Feature Article

August 30, 2012

Surprise! Smartphones See Accelerated Rise to Dominance

IHS iSuppli Market Intelligence has just released a new report that confirms what many of us already know to be the case - that smartphones are rapidly taking over both the high and low ends of the mobile phone market. Demand from the developed global regions in Asia, Europe and North America for high end smartphones remains huge; the one surprise may be how quickly the demand has grown in less developed and emerging third world regions for smartphones.

The conventional wisdom has long held that feature phones would continue to dominate here, but the ability of manufacturers to drive down the costs of entry level and lower tier smartphones has sealed the fate of feature phones, which will go extinct sooner than has previously been believed. In fact, according to iSuppli, smartphones can now be expected to account for the majority of global cell phone shipments in 2013. That is now two full years ahead of what had previously been the most optimistic of estimates.

Smartphone shipments in 2013 are forecast to account for 54 percent of the total cell phone market, up eight percent from this year and 35 percent since 2011. The year 2013 is the inflection point that will mark the first time that smartphones will make up more than half of all cell phone shipments.

“This represents a major upgrade for the outlook compared to a year ago, when smartphones weren’t expected to take the lead until 2015,” notes HIS senior analyst, Wayne Lam. “Over the past 12 months, smartphones have fallen in price, and a wider variety of models have become available, spurring sales of both low-end smartphones in regions like Asia-Pacific, as well as midrange to high-end phones in the United States and Europe. The solid expansion in both shipments and market share this year of smartphones will make them the leading type of mobile phone for the first time, and shipment growth in the double digits will continue for the next few years.”

The chart below clearly indicates how the mobile device mix will change over the next four years. Note that by 2016 smartphones will represent a truly dominant 67.4 percent of the total cell phone market.

Smart Devices - Higher ARPU

As smartphones become ever more popular and affordable, they become ever more attractive to the wireless carriers. Smartphones consume data, and the many services now being built around smartphones ensure that wireless data remains front and center. Average revenue per user (ARPU) continues to grow significantly around smartphone usage - which means that wireless carriers have no incentives to keep feature phones around any longer.

Even if smartphones remain more expensive than feature phones relative to direct manufacturing costs, the ability of smartphones to drive ARPU makes them far more cost-effective. No carrier can possibly resist top line revenue growth of the sort smartphones are now generating at both the high and low ends of the smartphone market - and this is the real reason feature phones will be entirely killed off in short order.

It is worth noting that the mobile device dynamics highlighted in the iSuppli report also represent the key reasons Microsoft and Nokia are now working closely together. Nokia (before Stephen Elop joined as CEO) had completely misread the future of feature phones and had doubled down on huge sales numbers for feature phones well into the future. Microsoft meanwhile understood that the future of feature phones were smartphones, and once Elop joined Nokia the die was cast. The iSuppli report confirms that Microsoft and Nokia are on the right path to potentially significant growth.

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Edited by Brooke Neuman

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