Loss after loss after loss. The mobile phone industry is in trouble. Even its flag bearers – Apple and Samsung – are not immune anymore, with both companies reporting plummeting profits for the last quarter of 2018.
The South Korean giant estimated its operating profit for the last quarter of 2018 at Won10.8tn ($9.6bn), down 28.7 per cent from a year earlier, and its fourth-quarter sales at Won59tn, down 10.6 per cent from 2017. And a week earlier, in a letter to investors, Apple's CEO Tim Cook warned that the company would miss its revenue target by a whopping $9bn. Apple blamed China and president Trump’s trade war; Samsung, who make the chips and screens powering the phones of many manufacturers, pointed at the industry slowdown.
The real trouble, however, is beyond struggling Apple and Samsung. Despite causing a media frenzy at the CES in Las Vegas with its (admittedly, pretty cool) bendable TV screen, the South Korean tech giant LG Electronics has also reported dramatically lower profits for its smartphone division – a whopping 80 per cent less than during the same time a year earlier.
Sony’s and HTC’s mobile phone businesses, meanwhile, are reporting numbers that are deep in the red. To illustrate the depressing trend: at the end of 2015, LG shipped 15.3 million units globally; at the end of 2017, meanwhile, it shipped 13.9m units. And this past year's last quarter's projected results are 10.6m, says Daniel Gleeson, a mobile analyst at Ovum. Sony's shipments for the same years went from 15.3m at the end of 2015 to 4m at the end of 2017 to 1.9m in the last three months of last year. And HTC, not to bore you much longer with numbers, slumped from 1.97m at the end of 2015 to 0.98m at the end of 2017 and 0.25m in the last quarter of 2018. Ouch.
Is it the end of the road for some phone makers, then? “I’ve been saying this for a few years now that Sony, HTC and LG need to exit the smartphone market,” says Gleeson. “I thought HTC managed to escape with the Google deal last year, but they’ve kept on some smartphone productions for reasons I don’t quite comprehend. LG and Sony are effectively now just using their handset businesses as a way to show off their displays and camera technology, respectively.”
Of course, it is possible that all or some of these three struggling brands could turn around and produce a hit smartphone tomorrow, but Gleeson says that they simply lack the marketing budget to make it a true success. And even if they were to suddenly surprise the world with a great phone with dramatically new features, it’s much less likely that they’d be able to innovate and produce excellent, exciting, new handsets consistently.
Sony, for its part, claims that the imminent launch of superfast 5G mobile networks will revive its fortunes. In a statement to WIRED, the company insisted that it is “fully committed to the smartphone sector and bringing market-leading technology to the mobile space. We believe that over the mid- to long-term, the mobile business is an area that we can transform into a sustainable business with growth potential by creating new products and services.” 5G, Sony argues, will underpin many of its devices, not just smartphones.
Inevitably, once a company understands that its phone division will never ever generate a profit anymore, it has at one point to stop making phones. HTC has already been pivoting its business, thanks to Google’s “acquisition” of talent for the Made by Google team and their attempt to try something different with the crypto phone, says mobile analyst Carolina Milanesi. “If VR in the enterprise starts to drive revenues for them, I see HTC only focusing on VR,” she adds.
For Sony, though, it’s a more difficult decision to make, Milanesi says, as their phone business is making money in a select few markets. “So the question will become more about where the whole company is going from a hardware and software perspective.”
WIRED contacted LG Electronics and HTC about their future business models and smartphone plans but had not received a response at the time of publication. This article will be updated once replies are received.
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Still, what’s going on? While we haven’t reached peak phone globally just yet, Apple and Samsung’s realm – the premium segment of the market – is definitely saturated and has been so for a few years. For several years, Apple managed to dodge the bullets by growing its iPhone revenue through price increases and by relying on its loyal base of fans. Still, iPhone unit sales peaked three years ago, in 2015, at 231m – after which they first dropped to a level of around 215m, but are now on the slide again.
One key issue is that all phone technology is now pretty good. Innovation is incremental. So if your two-year-old device is still working perfectly, the incentive to fork out a substantial sum for a new but not so much different phone is small, certainly much smaller than five years ago, when phones improved in leaps and bounds. “Apple’s overall commitment to quality has shown itself to be a double-edged sword as its users are better able to hang on to devices longer,” says Gleeson.
As for Samsung, its unit sales of smartphones have also dipped since 2015. The South Korean giant, just like Apple, has reacted partly with price increases and partly by pushing harder into the market for mid-range phones; however, unlike its Cupertino-based rival, that also makes Samsung much more vulnerable to competition from Chinese challenger brands such as Huawei, ZTE, OnePlus and Xiaomi.
Then there is China and the trade war with the US. Apple has blamed China for its latest loss, and while the trade war is indeed an issue for Cook’s firm, it’s less of a problem for Samsung, where it always had a much lower market share.
China is one of Apple’s largest markets, accounting for 15-20 per cent market share – and Apple was number five in China in the third quarter of 2018, behind Huawei, OPPO, vivo and Xiaomi. But the market share of these Chinese brands hasn’t stumbled like Apple’s. “They are in fact consolidating the market share from smaller players in the China market,” says Kiranjeet Kaur, an analyst at IDC.
Indeed – Chinese smartphone brands are now the ones to watch. In the eyes of Chinese consumers, the trade war has even strengthened these brands; after the US government nearly killed ZTE last year and now with the recent arrest of Huawei’s CFO in Canada based on a US warrant, there’s been a jingoistic response from many Chinese consumers, says Gleeson – with calls for boycotts of US products including iPhones.
Huawei – under pressure in many Western markets amid accusations that its products have “backdoors” that allow Chinese government spying – has proven to be a tough competitor. With aggressive marketing and strong product features for the latest products in the Mate and P series, the company is trying to carve out its niche in the premium segment. “iPhones getting more expensive created this vacuum in the $600-800 segment that Huawei has successfully gained share in,” says Kaur.
As a result, pretty much all premium smartphone brands are now struggling. LG, Sony and HTC’s handset units have all failed to turn a profit or see any growth for several years – and it will likely be really tough for them to turn things around, unless innovation makes a new leap or there is a shake up in the industry. Even the introduction of high-speed 5G networks are unlikely to help, thinks Kaur – because the Chinese players are simply unlikely to slow down, especially with their partnership with Qualcomm that can provide significant help in crossing the first hurdles of 5G.
This article was originally published by WIRED UK
