A shorter, edited & curated version of this article, published by CNBC.com on the 20th of May, 2015, is available here.
Big thanks to Eric Rosenbaum, CNBC strategic content editor, whose edits (and a notorious headline) made this article one of the top stories at CNBC.com and a social media hit the day of publishing (ranked among top 5 CNBC stories driving engagement)
The War is Over
Smartphones coupled with mobile services and apps (mobile ecosystems) have been the protagonists of the latest disruption tide for well over a decade. Horace Dediu is probably among the best analysts who have covered the phenomenon.
The Smartphone industry is a monumental business accounting for more than $380 Billions last year, on more than 1,2 Billion devices sold, according to IDC.
Furthermore, IDC is forecasting just under Half a Trillion dollars in revenues by 2018 ($451 Bn to be precise).
Despite these extraordinary numbers, this market has reached maturity and YoY growth is declining gradually, with manufacturers working with cut-throat margins and one single player monopolizing gains, seizing an estimated 93% of industry profits according to Cannacord.
No need to guess, just look around you, most likely you have one or more Apple devices on your desk or in your pockets.
Despite there are an estimated 8 Bn smartphones still to go into the market in the next 5 years, this industry is technically over.
…even in China.
Applying the diffusion of innovations theory (a.k.a the diffusion of technologies bell curve), when a technology goes over 50% penetration, the remaining audience is composed of a late majority of followers and laggards.
In other words, with smartphone penetration well over 70% in more developed countries like US, the saturation point has been exceeded long time ago, and the 8 Bn shipments to happen in next 5 years are driven by emerging markets, less penetrated (hence rising star Xiaomi) and shorter product lifecycles with little incremental innovation (hence commoditization, profits diminishing for all manufacturers, hence Apple & others moving quickly into wearables).
The Smartphone war is over. I’ve been myself involved in the mobile industry for nearly two decades (with Nokia and BlackBerry). I started when there weren’t yet internet capable phones and GSM was just a promising standard in Europe.
This is what happened:
From a software perspective, Operating Systems turned competition into a mobile ecosystems war (a.k.a mobile apps & services war) which ended in a duopoly with Android capturing majority of volumes and iOS taking a lion share of the profits.
Before that, devices didn’t have enough computing power nor couldn’t deliver the user experience to drive adoption of content, apps and services (but, for the record, back to the future 15 years ago there was a world of app stores, mobile services and everything we have seen exploding in the smartphone era, and all of it was already working, it was simply not adopted or diffused widely)
Google’s android and Apple iOS disruptions were enabled by asymmetric business models, Apple profiting from HW margins (while investing heavily on an ever growing iOS ecosystem & apps), Google making money out of their services rendered through a myriad of devices running android (commoditizing the OS by giving Android AOSP for free).
Apple case is ironic, as hardware sales and iphone in particular is piggybacking on carriers and the telco services industry (an estimated 80% of iphone market relies on carrier subsidies). Telco (carriers) is a several trillions industry providing the underlying infrastructure and data connectivity over which both hardware (smartphones) and software (Apps & services) have grown explosively (a.k.a OTT services).
Services have been actually the disruptor element driving adoption, ultimately dragging sales of hardware with them (Apple is today’s example, BlackBerry was a pioneer with this asymmetric model).
In its early beginnings BlackBerry didn’t even have intentions to get into the hardware business, their offering was originally focused on the service side only. BlackBerry’s messaging proposition evolved into the incredibly popular mobile push email which Wall Street embraced. Utterly ‘forcing’ users to buy anti-fashion qwerty devices as a necessary ‘accident’ to have real time email. This was back in 2001-2005.
This asymmetric offering turned into a phenomenal hardware business for BlackBerry, fostered by carrier driven sales of push email services embedded in their data plans.
Same pattern follows Apple, building an incredible ecosystem of apps & services which in turn make users desire and buy the hardware devices, and it’s in hardware where the margins and profits lie.
Ok, we’re done with smartphones, what’s next?
In any industry, once maturity has been reached, it’s poised to disruption, typically even before arriving to the tipping point of the adoption bell curve. Clay Christensen innovation dilemma explains this.
In essence the reason why it is so difficult for existing firms to capitalize on disruptive innovations is that their processes and their business model that make them good at the existing business actually make them bad at competing for the disruption.
But, how is this disruption going to happen in the case of smartphones?
Think of smartphones as the entry point to the online world. Now, wouldn’t it be better, easier and more convenient to access your digital world without the constraints of a small screen?
Everything outside the realm of your smartphone’s touchscreen form the domain of disruption for this industry.
To put it bluntly, our heads can’t continue down staring to our screens. Something must be done to fix this, and, the basic technologies to do it are already there.
The post-smartphone era is beautifully described by Horace Dediu in this post (a piece of poetry for analysts).
The writing is in the wall
Early signs of what´s to come can be seen even embedded in our devices in certain ways already.
Siri, Cortana, Google Now are voice portals replacing screen access and typing. These are actually NLP (Natural Language Processing) and AI technologies combined in the cloud.
Smartphones have started talking and displaying information to TVs, projectors and now to smartwatches and wearables.
Furthermore, we have now smart-glasses and head mounted displays capable of displaying virtual images (AR/VR) blended with our natural view of the physical world (MS Hololens, Magic Leap, Oculus Rift). These devices can also understand gestures.
All indicates we will be using our voice instead of typing, and we will be interacting with images well outside the limitations of today’s smartphone screens.
Now, let’s recap what the smartphone wars taught us over the last decade, and, let’s couple it with the early signs of what’s to come:
Services are the enabler and differentiator driving hardware sales. (the interface and point of entry for the user is king, think search box or voice recognition)
The majority of profits come from Hardware sales (think iphone revenues, hence Apple smartwatch)
Smartphone industry is mature and poised to disruption (market is ready to accept new propositions)
The new disruption wave of services will be driven by virtual assistants operated by voice and gestures combined with virtual reality (digital images outside phone screens) running on new smart wearable/apparel hardware (again, think voice enabled interfaces, Siri, Cortana, Google Now as disruptors at interface level)
We can discern how new disruption devices will be. At the intersection of some sort of smart – eyeware with powerful Augmented Reality display and an advanced voice recognition capabilities, coupled with wireless earbuds, as well as with other wearable apparel equipped with sensors all over our body.
But more important than any of these pieces of hardware, (remember, services drive hardware adoption not the other way around), services in this new smart-wearable context will be delivered through the new access points, voice and gestures.
Access determines hardware but, the key element gluing all together and managing how humans interact with this new mobile computing platform is Artificial Intelligence.
Artificial Intelligence in the form of a guardian angel (yes, the movie Her is an excellent representation of this concept, otherwise refer to HAL the ill computer in 2001 Space Odissey).
If you google ‘virtual assistant’ you’ll get around 18M entries, and you’ll struggle browsing results endlessly to find even the first reference to a truly artificial virtual assistant. It means we are still far from a practical ‘HER’ like experience and for the time being, we are hiring human assistants by the hour to do the tasks, offshore.
Most likely, we will be flooded by wearables, smart glasses, apparel and all kind of fragmented technologies while the new AI powered, cloud based operating system, takes over control of human interaction with the world.
Whoever gets that AI guardian angel operating system to work seamlessly with humans, will disrupt the disruptors and will take control over the wearable hardware, which ultimately will need to bend to its (proprietary) specifications or be left out of the service proposition.
Jay Samit, author of Disrupt Yourself, said
“Disruption causes vast sums of money to flow from existing businesses and business models to new entrants”.