Following quarterly investor calls by phone makers, research firms released a storm of market reports. Most notable, IDC, a little surprised by stronger 4.3 percent market growth than forecasted, reported Samsung’s market leadership rebound.
Richard Windsor of Radio Free Mobile summed up Samsung’s rebound saying:
“Despite this [the Note 7 disaster], the initial signs are good, as the reviews of the device are overwhelmingly positive despite the software shortcomings and pre-orders are pointing to no lasting damage having been done.”
Samsung’s new S8 flagship smartphone product cycle has not yet begun because it is not yet available to consumers. And Apple is in the middle of its product cycle, while consumers wait for its annual announcement of the next iPhone this fall with little more than a red iPhone 7 and an iPhone SE with more storage to advertise.
Because the companies’ product cycles are 180-dgrees out of phase, with Samsung’s annual announcement in Q1 and Apple’s in Q3, this quarter accurately represents the competition between the number one and two market leaders because neither has a shiny newly announced phone to sell to consumers. In Q4 2016, Apple topped the market share list with 18.3 percent share driven by the holiday season and Samsung’s Note 7 woes. This compares to Samsung’s 18.1 percent market share for the same time period. But according to IDC’s report, Samsung market share jumped to 22.8 percent, while Apple sunk to 14.9 percent.
Apple’s aspirations for growth have met a headwind of competition not only from Samsung’s brand recovery, but because according to IDC’s research manager Anthony Scarsella:
Phone makers “have started to implement a single premium design language that ultimately blurs the lines between the high end and the low end, allowing the average consumer to jump on the brand without a hefty upfront investment"
Just a couple of years ago, consumers had few premium smartphone choices: Samsung, Apple and few well-engineered phones from companies such as HTC if they wanted a great camera and smooth and fast app performance. I observed two years ago that the quality of smartphones was rising with the tide of much more reliable, battery-efficient and more integrated components from companies such as Qualcomm and a much-improved and secure Android operating system, closing the gap with the premium smartphones. Using the Motorola G5 Plus as an example, I wrote that the Moto G5 Plus’ camera, durability and budget price could make a consumer rethink buying an iPhone 7 for three times the price. The G5 Plus is not an isolated case, but a worldwide development.
What has changed with smartphones?
Two things have dramatically changed during the past year, increasing the pressure on Apple and premium phone makers.
First, midrange phone cameras have improved dramatically. Cameras lagged improvement compared to other components. With each product cycle, midrange and even budget phone cameras close the gap a little more with flagship phone cameras. Image-enhancing software contributed most of the improvement in these cameras.
Even more image-enhancing software improvements are expected now that researchers at Facebook and Google have made breakthroughs in squeezing machine learning models onto smartphones. Machine learning models can filter noise from sensors, correct lighting and apply themes.
The second dramatic change is consumers do not have to compromise on app performance by buying a midrange or budget smartphone like they had to two years ago. This is why Apple’s iPhone S8 announcement needs to include augmented reality (AR) hardware and features to justify its premium.
Globalization of the smartphone market
The globalization of the smartphone market will have a lasting impact. While Samsung and Apple shipments were essentially flat, Chinese phone makers Huawei, Oppo and Vivo—holding market share positions three through five, respectively—have realized 20 to 30 percent year-over-year quarterly shipment growth in China and other Asian markets. Chinese journalist Ivan Tang confirms and sums up the effect of globalization in China, reporting in Seeking Alpha (login required):
- China's top channel-type smartphone makers extend domination to online markets and tier-1 cities—both are traditional market strongholds for iPhones and Samsung.
- Top local smartphone makers are forced to push more expensive flagship smartphones with new features to enlarge their razor-thin profit margin. It means iPhone faces more challenges.
- Unless new iPhones to be launched this year are really outstanding, Apple's smartphone sales and market share will be squeezed further in China.
Tang makes another important point supporting my thesis of the improving phone quality. The replacement cycle is lengthening, as Chinese consumers are not compelled to upgrade as quickly.
China’s $362 average selling price (ASP) makes it a market that is not conducive to the western-priced flagship phones. Apple’s loss in China, a market representing one-third of the world market for phones, should not be seen as a win for Google. Though Chinese phone makers ship phones with the Android operating system, they do not ship Google Android’s ecosystem of apps (Gmail, Maps, Search, etc.) preinstalled, severely limiting Google’s ability to monetize Chinese consumers with advertising.
With Apple and Samsung’s year-over-year quarterly shipments essentially flat and the phone makers in the other category declining by 1 percent, the top and bottom of the market share positions are a challenge with no place to go but down as Chinese makers roar ahead.