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Apple’s earnings miss sounds warning bell for smartphone industry

Without a major technology breakthrough, people are in far less of a hurry to upgrade their phones.

NEW YORK: If Apple Inc.’s weaker-than-expected quarterly result is anything to go by, the global smartphone industry is a lot more vulnerable to economic shocks these days than during the 2008-2009 financial crisis. In developed markets, every other person already owns a smartphone. In emerging markets, penetration rates are much lower, but cheaper phones that cost under $100 are squeezing profit margins.

That was not the case during the last recession, when Apple’s iPhone and Google Inc.’s Android were still in their infancy. Smartphone demand remained strong even as sales of other electronics declined because consumers felt it was worthwhile to upgrade to a device with so much to more to give – touchscreens, email and full Web browsers.

Without a technology breakthrough such as touchscreen – made popular by the first iPhone in 2007 – people are in far less of a hurry to upgrade their phones this time around, analysts said.

That was evident from Apple’s June quarterly results, which showed a much bigger hit from the European debt crisis than Wall Street expected.

“The economy is having an impact on all electronic goods. Even Apple, which did defy gravity in the last recession, is not escaping now,” Hudson Square Research analyst Daniel Ernst said.

Smartphone users, who typically upgrade their phones every 18 to 24 months, are now holding on for three months longer than usual, according to Gartner analyst Carolina Milanesi.

“The reason to upgrade is less urgent” she said.

Overall smartphone shipments rose 32 percent in the second quarter, their slowest pace since 2009’s 16 percent increase, according to Strategy Analytics. The research firm forecast annual smartphone shipment growth would slow to 40 percent in 2012 from 68 percent in 2011 and ease further to 23 percent in 2013.

Analysts say demand from emerging markets will support smartphone shipments even if the global economy takes a turn for the worse, but a growing supply of lower price devices from vendors such as Huawei Technologies Co. Ltd. and ZTE Corp. will pressure prices even if the economy improves.

“We’re forecasting ASPs [average selling prices] to dip in 2013 and accelerate from there on,” Strategy Analytics analyst Neil Mawston said. “If the economy continues to flat line or dip that will accelerate the move to lower cost models.”

The popularity of Apple’s iPhone and Samsung Electronics Co. Ltd.’s Galaxy S will give these companies some pricing insulation, analysts said.

But there could be more pressure for price cuts at already struggling smartphone vendors, such as LG Electronics Inc., HTC Corp., Nokia Oyj and BlackBerry maker Research In Motion Ltd.

“Apple and Samsung’s ownership of the high-tier and intense price erosion means the fight among others will be cutthroat,” CCS Insight analyst Geoff Blaber said.

The tough road ahead for smaller vendors became more apparent this week, when Samsung reported its best quarterly smartphone sales in history as it outsold Apple and won customers from smaller rivals. Samsung’s bigger size allowed it to drive down costs and still make a profit on phones that would generate a loss for smaller rivals.

Some of Apple’s earnings miss was attributed to consumers postponing purchases in anticipation of a new iPhone model hitting store shelves this fall. LG did not have that excuse – its cellphone division, which accounts for around one-fifth of sales, posted a quarterly loss as competition forced LG to spend more on marketing for cheaper phones.

According to Gartner, about 35 percent of an estimated 1.9 billion cellphones sold this year will be smartphones. Between 20 and 25 percent of people in the world already own smartphones, with the penetration rate rising to 50 to 55 percent in the United States.

“The first wave is selling expensive models to affluent buyers. The second wave is selling lower cost models to less affluent buyers,” Strategy Analytic’s Mawston said.

Gartner’s Milanesi said Huawei and ZTE are in the best position among the lower-tier smartphone vendors.

“If price is the first driver I’m going to pick the Chinese,” said Milanesi, who said LG and HTC are most vulnerable to price declines as they “need more to stand out.”

Also putting pressure on handset makers are wireless service providers on which they are heavily dependent in many regions such as Europe and the U.S. for promotions. Carriers often subsidize phones to encourage customers to commit to long-term contracts.

In Europe, some operators such as Telefonica have been dropping subsidies entirely. The top three U.S. operators, Verizon Wireless, AT&T Inc. and Sprint Nextel Corp. have all been improving profit margins because they cut down on their subsidy costs by offering customers upgrades less frequently.

If consumers do have to cut spending because of the weak economy, IDC analyst Ramon Llamas said: “There’s smartphone available for just about every single budget out there.”

 
A version of this article appeared in the print edition of The Daily Star on July 30, 2012, on page 6.

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