Smartphone sales have grown exponentially since their introduction 10 years ago reshaping the way consumers connect and experience media.
In the past two years the total number of U.S. smartphone subscribers has nearly doubled to over 125 million.
In 2012, smart devices surpassed 50% of active mobile phones in the U.S and the industry is entering into the Late Majority stage of adoption. Consumers in this demographic are typicallyolder, conservative, and price-sensitive. This stage is usually marked by rapidly falling gross margins as marketers must invest more in product education and price cuts to entice buyers.
Duopoly
The U.S. smartphone market is dominated by Google Inc’s (NASDAQ:GOOG) Android and Apple Inc.’s (NASDAQ:AAPL) iOS, which account for 90% of total market share.
Android captured a majority of market share for the first time in February last year and now accounts for 53% of sales. In 2012, iOS grew its market share by 7% and is installed in 36% of all devices sold.
Several players are fighting for third place.
Microsoft Corporation (NASDAQ:MSFT) missed the last mobile cycle and spent the past three years catching up. Last fall, the company has released the new Windows 8 phone boasting a number of features including one year of ad-free streaming music from Pandora Media Inc (NYSE:P), customizable background interfaces, and custom child security settings. However, sales have been disappointing primarily due to a lack of touch-screen models.
Last quarter, Research In Motion Ltd (NASDAQ:BBRY) launched its Z10 device and initial results have been promising. The company reported to have sold one million devices in Canada and the U.K. However, the Street won’t have any firm numbers about the all-important U.S. launch until next quarter.
Changing fortunes
Will these new competitors be successful? The industry is in constant flux with consumers changing devices every few years.
In 2005, the space was dominated by Palm and Symbian. By 2007, Windows was the kingpin only to be overthrown by BlackBerry two years later. History suggests new players can quickly carve out market share.
Moats
However, analysts suspect gaining market share will be more difficult today. Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) have well developed application ecosystems that are difficult to replicate and lock-in customers.
Are there any facts to back up this theory?
Based on how customers choose other devices, there’s some evidence of loyalty as customers like to stick with familiar platforms.
Hardware
Samsung (NASDAQOTH:SSNLF) has emerged as a major player on the hardware side of the business. Sales of smartphone device devices have grown 100% year over year attributed mostly to the company’s popular Galaxy handset. While Apple Inc. (NASDAQ:AAPL) still reigns champ, Samsung is quickly catching up.
Samsung’s emergence has created concerns that the company is becoming too important in the Android ecosystem and could use its power to negotiate a slice of app revenue. Google is rumored to be developing its own handset device in order to counter the Samsung threat and grab a piece of hardware sales.
Emerging markets
While a duopoly has emerged in the United States, Android is the clear leader internationally accounting for 70% of all devices sold. More importantly, Android has 90% market share in China, which recently surpassed the United States as the world’s largest smartphone market.
Why has Android been so successful internationally? Google Inc (NASDAQ:GOOG)’s ad-subsidy gives Android handsets a price advantage over competitors.
In contrast, Apple Inc. (NASDAQ:AAPL) has struggled in China. In addition to being more expensive, Apple hasn’t been able to cut a distribution deal with the nation’s largest carriers.
Foolish bottom line
Three issues investors will have watch closely in the coming months:
New Competition: With Research In Motion (NASDAQ:BBRY), Nokia, and Microsoft making renewed efforts to retake the smartphone space, how well will Apple Inc. (NASDAQ:AAPL) and Google fend off this new competition?
Margins: How much will handset manufacturers have to cut prices to attract late adopters?
Ad Monetization: Will smartphone companies be able to successfully monetize advertisements?
