Smartphone Market Saturation Looms Despite Record Sales

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The take-home news of the December-quarter earnings reports from Apple (NASDAQ:AAPL) and Samsung (SSNLF.PK) is that the giants of the smartphone market sold fewer devices than expected.

That may seem surprising given that research firms Strategy Analytics and IDC both reported that global smartphone sales grew by a double-digit figure in the fourth quarter of last year, soaring 34 percent from the quarter in 2012 according to Strategy Analytics’ numbers but only 24 percent according to IDC. But smartphone sales figures from Apple and Samsung, as well as analyses from Raymond James’s Tavis McCourt and Wedge Partners’ Brian Blair and Jun Zhang suggest that the smartphone market has reached a turning point.

Apple’s first-quarter results — released Monday — showed iPhone sales set a record. The 51 million phones sold in the first fiscal quarter were the most Apple has ever sold in any quarter, surpassing the 47.8 million sold in the year-ago quarter. Those strong sales help the company post strong earning and profit numbers.

Yet even though Apple upset tradition and released two versions of its flagship smartphone — the iPhone 5S with Apple Touch ID and the low-cost iPhone 5C with the colored polycarbonate shell — sales figures missed expectations. That fact suggested to investors that the iPhone has little room to keep growing.

Since its introduction in 2007, the iPhone has pursued an upward trajectory that has left onetime stars like BlackBerry (NASDAQ:BBRY), Google-owned (NASDAQ:GOOG) Motorola, and Nokia (NYSE:NOK) in the dust. But now, the high-end smartphone market is becoming saturated, impressive technological advancements are becoming harder to come by, and investors worry that Apple’s time at the top of the market is nearing its end. The lower-than-expected sales figure also suggest that smartphone sales growth is slowing.

Analysts were also concerned to hear that Apple offered second-quarter guidance that was lower than expected, and Zhang wrote in a note to client acquired by Barron’s that Wedge Partners analysts “believe a meaningful part” of that weaker estimate “stems from a strong sequential drop off in iPhone units.”

As for Samsung, the South-Korean handset manufacturer reported on Friday that despite generating record revenue of 59.28 trillion won, or $54.95 billion, in the fourth quarter of 2013, profits declined for the first time in two years, falling to 8.31 trillion won, or $7.7 billion. More important than the disruption of Samsung’s consecutive quarterly profit growth was the fact that earnings from its mobile division were flat compared with a year ago, a drop the company attributed to tough competition from Apple and Chinese vendors.

Without disclosing exact numbers, Samsung said smartphone shipments decreased “slightly” from the third quarter levels. The shipment decreases do not in and of themselves mean the overall smartphone sales are slowing, but it is a sign the industry is under pressure.

Nearly 1 billion smartphones were shipped in 2013, but there is increasing proof that the market, especially for high-end devices, is becoming saturated, making market share growth harder to come by as phones are increasingly being sold to repeat customers looking for upgrades rather than new smartphone users. It is saturation that will sap the momentum of smartphone sales growth this year.

McCourt has termed this phenomenon “The Great Moderation in Smartphones.” In a note to clients acquired by Barron’s, he noted that most salient difference between the strong second- and third-quarter trends and fourth-quarter results is that sales in North American slowed “meaningfully” in the last three months of the year. The smartphone market in the United States is the most saturated in the world.

In 2014, sales of smartphones in China will “hit a wall,” he said, even though the most of recent growth has been generated by Chinese vendors. While approximately two-thirds of sales volumes and 80 percent of revenue in the global mobile device industry comes from non-Chinese vendors, those companies generally reported flat year-over-year sales trends and a modest 7 percent year-over-year gain in revenues.

Comparatively, the industry recorded sales growth of 24 percent. That means, in essence, vast growth of the mobile device industry is coming from Chinese-based vendors. But even Chinese-based vendors “appear to be slowing meaningfully coming off a blockbuster smartphone transition in China from mid-2012 through mid-2013,” McCourt said, per Barron’s. And that means there is “no reason why the high end of the market will reaccelerate” in 2014, according to the analyst.

The big picture is that smartphones are now more like the personal computer market, according to McCourt. For example, Apple’s Mac lineup has a dominant share of the high-end market for personal computers, but the vast majority of PC shipments “occur at the low end.” This means Mac has an approximately 5 percent market share and draws in about 12 percent of global PCs revenues.

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