Q3 smartphone market confirms need to build Services revenue as consumer sales slow

Smartphones have been the flagship product for the consumer market over the past decade. And Q3 confirms two key trends are now underway:

  • One is that the market itself remains in long-term decline as the chart shows
  • The second is that the former highly-profitable middle ground is under growing pressure from low-cost Value offerings

CHINA’S MARKET SLOWS AS CONSUMER CONFIDENCE SLIPS

These trends apply globally. But China, of course, matters most as the world’s largest smartphone market. As analysts Counterpoint note:

“During Q3 2023, the performance of most leading OEMs except Huawei was lackluster….OPPO, vivo and Apple all experienced double-digit decreases in sales.”

And as Bloomberg report, the new competition from Huawei is set to cause major problems for Apple:

“Against the backdrop of the strong growth of Huawei, Apple iPhone 15 series registered a 6% decline in sales. With the iPhone 15, Apple upgraded several key features of its lineup, but has not been able to stir growth in the world’s biggest mobile market. 

“Apple gets about 20% of its revenue from China, second only to the U.S.”

MARKETS ARE MOVING FROM PRODUCTS TO SERVICES

The smartphone market also highlights some major changes taking place in consumer markets as the chart shows:

  • The middle-market continues to be squeezed with Samsung’s market share down to 20% from 33% in 2013
  • Companies are focusing on adding features such as folding phones, but these have not reversed the trend
  • The cost of living crisis means many buyers need to trade down to the Value segment

As analysts IDC note, consumers are also holding onto their smartphones for longer. And today’s ageing populations in the major economies don’t need more “stuff”, as they already own most of what they need:

  • As the chart shows, the US Perennials 55+ cohort are the main source of population growth to 2030
  • And as US household data confirms, spending peaks at age 45-54, and then falls 59% by age 75+

The middle-market is therefore effectively reducing in relative importance. Increasing life expectancy means more people are living longer and joining the low-spending Perennials.

In turn, of course, this highlights the need for companies to develop a more services-based business.

Apple is the role model for this transition, as its latest SEC filing shows:

  • Product sales  declined in 2023 in all 4 main areas – iPhone, Mac, iPad, Wearables
  • But Services sales rose 9%, and are now 22% of total revenue

It supports the transition by ensuring that the iPhone has a long life. And commercially it is focused on building a robust market for used iPhones. As the Washington Post reports:

“Next time you buy a new phone, think of it like a car: The eventual resale value is as important as the new model’s sticker price… A used iPhone holds its value so much better than other high-end smartphones that you might want to think twice about buying anything else.”

The smartphone market highlights how companies are responding very differently to the economic slowdown. Samsung is adding features such as ‘foldables’. But Apple is building services business to provide annuity revenue for the future.