We all know by now that both Apple and Samsung, giants in the smartphone space, have issued sales warnings. What we don’t all know, and what in fact none of us really knows, is what this means to networking both at the service and the infrastructure level. Smartphones are arguably the most significant single devices in tech history, so surely a seismic change in the market would mean something. What?
How many of you remember Novell? The company was a giant in networking in the ‘80s, and its NetWare technology was for a time the gold standard in workgroup networks. By the end of the decade, Novell was clearly in trouble, an also-ran in the network space. The reason was simple; feature starvation. A workgroup network feature set is 90% or more about file and printer sharing. Once you have that, willingness to pay for more is very limited. Competition for the enabling features quickly kills profits on new sales, and the number of workgroups you can sell to is finite, which means new sales are harder to find in any case.
That’s where we are in smartphones. While there are many new things we do with smartphones, those new things are almost entirely supported by the apps and not the phones. What has kept the market afloat up to now? Three things.
Thing number one is new smartphone markets, outside places like the US and EU. Rapid growth in emerging economies, including China, opened new smartphone opportunities and that fed enough new users into the market to fend off the forces of commoditization. Now, more and more of those new markets are penetrated to the point of sales tapering off. Apple cited the softness in the China market as the reason for its shortfall, but it’s only a factor and not the full explanation.
The second thing that’s supported the market is curb appeal for new models. Remember the long lines at Apple stores to get the latest iPhones? Many of those in line wanted just that—the “latest iPhone”. Not anything in particular about it, other than it was the latest. Apple more than anyone else has appealed to the “yuppie market”, the upscale buyer who wants the latest and greatest of everything. Today, we take smartphones more for granted, and the cachet of new models has less impact.
The third thing is application horsepower requirements. Yes, it’s the apps that drive new uses for smartphones, but you still need the phone to run those apps acceptably. In the period between 2014 and 2017, my research suggested that the non-call, non-text activities of smartphones doubled every year. At the end of last year (2018), that usage was up only about 20% versus the prior year.
There are still new markets, but fewer than before. Cachet for the latest and greatest phones is still a factor, but less than it has been. Without the new-phone-every-year plans from wireless carriers, in fact, my model says that the average user would keep their phone for 28 months. Most won’t run out of phone horsepower in that period because of new app demands. That’s why we’re seeing issues with smartphone sales.
It also explains why we’re hearing so much about things like 5G or augmented reality. The former would obsolete old phones at the radio level, encouraging or even forcing upgrades and new sales. The latter would usher in a new set of apps that would likely demand more horsepower from phones. The question is whether either or both of these “new things” could come about, and more specifically whether the smartphone revenue warnings could change the dynamic to promote them.
The most obvious and direct way to jump-start a refresh in the smartphone space would be for smartphone vendors to offer new 5G-ready models at no increase in price. As these phones become available, operators who offer them would have a competitive incentive to offer 5G services, and other smartphone vendors and operators would be under competitive pressure to match this. In time, if users demonstrated interest in the 5G models, we’d have the start of a refresh in the smartphone space. The question would be how long this might take, since it presumes early smartphone buyers would value 5G capability even without networks to connect with.
Another approach that gets around this lack of service/smartphone synchrony would be to aggressively promote 5G both at the service level and the handset level. What could happen is that the handset vendors would agree to sharp discounts for 5G handsets that operators deploy in a renewal of the new-phone-every-year pattern. The operators would, in return, agree to deploy 5G (the Non-Stand-Alone or NSA version that’s really a radio-network upgrade only) in key market areas where the phone program was available. That would get both ends of the radio side of smartphone 5G in place at the same time. It spreads the risk to both operators and smartphone vendors, which is fairer at one level, but which also complicates the dynamic because both parties would have to believe the other wouldn’t blink. Otherwise they could be stuck with a massive sunk upgrade.
The obvious question that this all raises relates to the other of our two possible drivers of change, the augmented reality or artificial reality stuff. 5G offers the potential for higher connection speeds, and of course that potential may be enough to activate our “core appeal” driver, but actual benefits would be better. It’s been difficult to cite specific needs for mobile broadband speeds greater than 4GLTE can provide, but the AR application is usually considered the most credible. Even so, it has its problems.
The biggest problem is that virtually all smartphone apps are “socialized” more than marketed, meaning that users of the application promote it to their friends and co-workers. That means that getting something started requires a fairly diverse initial population of users to “seed” the market, and that’s inhibited by the fact that AR apps require AR gear, which means an ecosystem has to be put into place before you even get to the question of broadband speed. Then you have to ask whether the AR-receptive subset of the 5G population is large enough to build anything on, and whether requiring that AR and 5G both be available would limit the critical socialization effect. If you decide you need less inhibitors, then you tie to 4G and that then means less pull-through of new smartphones.
The net of all of this is that it’s possible that concerted efforts by operators and smartphone vendors, driven by growing concern that the smartphone space is topping out, could drive 5G adoption forward faster. It’s also possible that such a move would fail because it requires too much harmony across the market. If anyone blinks, the deal sours for all. In the long run, of course, you can’t expect a major wireless upgrade every time you want to drive a phone refresh. We have to accept the facts here, which is that all tech markets tend to lose feature differentiation over time, and vendors lose pricing power and growth potential with the shift.