Smartphone decline highlights the end of the profitable BabyBoomer-led ‘middle-market’

Smartphones were a great growth market, led by Apple and Samsung – and sales in China. But not today. Annual sales peaked in 2015-2017, and the growth is now in the second-hand market:

  • Global volumes have fallen 27% from an annualised 1.55bn in 2017 to 1.1bn in Q2
  • China’s volumes have halved from a peak 135M in Q4 2016 to 64M in Q2
  • Apple’s iPhone sales have plateaued since 2015 – they were 231M and 232M in 2022

The chart shows the story in terms of the major companies involved:

  • Samsung dominated in 2013 with a maximum market share of 35% in Q3, but are now just 20.5%
  • The top 3 Chinese players had just 9.6% share in Q1 2013, but are now at 32.4%
  • Apple have seemingly held steady – falling slightly from 17.5% to 16.7% in Q2

But a more detailed analysis highlights an important change in Apple’s strategy:

  • In 2013, Apple focused on selling Luxury high-priced iPhones and had a 17% share
  • Samsung’s 32% share dominated the middle market, with Value only 51%
  • But by 2017, Apple was down to 14%, Samsung to 21% – and Value was 65%

Since then, Apple have changed strategy to maintain market share and profits:

  • In the past, they focused on latest model iPhones. But today’s iPhone sites show every model
  • They are now happy for you to choose a cheaper, older, model instead of top-of-the-range
  • So they now offer the SE at €559 alongside the 14 Pro at €1349
  • And iPhones now dominate the second-hand market, with a 49% share

This highlights a vitally important shift in consumer markets.

The rise of the vast BabyBoomer generation changed the nature of consumer marketing. People no longer had to choose between Luxury and Value.

Instead, a new Middle Market emerged where buyers could pay a higher price and customise their purchase. In cars, for example, it became known as “Adding Go-Faster Stripes” to the model.

Thus VW, for example, use the same A series platform for the Audi A3 ($36.5k in the USA) and the Tiguan ($28.3k). And this strategy boosted profits as producers could spread their costs over a larger volume.

But now, as the chart shows, the Middle Market is disappearing. And we are going back to the more polarised world of Luxury v Value, before the Boomers arrived.

This means companies now have to choose their market positioning very carefully. The Luxury segment has high margins but is normally only 10%-15% of the total. And the Value market is fiercely competitive.

APPLE HAVE MAINTAINED SALES BY MOVING INTO THE SECOND-HAND MARKET AND SERVICES

Unlike most companies, Apple don’t break down their Gross Margins by Product area. But last week’s quarterly report showed:

  • iPhone sales revenue fell 3.7% to $157bn in the 9 months to June 2023, from $163bn in 2022
  • Total Apple sales fell in every major region in the same period, except Asia ex-China/Japan
  • Total Gross Margin in the Products segment fell to $84bn from $90bn

Obviously, currency movements have a role in these changes. But essentially, Apple’s strategy is no longer focused on the Luxury and top-end of the Middle Market.

Instead, it is steadily building its share of the booming second-hand market.  This saw 138m second-hand iPhones sold in 2022, and they now have 49% of the market.

These sales are no doubt, lower-margin –  but they also allow Apple to sell more services via its App Store.

Apple has been the world’s most successful company in recent years. Its example highlights how companies need to build Services and new Value revenue to maintain market share and profits.