Premium Range Smartphone OEM Strategies, Flexible Displays and 5G: A Triumvirate to Staunch the Declining Market?

The announcement of third calendar-quarter results from most of the major smartphone manufacturers shows an industry on the decline. While the sets of poor results are not necessarily uncommon for figures released in that particular quarter—a dip in performance as the market gears up for the buoyant holiday season—it could hold more underlying problems than first meets the eye. Stagnant smartphone shipments, saturating addressable markets, ballooning Average Selling Prices (ASPs), and consumer price fatigue are all working together to create a market environment that is currently short on growth. Not all is yet lost, though, as new technology innovation and features are just around the corner to help arrest the decline. However, if established Original Equipment Manufacturers (OEMs) are to take advantage of this innovation, they will need to modernize their strategies or else find themselves constrained by legacy.

Of particular note from the latest sets of financial figures is the continuing poor performance of number one smartphone manufacturer Samsung, reflecting how much the market has stagnated. Samsung has seen its smartphone shipments bottom out since March 2018 and has repeatedly reported weaker than expected sales of its high-end models. Having already taken steps to scale back its low and mid-tier smartphones, and despite the relative success of its “A” range of devices, it is at the premium end that the company is in need of a major refresh to help stimulate sales, improve ASPs, and compete more effectively against Apple and the continuing rise of Huawei. While this change in strategy will go some way to fending off strong competition in the premium market, Samsung is also notably challenged at both ends of the smartphone market as it also battles aggressive competition in the low- and mid-tier handset segments against vendors like Xiaomi, OPPO, and Vivo.

Adding to the lackluster display from Samsung are the diminishing fortunes of Apple, which may be a marker to an undercurrent of failing health in the smartphone industry and lower overall growth trends.As the current bellwether of the (high-end) smartphone market, Apple has stuck to its guns in terms of making revenue and profitability a priority, but its latest quarterly figures point to flat iPhone shipments. Although revenue has increased, it is mostly a reflection of the higher ASPs commanded across its latest tranche of launched devices.Undoubtedly, Apple has had stellar success in the market over the past decade, reaping high margins from its iPhone business, but it may now be witnessing the start of the demise of its smartphone growth era. This has been borne out by the warnings from some along its supply chain calling for reductions in component shipments, as well as indications from the investor community over declining revenue growth expectations. It is also not a coincidence that Apple has now decided to drop its shipment data from its report and accounts, hiding declines in smartphone growth, while it looks to grow other revenue streams, notably its streaming video service, which is expected to be launched in 2019 with the intention of building on its substantial installed user base.

Digging a little deeper into Apple’s finances shows that it is heavily reliant on iPhone sales, which account for around 60% of its revenue. It has also been steadily pushing up the ASP, taking it from US$618 to US$793 in just one year for the September quarter. This ASP is far higher than any of its competitors (for comparison, Samsung’s ASP was less than a third of Apple’s in 3Q 2018 at US$220), which begs the question how sustainable is this increase and how much further can it be pushed by Apple to balance flat or declining iPhone sales. The company broke the US$1,000 barrier with the iPhone X in 2017 and, with its latest batch of iPhones shifting prices even higher, the possibility to compensate for reducing shipments by increasing ASPs suggests future growth is to be extremely limited. While the simple calculation of shipments multiplied by ASPs will give one view on revenue, other factors will also come into play that will affect its ability to increase profitability, such as inflation, component costs, and trade tariffs, all of which are coming under increasing pressure across the smartphones industry.

While Apple has been attempting to create differentiation in the high end, through pricing, technology, and screen size, Huawei has also gotten in on the act with its range of Mate devices that have seen it push the envelope on screen size (with the Mate 20 X), while also breaking its own US$1,000 barrier for a non-luxury branded model with the Mate 20 Pro. While the flagship P and Mate series devices are shipping more than 10 million units each, strengthening the company’s position in the high-end market, it is the mid-range nova series that has helped shore up shipment growth.

For the time being, both Apple and Huawei are managing to find some level of shipment and/or revenue growth in the high end, while also improving the levels and breadth of ASPs across their flagship portfolios. However, there does appear to be some fundamental issues that need to be addressed by Samsung. As a market leader, the company is in severe need of an overhaul to its Galaxy S range and, having virtually invented the phablet sector, it is in danger of succumbing to its competitors if it does not evolve and innovate, and fast. It is imperative that Samsung re-examine its Galaxy S and Note line-ups with a thorough review of its premium smartphone portfolio set for 2019. Four versions of its next flagship Galaxy S series are expected at launch, probably in 1Q 2019, ranging from the much needed introduction of a cheaper version to a 5G-capable smartphone. This will allow it to compete more effectively against Huawei and Apple, giving it a vital selection of models across price tiers and functionalities, providing much needed improvements in innovation and experiences that should appeal to a much wider range of consumers. However, Samsung needs to implement this change and pricing in its flagship models, while showing a clear delineation of features and functionalities, or else it may run the risk of cannibalizing some of its successful mid-tier models.

In contrast, Apple needs to be extremely careful about raising prices too high in its iPhone segment, while also innovating across its product line. The company relies heavily on revenue from its smartphones, and with top-range iPhone models already ranging from US$1,000 to US$1,350 it could experience falling demand and revenue in a tightening economic environment. While the company is changing tack and putting greater store in revenue being generated from content and services, it could be a high-risk strategy, as revenue growth has been bound to the success of its iPhone products. Any issues Apple has down the line with this change could see a dramatic collapse of its business, which would not be the first time in the smartphone industry when a lead vendor has fallen quickly from a position of market strength.

Undoubtedly, smartphone growth has dwindled substantially over the past 12 months, and replacement cycles for existing users have lengthened as current features have matured. Major vendors have been lambasted for upgraded devices looking far too similar to their predecessors, withiteration rather than design innovation becoming the norm. In fairness, it is increasingly difficult for vendors to differentiate on features and functionalities, with price being one of the very few competitive factors, and the value pricing sector already exploited by a number of Chinese and Indian vendors.

While there is no real quick fix for vendors to turn the tide of market decline, once allowances are made for increasing competitive factors, it is incumbent on the major vendors to make sure that they remain competitive, continually providing a set of captivating and effective innovations in their portfolios, extending across many devices, segments, and form factors. Although iterative smartphone upgrades have introduced more processing power, better cameras, bezel-less displays, smart biometrics, voice recognition platforms, and Artificial Intelligence (AI), not all of these have grabbed the attention of consumers. These technology features will undoubtedly continue to be enhanced and mature in future smartphones, but there is also need for the major vendors to strengthen their business competitiveness and technological leadership in the mid- to long-term. The hope is that this will be kicked off with the launch and integration of 5G and flexible displays into device models, while also showcasing other features and services that can take advantage of these applications, such as improvements to voice assistance, AI, and smart biometrics.

The use of 5G and flexible/foldable displays may do enough to galvanize an industry on the wane, creating improved user experiences (UXs), while stimulating smartphone replacement rates. As most of the major vendors are expected to launch such devices over the next 18 months, each will need to tread carefully when accommodating them in their portfolios, as they are sure to command high ASPs; and this comes at a time of prevailing consumer smartphone price fatigue. Moreover, vendors will need to ensure that these introductions provide a clear purpose to consumers, offering strong reasons for purchase, or else they run the risk of becoming low-volume niche products.

Although 5G is likely to be used as a point of differentiation, with vendors vying for the “first-to-market” tag, its introduction could actually be a “silver bullet” for the wider smartphone industry. Expectations are that 5G smartphones will start to become available during 1H 2019, and by the end of 2020, all major vendors will have at least one high-end model that is 5G ready. With 5G promising enhanced broadband connectivity speed and services, users will also be introduced to new, unique, and innovative ways to interact with their devices. Immersive UXs are expected to continue evolving and, under this new paradigm, smartphones will develop to become an extended part of a wider ecosystem through which many applications and services will be accessed. Based on these initiatives, ABI Research expects smartphone portfolios to change immeasurably from today’s devices with 5G acting as the fulcrum, leading to the introduction of new device form factors that leverage a host of new and improved technologies, which will be activated by cues taken from the users’ surroundings, applications, or circumstances.