December 14, 2018

Here’s a straw in the wind: 2017 was the first year that smartphone shipments declined.

That (global) statistic is from Jake Swearingen’s report on the future of the smartphone industry for New York Magazine.

If you don’t give a fig for the future of the smartphone industry, then don’t hang-up – because it illustrates something of great importance to the future of the entire economy.

We’ll begin with a little recent history:

“From roughly 2007 until 2013, the smartphone market grew at an astonishing pace, posting double-digit growth year after year, even during a global recession. They were the good years… millions and then billions of smartphones going out; billions and then trillions of dollars in rising company valuations; every year new models of phones hitting the market, held up triumphantly at events that were part sales pitch, part tent revival.”

Double-digit growth during the deepest recession since the war? Who wouldn’t want to be in that business? But remember the wise words of Herbert Stein: “If something cannot go on forever, then it will stop.”

Why smartphone sales growth can’t go on forever (or at least for a while yet) is an interesting question. Market saturation is one answer – pretty much everyone has one of the blasted things (I’ll come on to the developing world later). Another factor is that we’re not upgrading as fast as we used to:

“…there’s no doubt that the replacement cycle for phones is elongating. ‘Over the last five years, the replacement cycles of smartphones in the U.S. has has increased from an average of 20.6 to 24.1 months,’ says Jennifer Chan, global insight director at Kantar. More worrying for smartphone manufacturers is that desire for new technology doesn’t really spur consumers to buy new phones.”

The underlying problem is that the latest smartphones are both too good and not good enough.

They’re too good because they do just about everything you’d want from a smartphone – and do it with increasing reliability

“Durability has vastly improved; waterproofing is now standard on smartphones, so a brief dip in the sink or toilet doesn’t mean you need a new phone, and the weakest links in smartphone hardware — batteries which tend lose their ability to hold a charge over time and screens that crack and shatter — have improved.”

These are near-perfect products, so why would you want another one next year?

And yet smartphones also aren’t good enough because new models have ceased to offer breakthrough, must-have features.

Thus the industry is left to compete on price or luxury. Price – and therefore commoditisation – is what’s driving competition in an as yet unsaturated market in developing nations. The luxury, high-end product strategy has worked out pretty well for Apple so far, but without those breakthrough advances, where does it go next?

The trouble with beautifully made, ultra-reliable products is that they’re keepers – and at Apple prices one would hope so. As for super-luxurious products, there’s only so many people rich enough or foolish enough to want a gold-plated iPhone, which in any case, is more about jewellery than technology. Even worse for the tech companies, the real status symbol among the elites has become not having a smartphone.

Suggested reading
Do you have to be rich not to have a smartphone?

By Peter Franklin

As I’ve argued before, the most dangerous word in economics is enough. One of the worst things that an industry can do is fully satisfy what we want from it. And as more and more industries do that there are profound implications economic growth itself.

Imagine that an omni-capable electronic gadget hits the shelves in 2019. Let’s call it the Acme ‘Everything’ – because that’s literally what it does: everything you could possibly want. Furthermore, it never wears out or breaks down, so each person only needs one of them. Effectively, we’d all be immensely rich, our material needs and wants abundantly catered for. The effect on the economy, however, would be disastrous. In fact, after the last sale to the last customer, GDP would fall to zero as there would be no need to buy anything ever again.

Obviously, we’re nowhere near to such a device, but collectively the many devices we currently depend on are getting closer to a state of sufficiency than they were. By producing extra functionality and reliability at no additional cost, they increase their value to us, but without increasing consumer spend, producer revenue or GDP.

Suggested reading
Does capitalism have an answer to ‘fully automated luxury communism’?

By Peter Franklin

Of course, not having to buy another smartphone or have your car repaired, frees up money that can be spent on other goods and services. But for a particular industry – and ultimately the whole economy – that requires the development of products that can cater to previously unmet needs and wants. Moreover, consumers have to recognise that they actually have these needs and wants.

This gets more difficult the less obvious they are. Jake Swearingen mentions the manufacturers who hoped that we’d want “3-D televisions and curved TV sets” – but for the most part we didn’t.

It’s hard persuading people to desire something they’ve never felt the lack of. And in some ways the bigger the technological breakthrough represented by a new product, the harder it is. It requires an intuitive breakthrough on the part of the consumer.

It helps to work with familiar concepts. For instance, the motorcar was initially understood as the ‘horseless carriage’. Mobile phones are the great example of our own time. Consumers intuitively grasped the relevance of the technological leap because it combined the idea of telephony with that of mobility. Similarly, smartphones combined the idea of the mobile phone and that of the internet (not to mention the camera).

Suggested reading
The truth about Gen Z

By Eliza Filby

The next leap forward, however, is less obvious. Swearingen mentions augmented reality, but a device that combines all the things that a smartphone gives you access to with your natural field of vision is not especially intuitive or attractive.

And that, in a nutshell, is a fundamental challenge to economic growth in 21st century: while advanced economies are getting better at improving the familiar; they are getting worse at envisaging the new.