We’ve been getting used to numbers showing declining PC sales, with much of the blame being placed at the feet of tablets and smartphones. As mobile takes over from the PC, everything from hardware sales to gaming, search and ad revenue is slowly following along.
So, what to make of Gartner’s press release announcing that worldwide mobile phone sales shrank by 1.7% in 2012? That’s not a huge amount, but it’s the exact opposite of the direction they’re supposed to be going.
Does this mean that Apple (NASDAQ:AAPL), Samsung and the other leaders in the smartphone marketplace have cause to worry? If you’re Apple — whose iPhone accounts for nearly two thirds of profits, whose margins on other products are slipping and whose stock is in a prolonged slump — declining mobile phone sales would be a very, very bad thing.
Don’t hit the panic button yet.
The problem with statistics about “mobile phone” sales is that the category encompasses a range of products. We hear mobile and tend to think of smartphones like the iPhone 5 or Galaxy S III, because those are the devices with the power to replace computers. These phones command the premium prices that are the revenue engines behind companies like Apple and Samsung, which combined have 52% of global smartphone share and scarf up over 90% of the profits in the market.
However, simple cell phones and feature phones — the inexpensive devices that people use to make phone calls, send the odd text, snap a grainy photo or maybe play a quick game — still represent the majority of that “mobile phone” market.
Gartner explains the drop (the first since 2009) this way: “Tough economic conditions, shifting consumer preferences and intense market competition weakened the worldwide mobile phone market this year.”
That may be, but another factor is at play: an ongoing transition from feature phones to smartphones.
In 2009 about 172 million smartphones were sold worldwide; in 2010 it was 297 million. By 2011, smartphone sales hit 472 million (out of a total 1.8 billion mobile phones sold). While overall sales may have shrunk last year (from 1.8 billion to 1.75 billion), smartphone sales continue to expand at a fast clip. In fact, Gartner sees smartphones surpassing feature phones in 2013, predicting 1 billion smartphones to be sold out of a total pool of 1.9 billion.
This means Apple and Samsung are likely to continue benefiting from the transition.
On the other side are companies like Nokia (NYSE:NOK), the longtime world leader in mobile phone sales that lost its crown to Samsung last year. It’s heavily reliant on the feature phones that consumers are moving away from. Indeed, Nokia alone accounts for a good chunk of the overall slip in mobile phone sales.
In 2012, it moved 333.9 million phones, down from 442.5 million in 2011. LG Electronics, which also depends on feature phones, saw a significant drop as well (from 86.4 million units in 2011 to 58 million), as did Google’s (NASDAQ:GOOG) Motorola — which has been rumored to be exiting the feature phone market all together.
HTC and BlackBerry (NASDAQ:BBRY) slipped too, but their smartphone market share was snapped up by Apple and Samsung, which saw shipments rise over the year from 89.3 million to 130.1 million and from 315.1 million to 384.6 million, respectively.
The slip in mobile phone sales signals further problems for the Nokias of the world. Cheap cell phones will always have a market. But their buyers will increasingly be the most price-conscious, their margins will continue getting thinner and that market segment will keep shrinking.
Nokia is a still a giant in the mobile phone market. Even after a dismal year, it’s the No. 2 vendor in the world and shipped two-and-a-half times the number of phones that Apple did. But a huge chunk of Nokia’s business was feature phones, and its move to Windows to power its smartphones hasn’t paid off.
With Microsoft‘s (NASDAQ:MSFT) Windows Phone managing a mere 3% smartphone OS marketshare in Q4 2012, Nokia has got to be considering releasing an Android phone, no matter how much Microsoft is coughing up for its Windows Phone support.
In the meantime, the top dogs of the smartphone heap — Samsung and Apple — should continue to see healthy growth in 2013 as more and more people ditch their feature phones in favor of smartphones. The rest of the pack will keep working on their Android smartphones in the hope of making a profit, just like in 2012.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.