The Smartphone Super Cycle Is Dead

By EconMatters 

Those Apple Channel checks that got investors all worried ahead of Apple's latest earnings report were spot on, it will show up in this next quarter, as these are forward looking due to the supply chain logistics cycle. 

This makes intuitive sense though if you think about it as smartphones have become a mature product category they have become even more commoditized. In fact one can take a low end $50 dollar smartphone and compare it to a high end $800-$1000 smartphone and there are only minor differences in product specs with technological convergence of all the best and necessary features along with a healthy dose of innovation fatigue. There are only so many marketing gimmicks that Apple or Samsung can come out with at this point in the smartphone cycle, and none of these move the bar enough to justify even the time of buying a new high end Smartphone and transferring over your contact and data information, not even considering the cost of an additional $800-$1000 for the new phone.

 

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In short consumers will keep their existing smartphones longer than ever before, as they value them enough given the high price tag to protect them with proper protective cases, all the features are about as good as they will ever utilize, and consumers would rather spend that $1000 elsewhere. These days consumers are going to hold onto smartphones for at least 3 years or several upgrade iterations, and not run out and buy the latest product upgrade. It is pretty hilarious watching Apple`s desperate marketing of the Red Phone when consumers can easily just buy a much cheaper stylish protective case in any color they desire. 

In the latest quarterly filings of Hedge Funds you see the smart money getting out of Apple stock, and the dumb money in Warren Buffet and Apple themselves buying their own stock at the top of the market. Warren Buffet buying Apple Stock at this point in the Smartphone cycle after everyone else buying the stock for a decade in the most overcrowded trade on the street and the QE Supercycle also coming to an end will provide a nice parting shot into his retirement career. This is even worse than his foray into IBM where he finally threw in the towel after many double downs on that technology dinosaur. Apple will miss the next earnings report bad, investors will finally get that smartphones have become boring commodity products that nobody will ever stand in lines for ever again, and many people will keep their smartphones for five years going forward. 

 

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However, this is just the start of the downturn as Apple gets most of its revenue from smartphones, they have failed to come up with a replacement product, and everyone on the planet who needed a smartphone has already purchased one in a decade of a strong business cycle. Talk about terrible fundamentals, Apple is a short for the next five years at a minimum as the QE Central Bank money leaves financial markets, Apple continues to have declining smartphone numbers, and the global economy heads into recession with the debt and financial market bubbles finally bursting making this next recession one of the worst in a century. Good luck marketing a $1000 smartphone with some new marketing gimmick going forward in that economic environment. The Smartphone Supercycle is over, Apple has had its decade long run, and to cap it all off they built that stupid spaceship office in California, usually like stadium naming rights this marks the top in a company. The only people buying Apple stock will be Warren Buffet all the way down in a value trap and Apple trying to prop up the stock effectively trying to cover up massively declining revenue growth that comes along with the death of the Smartphone Supercycle. 

Those channel checks are right and the pain is just beginning, think about how long you will wait to buy your next high end smartphone? Do you have the same compelling reason to run out and buy the latest Samsung or Apple iteration? The minute differences just don't amount to much in the overall scope of a mature smartphone market where they keep going up in price with only incremental new benefits for the consumer. Similarly to how the Commodity Supercycle ended with a crash in commodity prices, expect smartphone prices to start crashing, even at the high end, as these really are just handheld computers in the end. 

And once the marketing hype fades away when all phones are basically the same damn device that can take pictures, make calls and watch videos and movies equally well, they have in essence become fully commoditized. Next to occur is the price crash in smartphones, once they become fully commoditized, prices start reflecting this fact, and start falling as any commodity product does in the end. Just wait until Apple has to start lowering prices on those high end smartphones just to get rid of excess inventory! 

So I-Phone margins are going to go down considerably from here for the next decade! Think about that for a minute. It only makes sense that Warren Buffet is Apple's biggest fan, and he finally has an IPhone but it is too complicated for him to use, so he still uses his flip phone. He is basically a technology luddite who will be the last to know when the technology market has changed. He is just looking at Apple from all the value metrics that have occurred in the past, the classic value trap! All those pretty financial metrics have occurred in the glory days of the Smartphone Supercycle, Apple will trade going forward on all those pretty financial metrics going south along with the death of the smartphone as a sexy must have device. 

Smartphones are actually pretty boring these days, like a hit song that has been played too much. The newness of the product category and technological innovation has run its course, and all the hype in the world isn't going to make consumers run out and pay a $1000 bucks to replace their current phone that works perfectly fine. In short, the Smartphone Super Cycle is done!

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Comments

Utopia Planitia Wed, 05/16/2018 - 14:12 Permalink

This is a case study of how powerful free markets are. (I realize some will be triggered by "free markets", they can retire to the sidelines.)  Where do you think SnarkPhones would be if the entire industry was under govt. control?  Well, all you have to do is look at what you can do with your landline phone.  Like that?  Essentially you can do precisely what you could do in 1945.  Because of the iron-fisted overarching control of the govt. (there were alternatives that were actually demonstrated, but that is a story for another day)

The evolution of SnarkPhones to commodity status came much faster than it did for PCs/Laptops (and to some extent Tablets).  That was because of market forces and competition.

There are a few headline-grabbing features left to roll out, but they will essentially be hype.  The real question is how many FanBoyZ/GirlZ there are who are willing to throw Zillion Zimbabwe currency units at them.

EconMatters Wed, 05/16/2018 - 14:22 Permalink

Smartphones have become so commoditized that they all look the same, a homogenized rectangular device with the same apps on the front of the screens, severely limiting even the branding or status appeal from one offering to the other, as putting a nice protective case obscures or obliterates the status angle of a given phone almost entirely these days.  

snblitz Wed, 05/16/2018 - 14:51 Permalink

The Moto G5plus $179 discounted at fry's electronics.  No insurance or warranty needed.

Think about it

Moto G5 plus $180 + $0 insurance + $0 extended warranty over two years = $180

Iphone X $1000 + $240 insurance + $200 extended warranty over two years = $1440

https://www.finitespaces.com/2018/02/14/saving-a-lot-on-your-next-smartphone/

The $179 for the G5plus is **without** vendor tie-in or other ties.  You own it outright, it is unlocked, and works with CDMA (Verizon/Sprint) **and** GSM (all the others).

Jim in MN snblitz Wed, 05/16/2018 - 16:07 Permalink

The carriers' ending of handset subsidies marked the beginning of the death of this industry as a ***glamorous*** business.

Used to be routine to see nominally $600 phones sell for $150 on Sprint or wherever.  Heck I waited for Black Friday or Cyber Shitday or something one year and got a pretty nice new phone for.......FREE.

But the past 2-3 years, they are out of that whole platform.  Now it's lease the full freight phone and STILL owe them hundreds of dollars to buy at the end...in other words they are banking on people just leasing and giving back phones (and data) forever.

Who buys a $600-1000 phone?   BUYS it?

No one, that's who.

In reply to by snblitz

kbohip snblitz Wed, 05/16/2018 - 17:38 Permalink

That's a nice phone for the money but I prefer the LG V30 I got for about $75 more during the first month it came out last year.  Best phone I've ever had and LOVE the wide angle camera.  Usually I replace ever year or less as I sell my old phone and put that money towards the new one but I might even hold onto this one.

In reply to by snblitz

brooklinite8 Wed, 05/16/2018 - 15:12 Permalink

I bought a 150.00 USD chinese smart phone on Amazon. Its called Xiaomi Redmi 2 I think. I took that phone to Verizon, ATT, Sprint. Guess what none of these companies support this phone. Most phones they support are expensive. If Apple alone was in this game I have no problems. Everyone along the chain are in this upselling business. Then I said there is not a damn way to save your money. They will come and steal it no matter what. I have been trying hard. This is a virtue that's not sought upon these days. I even had a girl broke up with me as I was not interested in upgrading my small kitchen and bathroom for a whopping 30k. My point is consumers are in it too. I don't get it man. I will take your word and test it by buying a put or two a month before the earning when the Implied Volatility is low... Thanks for the research.

On a side note I can't seem to understand how people get to a point of playing games on their phones all the time during the commute, at work, while walking to a point where they are not paying attention to the surroundings. Am I just not enjoying life or what?

On another side note Verizon has a Unlimited  Text and Call for flat 40.00 a month. You don't have a bill or anything. Its just flat rate. It is a crime to pay more than that for a cell phone use. I already pay around 35 for my home internet. That is phone + internet = 75. When was the last time you looked at your phone bill? If you go through line by line and tell me how much additional taxes you are paying? You are genius. Most of it is not necessary.

 

TacticalTrading Wed, 05/16/2018 - 15:12 Permalink

TV commercial last night: Sprint Deal...

iPhone x for $20/Month (didn't say how many months)
But it looks like we know how AAPL will reduce their inventory
 

You probably have to mortgage your first born to qualify, but hey, they are pushing it

EconMatters Wed, 05/16/2018 - 15:41 Permalink

Here is Apple`s excuse for declining I-Phone sales next quarter on the conference call, the uptick in gasoline prices is the cause - this ready made excuse will be the staple of many conference calls over the summer.

cbxer55 Wed, 05/16/2018 - 16:39 Permalink

I never even got one, I still use a ten year old Samsung Rugby II flip phone with the original battery and it works flawlessly. Never fell for the gimmick of smart phones, never will. My phone company, AT & T, has been trying to get me to get one the last several years, via text, email  and snail mail. I just delete them or tear them up and toss em in the round-open-top-file. 

Grandad Grumps Wed, 05/16/2018 - 17:11 Permalink

I would like them to release free energy next, which releases a lot more technologies ... but there is no way they will give up their control of people through oil.

skeelos Wed, 05/16/2018 - 17:17 Permalink

 

Yeah, and I'm sure there are people out there still using WindowsXP.  The phone folks will figure out a way to fleece the sheep.  The phones are smart so the sheep don't have to be, and the sad thing is that most of the sheep like it that way.

 

Utopia Planitia skeelos Wed, 05/16/2018 - 19:21 Permalink

(even if you aren't a prog) you would crap yourself if you knew how many business systems are still using XP today!  I'm not suggesting that every Windows update should be applied to every business system.  But nearly all of those systems (such as the credit/debit card reader systems) are now networked on the Internet, and therefore highly susceptible to hacking/malware/etc.

For those inclined this opens a door to produce and offer a non-Windows operating system that is fully secure.  It is very possible. Really the biggest impediment to such a change would be to convince business folks to make the change.

In reply to by skeelos

empire explosives Wed, 05/16/2018 - 18:49 Permalink

Many of the providers may have to cut prices also.  I pay about $8/month for tracfone service.  That includes a Samsung J7 with 1000 minutes/year,100GB,and, 1000 texts/year on the verizon,or,ATT towers.  Obviously,if you are a teenager,or, like to talk a lot then you should go elsewhere.

smallbedbug Wed, 05/16/2018 - 19:00 Permalink

Yes, 100% right about smart phone. Another example is Tesla, when it first came out, everybody was jumping in to buy the latest and greatest. Now in 2018 and beyond, the consumer will have more of an selection from other car manufacturers. Tesla is too expensive too like the smart phone.

monopoly Wed, 05/16/2018 - 21:41 Permalink

Terrific article. My daughter works for Apple retail and we get great discounts. Even so, my Iphone 7+ is not even 2 years old and I just love it. Have no desire, or interest in "upgrading". Hell, I do not know how to use 70% of the current features and I do not need them. And you want me to upgrade for even more "features". Good luck with that. A complete waste. My phone does what I want and I will keep it at least 4 years or longer, as long as it keeps on ticking. :)

Will never spend 800+ for a phone. Not worth it. And I love Apple products. 

Charvo Wed, 05/16/2018 - 21:53 Permalink

The reason why PC upgrading slowed down for most people is that only folks who play high-end games need to upgrade to the latest and greatest PCs.  The same applies for smartphones.  I'm not going to shell out several hundred dollars for a phone when I can buy a phone for a couple hundred or even just $100.  I don't play games on my phone.  Most people don't play high end games on their phone.