The recent attempt by AT&T to expand into the smartphone leasing business company [5]in order to encourage customers to upgrade their equipment more frequently only confirms something that most industry observers have suspected for a long time: end customers have finally had it with annual (or even biannual) cell phone updates. And now we have proof. According to the WSJ [6], fewer people are upgrading their smartphones: "The rates at which American cellphone users have traded in their devices for more advanced models have declined over the last few years, according to analysts at UBS. They turned negative last year, when about 68 million people upgraded their phones in the U.S., down more than 9% from a year earlier." That was the first year in the past decade in which the turnover rate was below 0%. Sadly for Apple, Samsung and their competitors, 2013 is not shaping up any better: "UBS predicts upgrades will fall again this year."
[7]
It is unclear precisely which reason dominates for this plunge in end demand: the simplest of course is a drop in disposable income. The WSJ suggests two other: "With smartphone penetration approaching 70% of contract subscribers last year in the U.S., there are fewer customers left to upgrade to the Internet-ready devices and data plans. And among existing smartphone owners, fewer are seeing the need to buy the latest Apple iPhone or Samsung Galaxy as the pace of innovation slows."
Conner Green of Huntsville, Ala., said he won't upgrade his Samsung Galaxy S2 smartphone because he isn't eligible and it would be too expensive to do so. But he has also been less impressed with the latest models from handset makers.
"They haven't thrown anything out that's just like, 'Wow,' " said Mr. Green, who is 26. "There is a cycle every four or five years. It will be a few years before a breakthrough and people buy phones like when Apple first introduced the iPhone," he said.
Likely it is a combination of the above. And while the smartphone makers are still making money hand over fist, the golden age, especially in the US are over:
the slowdown in the U.S. has rattled investors. Shares in Apple have dropped 19% so far this year, as investors grow concerned about slowing iPhone growth and the flattening of the innovation curve. Samsung's stock is down nearly 15% this year after the company's profit outlook disappointed investors and raised concerns that sales of its high-end Galaxy S4 haven't been as strong as expected.
The lack of R&D by the manufacturers is also impacting the carriers, who find themselves in a bind.
[Carriers] suffer when contract subscribers that already have smartphones trade up to new ones, forcing them to pay subsidies that can reach around $400 per device.
To protect profits, carriers have been making it harder for customers to upgrade by assessing new fees and extending the time before they are allowed to buy new models. The new plans rolled out by AT&T and T-Mobile aim to split the difference by allowing more frequent upgrades as long as subscribers give up the subsidy.
Then there is the issue of technological self-cannibalization, so well known to chip makers. However unlike with computers where games, either with or without bloatware, always demand the very latest in technology, when it comes to cell phones and apps, once one has the latest there is hardly a fundamental reason to upgrade due to the technology curve for several years.
Convincing subscribers that they need the latest phone may get harder as devices become more advanced.
Yet the biggest loser from the above is Apple which has been unable to come up with the proverbial "wow" product since Steve Jobs ran the company. From AFP [8]:
Apple's iPhone sales are sputtering as rival smartphone makers ramp up their offerings, a market research firm said Wednesday.
The survey by IHS iSuppli said smartphones are still going strong around the world, but that Apple is lagging.
"Apple's iPhone franchise appears to be stalling as first-quarter shipments of 37.4 million fell below expectations," the report said.
"With the next iPhone model not expected until the second half of the year, there is a real possibility that the full-year 2013 sales volume of the iPhone may be essentially flat at around 150 million units, compared to 134 million units in 2012."
Now under normal conditions we would be very worried about AAPL. However, this is the New Dot Com Normal where companies like AMZN and NFLX are burning through gobs of cash and hitting daily record highs, where companies like YHOO guide lower and disappoint operationally but have "hip" and "edgy" CEOs and soar 10% the next day, and where the only fundamental premise to investing is: "will there be a greater idiot who pays more for this bucket of crap than I just did."
And as long as Bernanke is around, the answer is a resounding yes. So, for the time being at least, we would not be too worried about AAPL.
However, all bad things come to an end eventually. Even, or rather especially, central planning.