For How Long Will The Smartphone Market Remain This Profitable?

The smartphone market

For quite a while, the smartphone segment of the mobile market has been a very profitable one. Of course, every Tom, Dick and Harry in mobile manufacturing have gone after a piece of that cake as a result.

The logical thing is that the smartphone market then becomes gradually less competitive. What happens when the smartphone market becomes bigger than the feature phone market? What happens when it becomes significantly bigger?

Already, one amazing company that has ridden strictly on the smartphone market (and made good money from it for two straight years) has reported a decline in profits.

HTC posted a net profit of $364.26 million, which is a 25.5% decrease compared to the same period of last year.

But that’s not all. News has it that the company expects to see more of the same in the first quarter of 2012 with net profit expected to continue sliding.

We shall have to keep observing things, but simple economics suggest that as competition stiffens in the smartphone market, profit margins will dip. Sooner or later.

How fast it will happen is the question. Comments please.

0 thoughts on “For How Long Will The Smartphone Market Remain This Profitable?”

  1. This is my theory.

    Mobile, and more specifically, smartphones, used to be all about hardware and functionality. To get value, you needed powerful specs, which meant more big bucks. Times have changed however. The future of mobile is in the experience and the consumption of content.

    Companies like HTC will come into hard times if they don’t change their strategy. This is because smartphone hardware specs will become increasingly commodified as advances in technology make them easier and cost less to manufacture. In time this will result in a race to the bottom of the price scale in a bid to sieze and keep marketshare by enticing users with powerful devices that are cheaper than the competition’s.

    On the other hand, companies that sell experiences and services, will be able to price their products however they want. This explains how the relatively expensive iPhone is able to outsell higher powered devices that are priced lower. Amazon’s Kindle Fire is priced really cheap because they are betting that they’ll make money off the services that you’ll purchase when you buy the device.

    IMHO.

  2. HTC posted a net profit of $364.26 million, which is a 25.5% decrease compared to the same period of last year .

    HTC’s decreased profitability is probably Samsung’s gain. (or Apple’s, or LG’s, etc). This may / may not indicate any GENERAL profitability trend.

    Increasingly ferocious competition is likely to keep druving down unit_prices over time This is a natural law of Economics.

    But then, i tend to see tablets becoming the new main war front. The price vs feature war is raging there too.

    Interestingly, if every Harry, ForteSpy and Arumob can afford one of these, the manufacturers will sell more devices.

    The sheer volume sold will – in turn -impact profits positively. – despite thin margins.

  3. @Bankole, that is perceptive of you. I agree with this theory-fact ENTIRELY.

    This corroborates the view i have always held-and tried to sell, that software and the ecosystem behind them-are more important than raw hardware specs.

    The quad-cores, mHz etc aee mainly for the geeks. Most ordinary folks can not be bothered

  4. It is really going to be difficult to predict, but I think we have not got to a point of plateau in smartphone growth yet. More and more feature phone users are still converting to smartphones, a trend I believe will continue for some years in the future.

    Some companies will keep making less profits due to the fierce competition that helps to drive prices and by extension profits down. Those that will keep increasing their overall profits up relative to previous years are those able and willing to scale up their offerings in terms of different form factors, specs and different price points like Samsung. Very competitive pricing is another thing that will help keep companies up because of the economy of scale and this is where it is hard to beat the Asians.

    Of course Apple is in a different league and will keep increasing profit year after year for quite some time in the future because of their close control of everything in their line of products, and that is even without growing users. Their business is already nicely positioned to keep generating a steady stream of income with little effort on their part, so long as developers are still making their profits from the platform.

  5. @Eye.Bee.Kay

    HTC’s decreased profitability is probably Samsung’s gain. (or Apple’s, or LG’s, etc).

    Definitely Samsung’s, they’ve outsold everybody to become the world’s biggest smartphone vendor. And the reason is not far fetched, they’ve got some of the most competitively priced Androids in the market at virtually every price point.

  6. I believe there is still much space in the smartphone ecosystem for more players to come in. Innovation has to be the game changer. As for profitability there won’t be any end. I take an example from television surely our fathers will marvel @ what is on board compare to way back.

  7. HTC has apple up on their tail in the US and their loosing the court battles. They will most likely be banned from importing their phones to the US early this year based on those apples frivolous patent infringements. I don’t see profit takings slowing down any moment on smart phones. Not only is it still making converts of those presently using feature phones, a lot of smartphone users still upgrade yearly to the next tech gadget.

  8. Well written article and also good erudite contributions. I believe this smartphone arms-race among the major manufacturers would inexorably lead to one logical conclusion. Smartphones would become commoditised like PCs/Laptops. Profit margins is going to also drop significantly. And More people would now be able to afford a smartphone. Just last year, more people for the first time bought more smartphones than laptops. Also some statistics from NPD, show that the sales of Smartphones presently have now exceeded feature phones in a ratio 3:2. 

    So what does all this amount to? As Technology improves, cost of hardware drops. More people start affording smartphones. Device manufacturers start competing in the break-neck pace of smartphone innovation and sales. Price cuts to remain competitive becomes the norms. In the ensuring bloodbath, according to Tomi Ahonen, there would be major losers and gainers. Even Apple would have to make a price drop sometime in the future to remain competitive!

    If we compare smartphones with the PC 20 years ago, you’ll agree with me that there have been a major price drop. A computer those days used to cost on the average of 500, 000 to 1million NGN. Now you can get a brand new PC for just 40,000 NGN. 

    Yes, some manufacturers would find it difficult to continue competing like Nokia for instance, while some others like Samsung may take the lead! It’s the way of the world. Like Eye.Bee.Kay said; One Man’s (HTC, Nokia, Motorola) loss is another Man’s gain (Samsung, Apple etc).

  9. In my opinion, HTC had it coming. When Samsung et al were releasing phone with ample internal memory, all we got was the Sensation with just about as much internal memory as the Desire S.

    Like the tablet market, companies like Hauwei and ZTE, who make phones are re-badged by network operators are coming out of the shadows. There will always be those who will want the latest, and there are those who don’t want to break the bank to own a smartphone. The market can accommodate both, but some phone manufacturers will change the way they issue new phones to avoid saturating the market.

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