Dispelling hype around the next big device boom

There are a variety of signs that suggest that sales of smartphones may be slowing down. Despite impressive annual revenue growth, Samsung is likely to miss analyst’s expectations. Samsung is also cutting back on orders for the S4, despite being likely to meet their target of selling 22 million of these phones in the second quarter. Apple has also been rumoured to be cutting back on its future iPhone 5 orders.

It may seem obvious that the market for smartphones, in the western world at least, would be reaching a climax. According to IDC, 57.3 per cent of the US population now use smartphones. Smartphone use in Australia is similar, with the majority of phone users here now owning smartphones. Consequently, new releases of the flagship phones are generating less public excitement than they once did. Advanced features are now becoming routine and there is only so much you can do to extend the current format. Whilst a slowdown is a long way from the end for either Samsung or Apple, the market is likely to continue punishing their share prices until they come up with a strategy for what they are going to do next.

The challenge for these companies is not so much thinking of what to do, but how they will make the margins that they have enjoyed from phones - and for Apple at least - tablets. Despite the excitement of smart watches, Google Glass and other wearable computing devices, the market, and margins, for these devices is significantly less than that for phones. Technological and manufacturing issues are only part of the problem facing Google, Apple and others in establishing a market in wearable computing. Overcoming the social acceptability of devices like Google Glass is going to be considerably more difficult and this, along with price, is going to limit the mass appeal of the wearable to the general public.

Another area of potential growth is the services industry that delivers social, entertainment and business functionality to the smartphones that have become central to our lives. Cloud services, music and video streaming, productivity apps are all part of an already crowded and reasonably mature market dominated by other companies. Apple already dominates the online digital music industry with a 63 per cent share. Whether they manage to do the same with music streaming is yet to be seen but revenues from that source are going to be significantly less. For Samsung, the challenge is that although they dominate the phone industry, the software and services are largely provided by Google.

A final area of potential product development is in smart appliances, smart homes and cars. Apple and Samsung, along with many others are active in this area with Samsung already dominating the smart TV market. Apple is yet to bring their iTV to market but like with their watch, it is unlikely to have a significant impact on the everyday household.

The challenges to tech companies is that the markets that allow them to make huge amounts of money and profit are much rarer than the low-margin, low-volume markets that have high friction barriers to mass adoption. There was about 20 years between the explosion of the PC market and that of the smartphone and tablet. Whilst this move has enabled the development of the next phases of computing - like wearables and cloud services - these other markets develop in line with generational change. There is too much invested in the existing way of doing things to see rapid progress. You only have to look at electronic payments technology for example to see that even after 20 years, the magnetic strip still dominates over chips on payment cards and it will continue to be so for the next 10 years.

Despite what the stock market thinks of Apple and Samsung, their outlook is still significantly brighter than any number of companies that are more rapidly sliding to irrelevance such as Dell, BlackBerry or Nokia.  Apple, Samsung and Google will all continue to diversify and bring products to the growing smart markets - wearables, services and things but it will be another 10 years before we are likely to see the next “big thing”.