Peak Smartphone Ahead?
Is the market for high-end smartphones saturated? It’s a question more investors are asking after recent disappointing data from some of the world’s top mobile device makers.
Samsung Electronics (OTC: SSNLF, Korea: 005930), for example, recently forecast second quarter operating profits of 9.5 trillion won ($8.3 billion U.S.). That’s a record for the Korean firm, whose Galaxy S4 device, powered by Google’s (NasdaqGS: GOOG) Android software, is widely seen as the leader in the hotly competitive smartphone space. However, Samsung’s latest estimate missed the consensus forecast of 10.16 trillion won.
The story is much the same at HTC Corp. (Taiwan: 2498), which recently released its popular HTC One smartphone, also powered by Android. In the second quarter, the Taiwan-based company reported profits of 1.25 billion New Taiwan dollars ($41.6 million U.S.), down from NT$7.4 billion a year ago. The latest results also missed the analysts’ expectations of NT$2.0 billion.
And of course, investors are all too familiar with the struggles that Apple (NasdaqGS: AAPL) has faced due to concerns about demand for its iPhone, which was the top-selling smartphone until Samsung’s Galaxy S3 overthrew it last year.
BlackBerry Seems Most at Risk
Of all the major smartphone makers, BlackBerry (NasdaqGS: BBRY)—formerly known as Research in Motion—likely faces the steepest climb in the ultra-competitive high-end smartphone market.
The company created the predecessor to the modern smartphone in 1999, when it launched the first BlackBerry, a two-way pager that allowed users to respond to messages through a keyboard. In recent years, however, the company has been left in the dust, both by the Apple iPhone and Android-powered devices. According to recent numbers from ComScore, BlackBerry controlled just 4.8% of the U.S. smartphone market in the second quarter, compared to 52.4% for Android and 38.9% for Apple.
BlackBerry currently finds itself battling to hang on to the distant No. 3 spot with Microsoft’s (NasdaqGS: MSFT) Windows phone, which trails just behind at 3.0% of the U.S. market. But to even have a chance at holding its own—and perhaps even survive as a mobile device maker—it needs its two new devices, the Z10 and the Q10, to sell well.
The rollout of the touchscreen-only Z10 began in January (though the device didn’t go on sale in the U.S. until late March), and the Q10, with a physical keyboard made it into customers’ hands in April. That put the company’s latest earnings report—the first containing a full quarter of Z10 sales—squarely in the spotlight. And based on the numbers, the new phone is off to a slow start.
In BlackBerry’s fiscal 2014 first quarter, which ended June 1, 2013, its revenue rose 9.4%, to $3.1 billion from $2.8 billion a year ago. It shipped 6.8 million smartphones, which was down from 7.8 million in the prior-year quarter. Of that total, 2.7 million were the new BB10 devices.
BlackBerry lost $84 million, or $0.16 a share, which was better than a loss of $510 million, or $0.97 a share, a year earlier. On an adjusted basis, the company lost $0.13 a share.
The above figures were all well off analysts’ expectations: the Street expected adjusted profits of $0.06 a share on revenue of $3.4 billion. Shipments were also disappointing: analysts forecast 7.5 million this quarter, including 3.3 million new BB10 models.
To top it off, BlackBerry said that it expected to continue losing money in the current quarter, due to the cost of its ongoing BB10 rollout and its investments to make its BlackBerry Messenger app available on iOS and Android. The consensus forecast called for an $0.11-a-share profit.
Low-Cost Smartphones Will Fuel Growth
In response to slowing sales of high-end smartphones in developed markets, most device makers are launching lower-priced phones in emerging markets, particularly Asia.
These markets have big potential as more of their consumers move from basic cellphones to smartphones. In China, for example, 1.1 billion of the country’s 1.35 billion people use cellphones. This year, 300 million smartphones are expected to be sold in the country, according to recent figures from Tech in Asia, up from just 189 million in 2012.
According to April figures from ABI Research, low-cost smartphones will account for 46% of global smartphone shipments in 2018, up from 28% in 2012.
Manufacturers like Apple and BlackBerry have mainly been mainly relying on sales of older models at lower prices to build share in emerging markets, where most consumers have less disposable income than in developed countries. Now they are launching more cheaper versions of current devices.
BlackBerry, for example, recently unveiled the Q5, a lower-cost version of the Q10 that’s mainly aimed at developing markets. The company has yet to say how much the phone will cost, but it plans to start selling it in July.
HTC also recently released the Desire 200, priced around $167 U.S., and Samsung has revealed its Galaxy S4 Mini, which will be 5% cheaper than Apple’s older iPhone 4S. Apple is also rumored to be developing a lower-cost iPhone for developing countries.
However, despite their huge potential, emerging markets also present challenges for smartphone makers like Apple, Samsung, Sony (NYSE: SNE). Here are two:
Samsung Electronics (OTC: SSNLF, Korea: 005930), for example, recently forecast second quarter operating profits of 9.5 trillion won ($8.3 billion U.S.). That’s a record for the Korean firm, whose Galaxy S4 device, powered by Google’s (NasdaqGS: GOOG) Android software, is widely seen as the leader in the hotly competitive smartphone space. However, Samsung’s latest estimate missed the consensus forecast of 10.16 trillion won.
The story is much the same at HTC Corp. (Taiwan: 2498), which recently released its popular HTC One smartphone, also powered by Android. In the second quarter, the Taiwan-based company reported profits of 1.25 billion New Taiwan dollars ($41.6 million U.S.), down from NT$7.4 billion a year ago. The latest results also missed the analysts’ expectations of NT$2.0 billion.
And of course, investors are all too familiar with the struggles that Apple (NasdaqGS: AAPL) has faced due to concerns about demand for its iPhone, which was the top-selling smartphone until Samsung’s Galaxy S3 overthrew it last year.
BlackBerry Seems Most at Risk
Of all the major smartphone makers, BlackBerry (NasdaqGS: BBRY)—formerly known as Research in Motion—likely faces the steepest climb in the ultra-competitive high-end smartphone market.
The company created the predecessor to the modern smartphone in 1999, when it launched the first BlackBerry, a two-way pager that allowed users to respond to messages through a keyboard. In recent years, however, the company has been left in the dust, both by the Apple iPhone and Android-powered devices. According to recent numbers from ComScore, BlackBerry controlled just 4.8% of the U.S. smartphone market in the second quarter, compared to 52.4% for Android and 38.9% for Apple.
BlackBerry currently finds itself battling to hang on to the distant No. 3 spot with Microsoft’s (NasdaqGS: MSFT) Windows phone, which trails just behind at 3.0% of the U.S. market. But to even have a chance at holding its own—and perhaps even survive as a mobile device maker—it needs its two new devices, the Z10 and the Q10, to sell well.
The rollout of the touchscreen-only Z10 began in January (though the device didn’t go on sale in the U.S. until late March), and the Q10, with a physical keyboard made it into customers’ hands in April. That put the company’s latest earnings report—the first containing a full quarter of Z10 sales—squarely in the spotlight. And based on the numbers, the new phone is off to a slow start.
In BlackBerry’s fiscal 2014 first quarter, which ended June 1, 2013, its revenue rose 9.4%, to $3.1 billion from $2.8 billion a year ago. It shipped 6.8 million smartphones, which was down from 7.8 million in the prior-year quarter. Of that total, 2.7 million were the new BB10 devices.
BlackBerry lost $84 million, or $0.16 a share, which was better than a loss of $510 million, or $0.97 a share, a year earlier. On an adjusted basis, the company lost $0.13 a share.
The above figures were all well off analysts’ expectations: the Street expected adjusted profits of $0.06 a share on revenue of $3.4 billion. Shipments were also disappointing: analysts forecast 7.5 million this quarter, including 3.3 million new BB10 models.
To top it off, BlackBerry said that it expected to continue losing money in the current quarter, due to the cost of its ongoing BB10 rollout and its investments to make its BlackBerry Messenger app available on iOS and Android. The consensus forecast called for an $0.11-a-share profit.
Low-Cost Smartphones Will Fuel Growth
In response to slowing sales of high-end smartphones in developed markets, most device makers are launching lower-priced phones in emerging markets, particularly Asia.
These markets have big potential as more of their consumers move from basic cellphones to smartphones. In China, for example, 1.1 billion of the country’s 1.35 billion people use cellphones. This year, 300 million smartphones are expected to be sold in the country, according to recent figures from Tech in Asia, up from just 189 million in 2012.
According to April figures from ABI Research, low-cost smartphones will account for 46% of global smartphone shipments in 2018, up from 28% in 2012.
Manufacturers like Apple and BlackBerry have mainly been mainly relying on sales of older models at lower prices to build share in emerging markets, where most consumers have less disposable income than in developed countries. Now they are launching more cheaper versions of current devices.
BlackBerry, for example, recently unveiled the Q5, a lower-cost version of the Q10 that’s mainly aimed at developing markets. The company has yet to say how much the phone will cost, but it plans to start selling it in July.
HTC also recently released the Desire 200, priced around $167 U.S., and Samsung has revealed its Galaxy S4 Mini, which will be 5% cheaper than Apple’s older iPhone 4S. Apple is also rumored to be developing a lower-cost iPhone for developing countries.
However, despite their huge potential, emerging markets also present challenges for smartphone makers like Apple, Samsung, Sony (NYSE: SNE). Here are two:
- Domestic competition is strong, particularly in China: According to figures from research firm Canalys quoted by Canada’s Globe and Mail newspaper, Samsung still No. 1 in Chinese smartphone shipments in the fourth quarter of 2012, but the second through fifth places were held by homegrown firms Lenovo, Yulong Computer Telecommunication Scientific (Shenzhen) Co., Ltd., Huawei Technologies and ZTE Corp. All told, Chinese companies accounted for 70% of smartphone sales in the country. Apple was in sixth spot.
Chinese firms still hold an edge when it comes to price, as well. According to the Globe, the cheapest iPhone in China still clocks in at around $850 U.S., while Samsung’s Galaxy S3 is about $800. Compare that to the Android-powered Meizu MX, at $400, or China Wireless Technologies’ Coolpad 8060, at just below $100.
- Margins are thinner: It’s a given that lower-cost devices will deliver smaller profit margins than higher-end smartphones. As such, manufacturers will need strong sales volumes to boost their profitability. They’ll also be counting on some of these users to eventually move to higher-priced models.
Bottom line: Major smartphone makers like Apple, Samsung and potentially even BlackBerry—if the Q5 is effectively priced and marketed—are in a good position to make inroads as more emerging market consumers jump from cellphones to smartphones. But investors should take a prudent approach in light of strong competition in these markets and narrower margins on lower-cost devices.