The End of Subsidy in the US Has Implications for Europe
CCS Insight’s latest market forecast projects smartphone shipments in North America and Western Europe will grow just 3 percent between 2015 and 2016 — and that’s entirely at the expense of non-smartphones. As the market reaches maturity in many Western countries, hardware makers have become dependent on the smartphone upgrade cycle. With only marginal feature improvements on new smartphone models, people are no longer as convinced about discarding older devices for new ones. This, combined with new phone pricing models, is slowing the overall pace of sales.
At the same time, mobile operators’ tariffs and Apple’s financing programme in the US are making the actual cost of smartphones more transparent. With the end of subsidy, the true cost of smartphones is becoming more apparent. They certainly aren’t free. They aren’t even $200. They’re closer to the cost of a refrigerator or decent washing machine and consumers rarely upgrade those products until they stop working.
Unfortunately, the most recent financial results provided few insights into how Apple’s iPhone Upgrade Program is performing in the US. So far, it appears that the effect has been relatively modest; but it is still early days. Although CCS Insight expects the scheme to appeal to some smartphone buyers, many look poised to simply upgrade less frequently. The best-case scenario is that the combined effect with be positive, but probably only just. We forecast the US smartphone market to be flat or very slightly up in the next few years.
From conversations with many of our clients we know that smartphone manufacturers and mobile operators around the world have been looking at changes in the US market to get some idea of what might be in store for them, particularly in Western Europe. We believe the frenzy of consumer upgrades we have seen for more than a decade has reached an era of calm. Many people who own an up-to-date smartphone have a device they consider to be good enough. As subsidy recedes and buyers get a better understanding of the actual cost of smartphones, it is likely many will now upgrade only when they have to.
Given that a significant number of subscribers in the highly competitive European market are already signed up to SIM-only tariffs, the domino effect of eradicating subsidies and the advent of cheaper service tariffs looks ominous: the UK mobile phone market, for example, is bracing itself for a fourth consecutive year of decline.
Until the next hot trend emerges it feels like the market is on hold. The big question is whether that disruptive new trend will be in smartphones, and reinvigorate the market, or in a completely different area of consumer technology like wearables, the connected home or something else. With so much riding on the outcome, mobile phone makers will certainly be hoping they can breathe some new life into their smartphones lines.
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