Smartphones are now the world’s dominant computing device.
In 2011, smartphone sales exceeded PC sales for the first time—and we believe there will be nearly twice as many smartphones as PCs sold next year.
Apple, for example, sold 37 million iPhones in the fourth quarter of last year alone. All told, it sold more iOS devices last year (which includes iPads) than the total number of Macs sold in its 28 years of existence.
Smartphones are never going to displace PCs, of course. But the market for them will eventually be vastly larger than the PC market, both in units sold and revenue.
Despite all all our technological advancement, PCs are still not ubiquitous. Mobile phones, on the other hand, are everywhere. The International Telecommunications Union estimates that 87 per cent of the world’s population are mobile subscribers—including 79 per cent of the developing world.
In this report, we have defined smartphones as mobile phones that can browse the web and run apps. This includes previous-generation platforms like Symbian (Nokia), Bada (Samsung) and BlackBerry (RIM), but not Japanese phones which have limited web browsing and app capabilities.
In this report, we are publishing our forecast for the smartphone market through 2016.
We should note that our forecast is much more optimistic than those of many research firms, who peg smartphone sales at about 1 billion units in 2015. But we actually think our estimates could well end up being conservative.
Here are the highlights:
- Smartphone unit sales will reach nearly 1.6 billion by 2016.
- Unit sales will grow at an ~28 per cent compound annual growth rate from 2011 to 2016.
- Smartphones will represent two-thirds of all mobile phone purchases by 2016,
- Smartphones will be an almost $320 billion market by 2016, vs. $150 billion in 2011
These forecasts compare to the following unit sales of smartphones, tablets, and PCs in 2011:
- 2011 smartphone unit sales: 472 million.
- 2011 PC units: 352 million.
- 2011 Tablet units (including e-readers): 95 million
Overview and Background
Smartphones burst onto the scene more than a decade ago with the first generation of RIM BlackBerry devices and Nokia and Samsung phones. Sales then grew relatively slowly until the iPhone launch in 2007 turbocharged the industry.
Sales then slowed again with the huge fall-off in consumer and business spending during the Great Recession. Despite being the new “hot” technology and quickly becoming a necessity of life for many businesspeople, global smartphone sales only grew 17 per cent and 25 per cent in 2008 and 2009, respectively—and not from a particularly large base, either.
Sales have regained their momentum as the economy has improved though, increasing 71 per cent in 2010 and 57 per cent last year. Smartphones accounted for approximately 27 per cent of all mobile phone sales in 2011, up from 19 per cent a year prior.
Despite this rapid growth, global smartphone penetration still only stands at approximately 10 per cent of the handset market.
At the end of 2011, the International Telecommunication Union estimated there were approximately 5.9 billion mobile subscribers worldwide. At a 10 per cent penetration rate that means there are about 5 billion people still using feature phones (aka dumbphones). In other words, a huge market opportunity still lies ahead for smartphones and, despite their visibility in developed countries, they are still in their infancy worldwide.
Our smartphone growth forecast is therefore driven by three key assumptions:
- Greater penetration of existing markets
- Replacement of “dumbphones” with smartphones
- Lower unit prices
- Rapid adoption in emerging markets
Furthermore, phones generally have a higher replacement rate per person than PCs and tablets. So this should drive a higher velocity of unit sales as markets become more penetrated.
Higher Sales In Existing Markets
Last year was the year smartphones really hit the mainstream in the world’s biggest economies.
According to comScore, U.S. smartphone penetration jumped 15 per cent last year to almost 42 per cent.
In Europe’s five largest economies (Germany, United Kingdom, France, Italy, Spain), penetration grew an average of 13 per cent. In Spain and the U.K., more than 50 per cent of mobile users now have smartphones (see chart to the right).
Unsurprisingly, in some segments of the market, smartphones have become the only phones. Nielsen found, for example, that smartphone penetration has risen above 50 per cent across all income brackets for Americans aged 18 to 24, but among older age groups adoption falls sharply (see chart below to the right). Nielsen’s survey indicates that young people increasingly view the devices as a necessity—regardless of income.
Furthermore, among Americans who had purchased a phone in the previous three months, smartphone penetration was an astounding 69 per cent. While that rate was probably boosted by the holiday season, it nonetheless shows that smartphones have essentially replaced feature phones for most Americans.
In other words, we have reached a sort of tipping point for smartphones in developed mobile markets. There will always be a small minority of subscribers who prefer feature phones, presumably for the cheaper plans and perhaps even the simplicity. However, within five years the vast majority of mobile subscribers in mature mobile markets will be using smartphones.
We are forecasting that smartphones will represent 90 per cent of new phone purchases in the U.S. in 2016.
Prices Will Continue To Fall
Like all new technologies to burst into the market, the average price of a smartphone has already fallen significantly since their introduction—and will continue to do so as penetration increases. According to research firm NPD, the average price of smartphones has fallen for four consecutive quarters through the third quarter of 2011 (the study includes carrier subsidies, but the underlying price drop is real). In fact, many smartphones are now given away for “free,” including the iPhone 3GS.
What’s more, smartphones are increasingly becoming commoditized in the market (with the iPhone being a huge and remarkable exception).
For most consumers, the name of individual smartphone models not named “iPhone” does not really resonate. Case in point: The top three best-selling phone models of 2011 were all iPhones, according to comScore.
What consumers have come to expect in smartphones is a certain set of features, namely:
- Big high-resolution screen
- Access to relatively high-speed mobile internet (i.e. 3G or higher).
- Access to an expansive content universe (i.e. lots of mobile apps).
And that’s pretty much it!
Some people need more features of course, but for the average consumer, Apple’s “Siri” won’t seal the deal yet.
The introduction of Google’s Android operating system in 2008 was crucial to this development (see chart to the right).
Android was important because it streamlined an operating system that otherwise disparate handset makers could coalesce around. Before Android, the smartphone landscape was more fractured, with numerous company-specific platforms vying for dominance.
Android let handset manufacturers effectively target multiple segments of the smartphone market because all Android phones plug into the expansive content universe of the operating system. In other words, Android opened up the market to a wider consumer audience because both a $100 HTC phone and a $300 Samsung phone have access to Android’s mobile app store. In countries with limited or no carrier subsidies—which is much of the developing world—the price diversity of the Android platform will be a huge boon to adoption.
We expect smartphone prices to fall modestly in the near-term as the continued popularity of high-end models like the iPhone will keep the ASP (Average Selling Price) buoyant. However, we expect the drop in ASP to accelerate in the coming years because:
- Increased adoption in emerging markets creates economies of scale.
- Handset makers not named Apple will drop pricing to gain traction in emerging markets.
- Handset makers will develop basic low-end models specifically for emerging markets.
The bulk of the growth in smartphone’s sales will come from emerging markets. “Mature” smartphone markets will be more or less saturated within five years and will largely grow in line with their overall national mobile market.
China and India, for example, are both approaching 1 billion mobile subscribers—with only minimal smartphone penetration.
Of China’s approximately 1 billion mobile users, only about 100 million are estimated to have smartphones. India’s smartphone penetration is even lower, standing at approximately 3 per cent, according to industry analyst Tomi Ahonen. Rounding out the BRIC countries, Ahonen estimates than Russia has 11 per cent penetration and Brazil 12 per cent penetration (always take these stats with a grain of salt, of course).
It is inevitable that this will change.
Smartphone sales have already started to gain traction in China. Apple even had to suspend iPhone 4S sales in China after crowds overwhelmed stores in January. India will be a bit tougher to crack because of market inefficiencies stemming from its notoriously bloated and corrupt bureaucracy. Nonetheless, India and a number of the other large developing countries will eventually catch up, too. We believe that smartphone sales will exceed 400 million units annually in China alone by 2016.
Finally, it is easy to forget that smartphones offer an attractive alternative to PCs for bringing people online.
Internet access is not nearly as ubiquitous worldwide as many people often assume—we estimate that only about one-third of the world’s population currently has access to the internet.
Only a few years ago, almost all internet users came online through an expensive fixed access point. Increasingly, however, users are accessing the internet through a more cost-effective mobile device, like smartphones or tablets (see chart above). Smartphones, in other words, offer a cheap alternative to PCs for bringing people online in the developing world.
The Bottom Line
We think smartphone sales will grow at a much faster rate than most analysts think, buoyed by their limited global penetration, a replacement cycle with the ~5 billion plus mobile subscribers still using feature phones, and falling prices.
Specifically, we think unit sales will exceed 1.5 billion per year in 5 years for the following reasons:
- The average price will continue to fall
- There is still room for growth in relatively “mature” markets.
- The world’s largest mobile markets by population have limited smartphone penetration.
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.