues with all the carriers moving away from the subsidy is, a lot of people are so ingrained into that thought of, "OK, this new phone will cost me $150 through my plan." And then you see the actual retail sticker price that phone is worth, and without a subsidy model, you're paying $650. You're like, "Man, that's a lot of money!"

O'Reilly: That was the thing that happened when I went in and did the T-Mobile switch, because the one way they can mitigate that is just no interest, two years, you pay off the phone. So it's $650, 24 months. So I'm paying like $28 or so a month. The second that ends, my cell phone bill gets really cheap, and it's going to be awesome. But then I'm going to want the new iPhone. Agh!

Lewis: Yeah, then they're going to drop some new features ...

O'Reilly: They're going to give me some wireless headphones and all this stuff, and game over.

Dylan Lewis has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com and Apple. The Motley Fool recommends Verizon Communications. 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.