Smartphones are the products most at risk of cannibalization in the rising tide of tablet sales—not laptops, as some industry analysts are predicting.
Current forecasts for the 'tablet effect' are shortsighted and fail to consider the long-term implications that this phenomenon will have on the mobile electronics industry. While tablets are likely to crimp laptop and netbook sales for the first year or so—until consumers fully understand what a tablet is—the long-term trend is different. Laptop sales will bounce back. Smartphone sales will drop. This long-term trend should be clear just by looking at user surveys, product evolution, the redundancy factor, and basic economics.
Consumers use smartphones primarily for media and data capabilities, not calling features. That means they're not really 'telephones,' per se; to the average person, they are portable media devices. So why stick with a three-inch screen when you can have one three times larger? And if you do buy a tablet, why continue with a smartphone? At current prices of $200 to $400, the smartphone is too expensive to win the battle against tablets at a mass-consumer level.
According to a 2008 Nielsen (NLSN) survey, consumers were already using SMS text messaging more frequently than telephone calling. The survey found users in the 13-17 age market texted 754 percent more often than they called. The same held true for the 18-24 market, which texted 298 percent more. Even the 25-34 market texted 138 percent more often. The Pew Mobile Access 2010 Data Usage Report found a steady and significant increase in data usage by smartphone users: 34 percent record videos with their smartphones (vs. 19 percent in 2009); 34 percent play games (vs. 27 percent in '09); 38 percent access the Internet (vs. 25 percent in '09); and one-third play music (vs. 21 percent in '09).
Nielsen also reported that smartphone data usage increased by 230 percent from the first quarter of 2009 to the same period in 2010; a mere 3 percent of smartphone owners use these devices for only voice communications and half use Wi-Fi on their phones to download data. At its core, the smartphone is just a smaller tablet—a precursor, in fact. Product evolution demonstrates that there is an optimal size that a mobile device wants to be. That size isn't three or four inches. It's seven-to-nine inches.
Rumors of midsize Apple screens
Consider how smartphones have grown bigger while tablets are shrinking. Smartphones began as small 2.25-inch BlackBerry (RIMM) screens, jumped to the 3.5-in. iPhone screen, and now range as high as a 4.3-in. Android (GOOG) screen. At the same time, tablet sizes are getting smaller—from the 9.7-in. iPad screen to the 7-in. screens of the Samsung (000830:KS) Galaxy Tab and RIM PlayBook. Rumors have also circulated that Apple (AAPL) is developing a smaller iPad, in the six-to-seven-in. range, or a larger iOS device with a five-in.-plus screen. Remember that when the first tablet appeared in 2010 as the iPad, the form factor was almost identical to Apple's iPhone. So, too, were the features. The only real difference was size.
Consumers use smartphones not to call their friends, but to consume data and media services. That puts smartphones in the same market space as tablets. The devices mimic each other in services and features, particularly when you consider that tablets can also make video calls via Skype and FaceTime. The only essential difference is user experience, reflecting the disparity in screen size. Given these devices' redundancy, and the costs for maintaining both, it makes sense that consumers will eventually shift away from the smaller of the two.
The relatively 'cheap' price of tablets, in relation to the cost for smartphones, puts the latter at a market disadvantage:
Samsung Galaxy Tab ($299) vs. Samsung Fascinate ($199)
iPad 2 ($499) vs. iPhone 4 ($299, $199)
RIM PlayBook (est. $499) vs. BlackBerry Storm2 ($199)
So what's the point of having two mobile devices—at hundreds of dollars apiece—when both do pretty much the same thing? Does it really make sense to own an iPad and an iPhone? Or a Galaxy Tab and a Samsung Fascinate?
Smartphone Sales Decline in 2012?
If this year's tablet sales meet the 24.1 million projected sales numbers of Forrester Research (FORR), and smartphone sales overtake feature phone sales for the first time, as predicted by Nielsen, then it is quite reasonable to expect that smartphone sales could start to diminish by the latter part of 2012.
I specifically see smartphone sales falling among consumers in the 13-17 and 18-24 year old markets. Young consumers will start buying down on their phones, opting to buy a tablet plus a feature phone, rather than the expensive redundancy of a smartphone and a tablet, or the limited features of just a smartphone. These age groups are particularly vulnerable because they are already adopting tablets and e-readers as book replacements. Changing readership habits provides a strong incentive for moving to a tablet device; these demographics' smaller budgets will necessitate a buy-down on the phone. In the 25-34 market, consumers will still use smartphones when employers provide them. Left to their own devices, a significant proportion will opt instead for a tablet, plus a basic phone.
This buy-down trend is coming in the next two to four years. But it's possible for smartphones to stay in the game.
Mobile Payments and Price Cutting
Mobile payment could be the key for smartphones. If mobile payments become widely adopted by carriers, operating systems, credit-card companies, and retailers, it could help smartphones withstand the natural downward trend that is coming. Bloomberg News reported on Mar. 15 that Google plans to begin testing a mobile payment system in New York and San Francisco in the coming months. Such a service would extend the use of its Android mobile platform.
Another short-term strategy is price cutting. Staying as close as possible to $200 will be critical. Also, manufacturers and retailers will likely have to offer special incentives for buying a tablet plus a smartphone. In the long run, smartphone survivability depends on the manufacturers' ability to maximize the smartphone's single inherent advantage over the tablet: size. Because of it, such key functionalities as photography, navigation, calling, mobile payment, and scanning are easier to perform on a smartphone than on a tablet. Harness those advantages, and smartphone sales will decline less than they otherwise would.
In general, the next few years will likely be tough for smartphones. This may not be a permanent trend; I think it will last only a few years, until consumers adjust to the idea of spending more on personal devices. But in this multiyear interim, we will see the smartphone market wither as innovation tapers off, developers exit, sales decline, and brand diversity wanes.