Smartphone Commodification: Good for Consumers, Bad for Investors

by Brad Moon | April 3, 2013 2:09 pm

Today marks the 40th anniversary of the cell phone. It was 40 years ago today that the first cellular call was placed by Motorola Engineer Martin Cooper, on a 2½-pound prototype that managed 30 minutes of talk time[1].

We’ve come a long way since then. Mobile phones have shrunk from pounds to ounces, talk time has increased from minutes to a good chunk of a day, computer-in-a-pocket smartphones are in the process of supplanting old-school cell phones in many markets, Motorola Mobility was snapped up by Google (NASDAQ:GOOG[2]), and the mobile device that’s dominated the market for the past half decade is made by a computer company that didn’t exist in 1973 and didn’t enter the mobile market until 2007: Apple (NASDAQ:AAPL[3]).

The mobile industry has enjoyed rapid advancement in the past decade, and every new generation of mobile devices and every wireless infrastructure upgrade has been accompanied by consumer excitement. Smartphones in particular have upped the ante, with a hardware arms race between players like Apple, Google, Samsung (PINK:SSNLF[4]), BlackBerry (NASDAQ:BBRY[5]) and Nokia (NYSE:NOK[6]) that has seen smartphones get “smarter” and faster while tacking on new capabilities like displays with the same 1080p resolution you’d find on a big-screen TV hanging in the living room.

As Slate’s Farhad Majoo points out[7], these mobile devices now rival PCs from only a few years ago. Check out Primate Labs[8], a website that tests and tracks the relative processing power of devices using its Geekbench score for proof. The original iPhone managed a Geekbench score of 136; just five years later, the iPhone 5 clocked in at 1601. Samsung’s recently announced Galaxy S4[9] blows past the competition with a Geekbench score of 3163 (twice as fast as 2012’s Galaxy S III[10]). To put those numbers in some perspective, a late 2010 vintage 13-inch Apple MacBook Air with a 2.13 GHz Intel (NASDAQ:INTC[11]) Core 2 Duo processor scores 3003 on the Geekbench test[12].

That’s right, a smartphone today — a device you can hold in your hand and easily slip in a pocket, powered by a tiny mobile CPU — has sufficient horsepower to theoretically outperform a computer that’s 2½ years old.

Add in the incredible advances in wireless network infrastructure (in the past five years, we’ve gone from 3G to 4G LTE, which gives compatible smartphone users in LTE markets download speeds rivaling their home broadband Internet performance), and there’s no wonder consumers are gaga for smartphones.

That enthusiasm, the kind of reaction that results in long lineups for new iPhone releases, was a big part of pushing Apple’s stock from the $90 range at the start of 2009 to over $700 in late 2012 — a 678% increase.

But late last year, something happened.

People are still snapping up smartphones like crazy, but the excitement seems to be dying down. There were still long lines for Apple’s iPhone 5 launch last September, but as BGR reported, the people outside of Apple’s flagship store in New York who were camped out five days in advance weren’t there out of excitement about being among the first to snap up the new smartphone[13] — they were there hoping to take advantage of the hoopla to promote their own products or companies.

BlackBerry’s long-awaited launch of its new Z10 smartphone has been a bit of a yawner[14]. The company has reportedly moved 1 million of the new devices[15], which is a solid performance, but there have been no lineups or customers clamoring to be first to grab one. Samsung staged a big event in New York to launch its Galaxy S4, probably the most anticipated mobile device of the year. The new smartphone is bigger, better in virtually every way (including that monster CPU boost) and incorporates a slew of new features including eye tracking and health monitoring. The reception? As Wired put it, “The Samsung Galaxy S4 is Completely Amazing and Utterly Boring.[16]”

In other words, we seem to have reached a point where we take smartphones for granted; we expect them to be awesome, to look great and to perform. Any advances smartphone manufacturers come up with now are icing on the cake — they might help to choose between Android and iPhone or BlackBerry, but they’re no longer sufficient to cause pandemonium.

And, as the Wired piece notes, this is great for consumers. Not so great for investors, though, at least if you were looking for a stock that would move dramatically based on being the producer of the next must-have smartphone.

That’s part of the explanation behind Apple’s 38% stock price decline since the iPhone 5 launch. That huge run-up on Apple’s share price was based in no small part upon the idea that the consumer frenzy over snapping up the latest and greatest iPhone would continue into the future. Instead, it seems more likely that smartphones will come to resemble the PC market (before it began to decline) — consistent sales and regular update cycles, but devices that have reached the capability level where most consumers are content to upgrade every two, three or even four years.

If you want to invest in a technology company with stock that has the potential to explode, smartphones probably aren’t the place to look. The next must-have device that launches a new category is more likely to yield results. Keep an eye on developments in the smartwatch and wearable tech[17] fields and the living room, for example. It’s no coincidence that Apple, under pressure from investors to do something about its slumping stock price, is rumored to be hard at work[18] in those areas. Google, Samsung, Microsoft and Sony (NYSE:SNE[19]) are all circling too … and the first to hit a home run could see a repeat of Apple’s 2012 run.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/04/smartphone-commodification-good-for-consumers-bad-for-investors/

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