As many were expecting, Apple inc. (NASDAQ: AAPL) unveiled the newest iPhones at its September 12 event. Since the first iPhone was introduced by Steve Jobs in 2007, the smartphone has generated a significant a portion of Apple’s revenue and earnings. Today, it’s still far and away the tech giant’s largest division.
In Apple’s most recent earnings report, the company sold 41.3 million iPhones during the fiscal third quarter, generating $29.91 billion out of total revenue of $53.27 billion. Even though unit volumes were up only 1 percent year over year, revenue in the division was up 20 percent thanks to increases in average selling prices (ASPs), according to management.
In addition to sales of the physical product itself, the iPhone provided Apple with a gateway to reach hundreds of millions of users and sell new products and services via a distribution channel we carry around in our pockets.
The market is arguably more competitive today as well-capitalized tech giants vie for the massive business of device sales (not to mention the billions in accessories), combined with the toll-booth-like streams of recurring revenue that app store operators can generate.
Battle for the Smartphone Market
There aren’t many products that have a total addressable market like smartphones. Market research firm Newzoo recently released a report with some facts that highlight this:
- There are currently roughly 3 billion smartphone users worldwide. Newzoo estimates that number will reach 3.8 billion by 2021.
- China, India and the Asia Pacific region are the largest markets in 2018 with 783 million, 375 million and 441 million smartphone users, respectively. An example of the importance of China’s smartphone market is the fact that Apple built new versions of its phones with dual SIM technology with physical slots since the eSIM technology in the other versions isn’t widely compatible with China’s mobile networks.
- By 2021, the number of smartphone users in China, India and the Asia Pacific region is expected to reach 918 million, 601 million, and 580 million, respectively.
Not only is smartphone penetration expected to continue to grow, Newzoo also estimates global app spending will grow at a 20.7 percent compound annual growth rate through 2021. In 2018, global app revenues are expected to total $92.1 billion, according to their report, and by 2021 they are projected to hit $139.6 billion, with gaming apps responsible for $33.3 billion of the total.
Apple’s services category, which includes sales from apps, music, movies, and other products across the company’s devices, has grown to become its second-largest division behind the iPhone. In fiscal Q3, services revenue grew 31 percent year over year to $9.55 billion, according to Apple’s reports.
Apple built much of its business on the smartphone, while other tech giants have tried to get in later in the game.
Amazon.com, Inc. (NASDAQ: AMZN) short-lived Fire Phone resulted in the company taking a $170 million charge related to costs associated with the smartphone, the company reported in 2014. Not long after that, Amazon rolled out its virtual assistant Alexa, which offers many of the widely-used features on smartphones.
Alphabet Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL) Google developed the Android mobile operating system, which is open source, and the most widely used mobile operating system in the world with 84.8 percent of market share in 2018, according to industry research firm IDC.
And after many years of partnering with other manufacturers, Google has released two versions of its own smartphone, the Pixel. The next version, the Pixel 3, is expected to be launched at the company’s upcoming event on October 9.
Overseas in China, Xiaomi and Huawei are two of the major manufacturers. Both companies have grown over the years. Huawei had 15.8 percent market share based on smartphone shipment volumes in the second quarter of 2018, putting it in second behind Samsung Electronics Co. Ltd. (OCTMKTS:SSNLF) 20.9 percent market share, according to IDC. Meanwhile, Apple was ranked third with 12.1 percent market share and Xiaomi came in fourth with 9.3 percent.
What’s next for smartphones? Since they’re already jam-packed with essential features, many companies have focused on making incremental improvements, such as a larger screens, better cameras, faster chips, and so on. This has allowed them to achieve higher ASPs and grow revenue at a faster pace than unit sales as customers upgrade.
Technology analysts have already started considering what could replace the smartphone down the road. After the newest Apple Watch was unveiled on Wednesday, a small number of analysts speculated that sales of the wearable could eventually surpass the iPhone at some point in the future, although that seems far off given the company’s current sales numbers.
Tech companies also seem to think there’s potential in tech-enabled eyewear. Apple has reportedly been working on a pair for some time that could be released in 2020. Google Glass is being used by a number of major manufacturers, although it struggled with public acceptance when it was launched and hasn’t been widely adopted as a consumer product.
If history is any lesson, the smartphone is likely to eventually be unseated by new technology. But for now, the market is expected to continue to grow.
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