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BLOG:Mobile saturation means innovation will slow

Bill Snyder | Oct. 31, 2013
A smartphone in every pocket may soon be a reality. That will make it harder to fund further innovation

Computer buyers are no dummies. Why spend money on a new PC when the old one does everything you need quite well? PC makers reacted by cutting prices, a fratricidal strategy that resulted in shrinking margins for everybody and the deaths of major companies (remember Gateway?) up and down the supply chain. Now, even Mac sales are declining.

Why did that happen? It's not because engineers got stupid. Tight budgets means less money for R&D. Once you get past Apple, IBM, and a few other giants, almost no one is doing original research. Look, for example, at the story of how Steve Jobs midwifed the birth of the iPhone: He spared no time, no expense, and no effort to develop a product that was as perfect as he could make it. Who can afford to do that now?

In the last for years, there's been a stampede to mobile platforms, which seem to have further slowed PC sales. Just a few years after they debuted, tablets and even smartphones today do much of what you could only do on a PC just a few years ago. The rate of change in mobile technology has been extraordinary. Think of the leap from first-generation products like the Palm Pilot in 1997 to the iPod in 2001 and then the iPhone in 2007 and iPad in 2010.

Today's Apple iPhone 5s and Samsung Galaxy S 4 are excellent products and offer some improvements over their predecessors. But does either device contain an innovation so compelling that it's a must-buy for the tech-savvy? I don't think so. There's a limit to the advances we're going to see in smartphone hardware, and as the market saturates, the pressure to compete on price is going to become extreme.

Profits are already shrinking
Apple is already feeling it. A year ago, the average iPhone sold (before subsidies) for $619; now it goes for $577, Apple reported this week. And despite a 4 percent increase in sales, Apple's net income was down 8 percent. LG is being hit as well; the world's third-largest smartphone maker posted earnings that missed analyst estimates as marketing costs for its new flagship handset eroded profit.

This trend will continue as sales in Europe and North America slow and vendors push harder in less affluent markets in the developing world. There are plenty of wealthy and middle-class people in Asia and the Middle East, but the average individual there is much poorer than his or her counterpart in the U.S.

Some of the same forces are already showing up in the younger, still vigorous tablet market. Apple introduced the iPad Mini partly as a way to get customers who couldn't afford a full-size iPad, as well as to be an affordable to wealthier families as an iPad for the kids or for use as a second tablet, such as in the living room. And it has sold well — but at a cost to Apple's overall financial performance. The iPad Mini has a smaller profit margin than its more expensive cousins, and its high sales may be part of the reason behind a 13 percent decline in Apple's overall iPad revenue.

 

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