When the world’s biggest phone maker warns of a difficult start to the year, that is something to take notice of. 2012 was a stellar year for Samsung. It overtook Nokia to become the world’s biggest phone maker, it shifted more than 40 million Galaxy S III smartphones in little over six months on sale, and ended 2012 with a whopping £4.2bn in profit.
Sterling results, but Samsung’s share price fell in the subsequent days, which could largely be seen to be due to some rather gloomy predictions about the months ahead. It warned the ‘furious growth spurt’ in the smartphone market that it has benefited from is likely to be tempered by increasing price competition as more and more high tech devices come to market during the next few months. It said that demand for smartphones will slow down in the developed world, where adoption is at its highest.
A fall in share price also hit Apple after it also posted a set of record results. The iPhone maker shifted a record 6.6 iPhones per second during the quarter, with total shipments of 47.8 million, a 29% increase on the previous year. Apple posted a record profit worth $13.08bn but that wasn’t enough to placate disappointed investors and analysts. Its share price took an absolute hammering in the hours following the results, with a staggering $30bn wiped off its value. That is enough cash for a company to snap up Nokia and BlackBerry and have enough change left to also buy PC manufacturer Dell (at least it was until the company took itself private some weeks after the Apple results).
Software not hardware
So what do these two highly impressive but badly received results tell us about where the smartphone market is in 2013? Victor Basta, MD at Magister Advisors, a mergers and acquisitions advisory firm for the technology sector, has argued they show that the profits that can be made from smartphones are plateauing and will eventually start to contract.
He said manufacturers need to get to a place where it does not matter how many devices they sell, because they are making their money from software. He said: ‘Device saturation will have a huge effect on BlackBerry, Nokia, Samsung and other device manufacturers. By chasing volumes, they will inevitably go the way of Dell which has itself been frantically replacing declining revenue by driving greater volumes.’
Basta said Apple is better placed than most, with a huge pile of cash reserves and a lot of related products. He said: ‘It has hundreds of millions of credit card enabled subscribers through iTunes and the App Store. Apple arguably owns and controls the whole app concept and is the micropayments king. How Apple transitions its revenue dependence from hardware to software is at least as important as any Apple TV and in the medium to long term much more so. Fundamentally Apple needs to get to a place where it doesn’t matter whether they sell 50 million devices or five. Devices are fast becoming irrelevant and will continue to trend towards zero profit and beyond.’
One company that is arguably doing its utmost to build unique software into its devices is Nokia. The one-time phone giant had an encouraging end to its latest financial year, posting its first quarterly profit in almost two years. It has built a range of different software that is showcased on its Windows Phone 8 devices, whether it’s the location-based City Lens feature, or HERE, its mapping service.
Last week, the manufacturer announced an upgrade to its music service, which gives users additional features like offline music playback for £3.99 per month. Nokia CEO Stephen Elop said services such as those will be crucial for Nokia in the year ahead. He said: ‘So we clearly have had the time to really begin to show how focused [research and development] effort on differentiation can land in the products, and that’s a huge focus for us. And you are really going to see that drumbeat during the course of 2013 as we go further and further.’
Other companies seem likely to follow suit, with Samsung expected to put more focus into its Tizen operating system in the coming months and reduce its reliance on Android. The Korean manufacturer is already shouting about its own services on Galaxy handsets, such as Smart Stay, which means a screen stays unlocked so long as it has eyes looking at it.
Basta predicted in time that profit will come from the content and services that will be purchased on the device, rather than the device itself. He said: ‘Amazon already makes no profit on the Kindle mobile device. As competition intensifies across the mobile industry we predict that devices will be sold at a loss or potentially given away to capture value in content sales.’
Author: Graeme Neill