Smartphone makers are pricing themselves out of the market

Makers of high-end smartphones are seeing declining sales as users who find them too expensive increasingly opt to keep their phones longer, according to a global smartphone sales report.

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While demand for entry-level and mid-price smartphones has remained strong, global sales of high-end smartphones like the iPhone XS and XS Max have steadily declined over the past year, according to a new report from Gartner.

Less innovation in top-of-the-line smartphones coupled with steep price increases are pushing consumers to wait longer to replace older handsets, according to Gartner.

The research firm found that in 2018, global sales of smartphones grew just 1.2% compared to the year before, reaching 1.6 billion units.

North America, mature Asia/Pacific and Greater China recorded the worst declines of all regions, at 6.8%, 3.4% and 3%, respectively. Those mature markets rely more on flagship smartphone sales than any others and therefore were more dramatically affected by the sales drop.

In the final quarter of 2018, Apple experienced the biggest decline – down 11.8% –  among the world's top five smartphone vendors, selling 64.5 million handsets; it was Apple's worst quarterly decline in smartphone sales since the first quarter of 2016.

Still, Apple clung to second place among smartphone makers with 15.8% of market share. In the same quarter, Samsung led with 17.3% of the market, with Huawei third with 14.8%. But Huawei was first in growth, with sales rising 37.6% to more than 60 million smartphones, according to Gartner.

Huawei's growth throughout 2018 helped it close the gap with Apple.

Along with its primary markets of China and Europe, Huawei pushed further into the Asia/Pacific, Latin America and Middle East regions to drive growth, according to Anshul Gupta, senior research director at Gartner.

Smartphone sales Gartner

"Huawei also exploited growth opportunities through continued expansion of the Honor series in the second half of 2018, especially in emerging markets, which helped Huawei grow its market share to 13% in 2018," Gupta said in a statement. Honor series smartphones start at $199; even the flagship Honor 10 series smartphone retails for about $468 compared with the iPhone XR, which goes for $749.

Of the top five smartphone makers, OPPO and Xiami came in a distant fourth and fifth place in market share, with 7.7% and 6.8%, respectively. All other manufacturers made up the remaining 39% of the market share.

"Although Samsung is strengthening its smartphone offering at the mid-tier, it continues to face growing competition from Chinese brands that are expanding into more markets. It also faces difficulty bringing significant innovation to high-end smartphones," Gupta said. "Samsung introduced new mid-tier-focused M series smartphones in the first quarter of 2019 to compete with aggressive Chinese manufacturers in emerging markets, and to expand into the online sales channel."

Tuong Nguyen, a Gartner principal analyst, said Huawei is mainly competing with Samsung in in terms of product breadth, and the Chinese handset maker's industry-leading growth is being bolstered by a strong Chinese home market, where it sells 10 times as many phones as Samsung.

"When you compare Samsung and Huawei on a [larger] geographical level, in most markets, Huawei is selling from 1% to 50% of what Samsung is selling," Nguyen said.

Apple's challenge is that it only offers high-end smartphones, and those devices aren't delivering the same, compelling new features they once did. And some users are finding they don't use all of the features high-end smartphones have. 

"I think that's where we are with phones. It does everything you want and then some, and now you want to offer me even more?" Nguyen said. "That combined with these price points they continue to push up, now the consumer is not feeling like Apple is delivering on that promise the way they said would. "They may be saying, 'I'm loyal to Apple but maybe the value proposition is not what I've bought into all these years.'"

Except for North America and in Asia/Pacific nations, Apple saw iPhone demand weaken in most areas, including in greater China, where its market share dropped from 14.6% in Q4 2017 to 8.8% this past quarter. For 2018 as a whole, iPhone sales were down 2.7%, to just over 209 million units.

"Apple has to deal not only with buyers delaying upgrades as they wait for more innovative smartphones, but it also continues to face compelling high-price and mid-price smartphone alternatives from Chinese vendors," Gupta said. "Both these challenges limit Apple's unit sales growth prospects."

While BYOD programs still remain common among enterprises, many North American companies purchase subsidized devices with two-year service agreements, which translates into a built-in two-year upgrade cycle. Because of that, enterprise purchases of smartphones have probably not been a part of the downturn of smartphone sales.

"However, in other regions where the subsidized device is non-existent, it's possible if not likely the device retention period could be lengthening, as it may be in the consumer market, with similar impacts on sales," said Bill Menezes, a principal analyst at Gartner. "If the slowdown in sales is attributable to smartphone ownership behavior by consumers, this could see an increasing impact from the corporate side as this trend continues.

"At the same time, I have had numerous discussions with corporate clients that are maintaining the use of devices beyond their two-year service contract," Menezes continued. "Anecdotally they appear to be in the minority. But to the extent that may mirror the trend in the consumer market, it could create a growing impact on sales over time."

Gartner's smartphone market results closely match those of two other research firms, which released their 2018 reports last month.

Both firms, IDC and IHS Market, blamed smartphone shipment declines on high prices and growing consumer frustration. One expert even called today's smartphone market a "mess."

Anthony Scarsella, research manager with IDC's Worldwide Quarterly Mobile Phone Tracker, said the arrival of both 5G and foldable devices later this year could bring new life to the smartphone industry – depending on how vendors and carriers market the real-life benefits of those technologies.

"Apple is certainly not out of the game," IDC said in its report, "but the likelihood of not having a 5G iPhone in 2019 means it will need to tell a strong iPhone and, more importantly, ecosystem story to succeed. If anyone can do it, it is Apple. But it certainly won't be easy when faced with all the other downward market pressures."

Apple has limited options in the short term, according to Gerrit Schneemann, senior analyst for IHS Markit's Mobile Handsets, Technology, Media & Telecom division.

"It is clear that they are not going to move away from their premium branding and there is not a lot of room for pricing elasticity. So, they will expand on trade-in programs and financing options to bring their premium price to a manageable level for most consumers," Schneemann said.

In fact, Apple is currently selling the iPhone XR for $499, the iPhone XS for $699 or an iPhone XS Max for $1,099 for buyers who are trading in an iPhone 7 Plus in good condition. Those prices are reduced from the phones' retail prices, with the final price dependent on which older phone is being traded in.

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