Assessment of the Smartphone Market

An Analysis of the Smartphone Market

The advent of the smartphone has contributed to the emergence of a new generation of mobile Internet devices. Smartphones have become popular and common across the globe because of Internet connectivity. These devices enable the sharing of real-time information and support communication via the Internet, particularly on social media platforms. As these devices have become popular, the smartphone industry has experienced tremendous growth and profitability. Smartphones will continue to dominate the mobile devices industry given the anticipated increase in sales in the coming years. The anticipated growth of the smartphone industry will also be fueled by the fact that customers in this industry continue to prefer access to a wide range of mobile services unlike before.

For the key players in the smartphone market, an understanding of the market size, share, and structure of this market is critical to enhancing their competitiveness. An economic analysis is essential for these players in order to understand emerging trends and position themselves for profitability. This paper provides an economic analysis of the smartphone market in terms of its size, structure, and trends. Insights obtained from the economic analysis are critical for industry players to develop and adopt effective competitive strategies. This analysis seeks to answer the question, “What are the current economic trends in the smartphone market?” Economic analysis of the smartphone market is also critical for stakeholders in economics and policymakers to understand how to propel the growth of this industry.

Literature Review

The global smartphone market and strategies employed by its key players have been the subject of numerous studies conducted in the recent past. These studies have been fueled by the rapid growth of this industry as smartphones are the most rapidly adopted electronic devices. Cho (2015) notes that the proportion of smartphones in the global mobile industry increased dramatically from 10.9% to 54.9%.[footnoteRef:1] As a result of this growth, smartphones have the core of mobile handset competition worldwide. The increased preference for smartphone devices has contributed to the rapid growth of the smartphone market. Fan & Tang (2020) contend that the smartphone industry has become one of the fastest-growing sectors worldwide. Over the past few years, global smartphone sales have increased from 122 million units to over 1.4 billion units (Dedrick & Kraemer, 2017; Fan & Tang, 2020).[footnoteRef:2] As of 2016, the total revenue from worldwide smartphone sales was $400 billion. [1: Growth of smartphones in the global mobile handset industry between 2008 and 2013. ] [2: Global smartphone sales between 2007 and 2015.]

Lee & Kwon (2017) state that the growth of this market is reflected in the growth of the smartphone penetration rate among adults. It is estimated that the smartphone penetration rate among adults has reached 60% in more than 50 countries worldwide (Lee & Kwon, 2017). However, some countries have a higher penetration rate such as UAE, Singapore, Saudi Arabia, Korea, and the United States at 90.8%, 86.1%, 86.1%, 83%, and 70.7% respectively.[footnoteRef:3] According to Dedrick & Kraemer (2017), the growth of the smartphone market has originated from developed countries like the United States, China, and Japan as well as regions like Europe. However, the Chinese market has played a major role in the growth of this industry throughout the world. [3: Smartphone Penetration Rate among Adults as of 2016. ]

The increase in smartphone penetration rate, which has fueled the growth of this market, is attributable to the enhanced performance and capabilities of these devices since the first iPhone was introduced in 2007 (Lee & Kwon, 2017). According to Cho (2015), competition in the smartphone market relies on a mobile operating system, which incorporates a complex smartphone system. Smartphones are essentially based on a new mobile ecosystem in which the devices are connected to different applications. Lee & Kwon (2017) concur with Cho (2015) that smartphones have improved characteristics like user interface, add-on applications, performance, and security. These characteristics affect the preferences of customers and in turn, shape the competitiveness of key players in this market. This implies that the key players in the smartphone industry compete primarily on the performance and capabilities of their devices. The average specifications and factory prices of smartphones have grown rapidly as key players seek to enhance their competitiveness and profitability (Lee & Kwon, 2017). As shown in Table 1 below, companies in this industry have enhanced the specifications of their devices in effort to enhance competitiveness.

Table 1 – Cumulative Growth of the Technical Attributes of Smartphones[footnoteRef:4] [4: Rate of change in average improvements of smartphone attributes between 2011-2016 by Lee & Kwon (2017).]

Dedrick & Kraemer (2017) contend that the growth in smartphone sales across the globe has been accompanied by an increase in the total value of shipments. As shown in Table 2 below, the total value of smartphone shipments increased to $425.2 billion in 2015 from $52 billion in 2007 (Dedrick & Kraemer, 2017). However, the growth of the total value of smartphone shipments slowed down in 2016 because of market saturation. In 2016, the total value of shipments was $418 billion (Dedrick & Kraemer, 2017). The average selling price of a smartphone also played a key role in the growth of this market. While it remained in the range of $425 from 2007 to 2011, it started declining to $283 in 2016.

Table 2 – Global Smartphone Sales between 2005 and 2016[footnoteRef:5] [5: Source – IDC Worldwide Mobile Phone Tracker, 2017. The totals are based on 385 smartphone manufacturers.]

The evolution of the smartphone market over the past few years has contributed to dramatic changes in market leaders in relation to mobile platforms (Cho, 2015). Prior to the advent of smartphones, Microsoft, Nokia, and Blackberry were the dominant players in the mobile phone industry. However, since the third quarter of 2013, Google and Apple have developed to become major industry players in mobile platforms. Android OS and iOS account for 94.4% of mobile platforms in the global smartphone market (Cho, 2015). Apple and Google’s entrance into the smartphone industry contributed to the rapid growth in the sales of these devices across the globe. Following its entrance into the smartphone industry, Apple has developed to become the market leader in the North American market (Song, 2019). As a result, Apple and Google account for a significant share of the global smartphone market.

Analysis

Existing literature demonstrates that the global smartphone market has continued to experience tremendous growth in the recent past. The growth of this market is shown in the increase in shipments and sales of smartphones. The increase in shipments and sales is fueled by the increased performance and capabilities of smartphones. Smartphone manufacturers are seemingly competing in terms of the technical attributes of their devices. As a result of increased shipments and sales, the smartphone industry is considered one of the most profitable industries. However, since this market has become saturated, current economic trends are critical for current and new competitors. An understanding of the current economic trends of this industry is essential for the various market players. Such insights would help major players to develop strategies to maintain their profitability. Some of the key economic trends in the smartphone market are as discussed below.

Market Growth

According to a recent study by Mordor Intelligence (2021), the global smartphone market is projected to grow by 4% between 2022 and 2027. The expected growth is linked to the fact that this market has been steadily developing and growing over the past few years. Despite becoming saturated, the smartphone market is expected to experience growth in total revenue due to various factors. Some of these factors include the emergence of budget-centric smartphones, an increase in disposable income, an increase in the number of product launches, and the development of telecom infrastructure. In 2019, the total revenue generated by the smartphone market was estimated at $77.5 billion. However, the industry experienced a 6% decline in total revenue in 2020 due to the COVID-19 global pandemic. The global pandemic affected the total revenue of the global smartphone market by disrupting the balance between supply and demand. It is estimated that total revenues in this market will grow to $99.6 billion by 2027, which will represent 7.5% of year-to-year growth (Research and Markets, 2021).

The smartphone sales data collected by Research and Markets (2021) and Mordor Intelligence (2021) shows that quarterly smartphone sales are expected to increase in Africa and other emerging countries. Africa will be the fastest growing smartphone market in the world while Asia Pacific will be the largest market between 2022 and 2027. During this period, the compound annual growth rate is estimated at 4%.

The balance between supply and demand in the smartphone market is expected to bounce back in the aftermath of the COVID-19 global pandemic. From a supply perspective, marginal cost results in an increase in quality. Removing a product from this market results in declining total surplus regardless of savings in fixed costs. On the other hand, the addition of a product or launch of a new product would result in an increase in the total variable profit of a smartphone company. This is primarily because the introduction of a new product into the market fills a gap in demand or address an issue in the quality spectrum. With more disposable income, consumers are increasingly looking for smartphones with enhanced quality in terms of performance and capabilities. Therefore, the introduction of a new product will help fill this gap in the quality spectrum resulting in increased profits for the smartphone company. In addition, the projected introduction of new budget-centric smartphones into the market over the next five years will increase the total variable profits of manufacturers (Mordor Intelligence, 2021). As a result, the smartphone market will experience increased growth and profitability within the next five years.

Fixed costs will also play a critical role in the profitability and growth of the smartphone market. Smartphone companies that attempt to generate savings in the fixed cost through removing a product would end up decreasing their total variable profit. Based on the projected estimated demand, fixed costs that are less than 2.3 times would increase total surplus and contribute to increased profitability of the firm.[footnoteRef:6] This implies that smartphone companies, which introduce new products, would experience an increase in marginal revenue. Supply and demand trends in the smartphone market show that the launch of new products, particularly budget-centric smartphones, could result in an increase in marginal revenue of between 21%-50%. [6: Fixed costs based on a simulation by Fan & Yang (2020). ]

Slowed Down Subscriber Growth

The smartphone market has become saturated, which has affected the operations and profitability of all industry players. Despite being saturated, the oligopolistic smartphone market is not creating enough devices for customers (Fleisher, 2020). Based on a study by GSM Association (2021), it is estimated that the number of subscribers to mobile phone services will increase to 5.7 billion by 2025, which will account for nearly 70% of the global population. However, the smartphone market is expected to experience slowed-down growth in the number of subscribers worldwide. This will be as a result of the saturation of markets and the complex economics of reaching rural markets.

The demand for budget-centric smartphones and more devices to meet customers’ needs will not necessarily contribute to the rapid growth of the number of subscribers. Recent trends indicate that the growth in the number of subscribers in this market is influenced by various factors within and beyond the industry. In this case, market saturation does not necessarily lead to subscriber growth. The slowed-down growth in subscribers is likely to contribute to declining total costs of key players in this market. Factors beyond the smartphone market that affect subscriber growth include unemployment rates, country income level, gross savings, inflation, and GDP per capita. These macroeconomic factors affect individual customers and shape their purchase decisions.

Declining Shipments

Based on data provided by the IDC Worldwide Mobile Phone Tracker (2017), smartphone shipments by the top 2 companies have declined since 2012. In addition, there has also been a decline in the total value of global shipments in this market. Since 2005 and 2012, shipments by top 2 firms and the value of global shipments increased year-to-year. However, as the market started to become saturated, global shipments started to decline.