Will wireless providers benefit from smartphone market’s ‘device exhaustion’?

When smartphones first became available, they were groundbreaking and innovative because they brought together the functions of previously separate devices—cameras and GPS, telephones and computers—into one. They “integrated the functions of other devices we had in our pocket at the time,” Glen Yeung, managing director and global head of technology research at Citi, said in a telephone interview. Now, though, it seems we’re all out of devices to integrate. The smartphone market is beginning to suffer from “device exhaustion,” Yeung said in a July 25 report, meaning smartphone innovation is getting increasingly difficult and markets are becoming saturated. As a result, consumers will take longer to upgrade their phones, and smartphone prices will fall. While Yeung said device manufacturers should be worried, Troy Crandall, a media and telecom analyst with MacDougall, MacDougall & MacTier, said wireless providers shouldn’t be. “If customers take longer to upgrade, that generally would be a good thing for wireless providers, because they currently provide subsidies for those smartphones,” Crandall said. “If they don’t have to provide as many subsidies for them, obviously that kind of helps their bottom line.” Since the original iPhone’s successful combination of a touchscreen and operating system, innovation has focused on aspects such as better screen quality, cameras and GPS, Yeung said. Though the recently-released Galaxy S4 and the iPhone 5 “were great phones,” he said he doesn’t think they “truly chang my user experience from the prior generation,” or that features such as air gesture or smart scroll will drive customers to go out and buy the next generation phone. Integrating the functions of a wallet could be “the next marginal innovation that drives cellphone growth,” Yeung said, though he is skeptical about that possibility given the security and infrastructure issues involved. Duncan Stewart, director of technology, media and telecom at Deloitte Canada, said previous technologies, such as PCs, underwent the same phenomenon. “When, every year, the new PC is twice as good or ten times as good as the one from last year, I throw mine in the river and rapidly run down to my local computer store and buy a new computer,” he said. “When, on the other hand, the new one really isn’t that much different from my old one, might as well keep the old one.” He said the size and form of smartphones limits the options. “The number and possibility of permutations, combinations and features that you can stick on a device that weighs a couple hundred grams is just an awful lot smaller than we saw with PCs,” Stewart said. He said he couldn’t think of any innovations capable of reviving the smartphone industry; for instance, while researchers are working on bendable phones, he doesn’t think that feature has a lot value for consumers, while smartphones with 3D displays proved unpopular. “Of all the various things that are technologically possible, most of them have either been tried or don’t work that well,” Stewart said. Crandall said that as the “device exhaustion” process continues, wireless providers benefit both from two kinds of declining subsidies: customers holding onto their devices longerwill mean carriers have to pay for subsidies for fewer new devices, and the drop in device price willmean the subsidies will be cheaper for the providers overall. “They win both ways, really,” he said. The CRTC’s wireless code, released in June and applicable to new contracts starting in December, effectively limits contracts to two years. Crandall said that in its wake, providers have been introducing new pricing plans that include discounts for customers who bring their own devices or choose a device that isn’t subsidized. If customers decide to keep their own phones, they’ll still need the phone and data services the wireless carriers provide, Crandall said. “So the wireless company, they’re continuing to make their money at whatever the rate may be that they’ve set with the individual,” he said. If a customer negotiates a new contract, he might choose to keep his existing phone and take, for instance, a 10 per cent per month reduction in his cellphone plan, Crandall said. “That’s less monetary incentive that they need to provide to that customer, and they’re going to likely stay with them anyhow,” hesaid. With the move from three-year to two-year contracts, more customers may hold onto existing phones instead of upgrading, Crandall said. With three-year plans, customers had more incentive to upgrade because “you knew your smartphone probably will last for three years, but there’s a pretty good chance it’s not going to last for six,” he said, adding that “a six-year-old smartphone is a pretty old phone, but a two-year-old smartphone is not a very old phone.” Crandall said the wireless industry saw the same “device exhaustion” trend in the past with feature phones. “Dumbphones had kind of technologically got as far advanced as they pretty much were going to get,” and wireless providers weren't negatively affected, he said. “In fact, just ahead of the smartphone phase, their margins were peaking, basically.” Iain Grant, a telecom analyst with research firm the SeaBoard Group, said that if customers take longer to upgrade their devices, “the short answer would be that wireless carriers would make more money since they would not be subsidizing handsets anymore.” He said that in that case, if carriers can’t draw customers in with brand-new devices, there are many ways they can compete with each other, other than the prices of their rate plans. “We as Canadians have managed to resist competing on price for a long time. Certainly in wireless, coverage is a huge differentiator. So are speeds… There is elegance and beauty and simplicity in billing as a service differentiator,” he said. Grant said he doesn’t believe “for a moment” that the smartphone market is facing device exhaustion. “If your world is limited to talking to only people who used to work at BlackBerry a decade ago, the answer would be yes,” he said. “ ‘Obviously, we’ve done everything we possibly can. Obviously, we have a phone and we have an email messenger – what more could it be?’” He added: “Now, certainly, the phones have changed immensely in the last five years. That doesn’t mean it’s going to stop changing.” When it comes to the next big development, Yeung said it’s more likely an unrelated device, such aswearable technology, will be a bigger driver in the future than “something within the existing devices.” Stewart said that wearable devices posit the same kind of challenges when it comes to innovation as smartphones. For instance, devices such as glasses have to fit on the human head and include a camera and a display screen, and they have no UBS ports and minimal internal storage. “How do I come up with the next generation of this for ten years that keeps being fresh and new?” he said. “The ability to innovate with these things is likely to drop off even faster than smartphones.” Crandall said wireless providers will likely see their margins start to go back down when the next wave of popular devices arrives. “There is more potential for them to take a hit on the next new technological innovation that comes out in the mobile space,” he said. With reporting by Anja Karadeglija at akarad@thewirereport.ca and editing by Mark Burgess at mburgess@lobbymonitor.ca.

Will wireless providers benefit from smartphone market’s ‘device exhaustion’?

News | August 28, 2013

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Will wireless providers benefit from smartphone market’s ‘device exhaustion’?

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