Finally Data on Second Hand Smartphones (Thank you Gartner!) including hand-me-downs, recycleds and resolds

Gartner has given us rare data (smartphone replacement cycle) and previously never released data (what happens to smartphones after first buyer stops using them). This is magnificent and we can do some very rare analysis and also do a sanity check on one controversial number. So lets first get to Gartner's data.

Gartner has a brand new report, 'Reused, Recycled, Resold' about the afterlife of smartphones. There is a nice highlights-level summary of main points in their press release (thank you Gartner for this valuable info!)

GARTNER FINDINGS

So based on a survey of 5,600 consumers in the USA and Germany, on their smartphone habits, Gartner found that nearly 2/3 of smartphones are offered a second life. Some are sold as used. Some are handed in as trade-ins when buying the next smartphone. And many - 23% of all smartphones, are given to family or friends as hand-me-down phones. Incidentially only 7% of smartphones are properly recycled, so roughly 3 out of 10 smartphones will just linger somewhere in the bottom drawer of our desk wtih a dead battery and lost recharger, maybe a broken screen too...

Gartner also reports that for smartphones the replacement cycle is now down to between 18 and 20 months, and for just over half of the 'tech enthusiast' segment, the replacement cycle is less than a year. That accounts for 13% of all smartphone owners who are so in love with their pocket gadget they get one more frequently than once ever 12 months.

There also is data on 'refurbrished' phones that are resold. Gartner counted that 56 million refurbished smartphones were sold to a second owner in 2014, and this business was worth 7 Billion dollars in the wholesale market. If we assign a 33% markup to the phones, that means refurbished used smartphones have an average sales price of about 166 dollars globally (unsubsidised price). Not bad for a device that on average is 19 months old...

Now the actual second hand market is considerably larger than that 56 million 'refurbished' smartphones as especially in the Emerging World market there is a big second hand market for older phones. For that we don't have numbers. But we do have now some very interesting data points for the installed base calculation of smartphones. 

GLOBAL SMARTPHONE INSTALLED BASE

There are not many who report the installed base of smartphones (I do here at the CDB blog of course) and when that kind of data comes out from some random sources, often it is an obscure data provider who may have bizarre numbers based on questionable methodology that often defies all published data on say new sales etc. But lets see what we now can calculate from Gartner's data.

The replacement cycle for smartphones is between 18 and 20 months. So lets see how many smartphones are then currently in use. We do have the data points for 18 months ago and 21 months ago. If all new smartphones sold in past 18 months are now still in use (by the first user obviously), that would mean 1,841 million (1.8 Billion) smartphones. If all smartphones sold in the past 21 months are still in use today (by first buyer) that is 2,074 million (2.1 Billion) smartphones. The weighted average at 19 month replacement cycle is 1,994 million (2.0 Billion) smartphones.

Now, 19 months old smartphones are no longer used by their primary owner. But 23% of those are given to family or friends (often our kids) as hand-me-down smartphones. How long are they used? Definitely not as long as the primary phones (on average) as these are older, already somewhat worn so they will show ever more wear. The single biggest group receiving them are our kids (and nieces, nephews, grandkids and little brothers and little sisters). They in turn will grow older, ask for a new smartphone for birthday or Christmas, and soon grow old enough to earn some money to buy their own smartphone. Yes, some of our hand-me-downs go to wives and husbands and parents etc, but most go to kids and thus we can say the average life is far shorter. Lets say half. So if we say they live one year on, lets take the smartphones that were sold in the 12 months ending October 2013, so 757 million smartphones, and take 23% of those that are given to family and friends as hand-me-down second hand used smartphones. That is 174 million smartphones.

Adding 1,994 million new smartphones still in use by their first buyer and adding 174 million hand-me-down second hand smartphones, we get an installed base estimate of 2,170 million (2.2 Billion) smartphones for end of 2014  Now as we measure slightly different things (new sales include some phones that shipped to market that were never sold) the reality is slightly less than this number but reasonably close. So what did your CDB blog calculate as the installed base of smartphones as of December 31, 2014? I said it is 2.110 million smartphones in use!

Haha that is almost exactly what this Gartner data supports, but my number is below it, as it should. That 2.1 Billion active smartphone installed base calculation is pretty perfect. If you needed the breakdown by OS it is of course:

INSTALLED BASE OF SMARTPHONES BY OPERATING SYSTEM AS OF 31 DECEMBER 2014

Rank . OS Platform . . . . Units . . . Market share  Was 2013  . Main Manufacturers of current base
1 . . . . Android . . . . . . . 1,596 M . . . 76 % . . . . . . ( 66 %) . . . . . . Samsung, Huawei, Sony, ZTE, LG, Lenovo/Motorola, Xiaomi, Coolpad, TCL-Alcatel 
2 . . . . iOS  . . . . . . . . . . . 410 M . . . 19 % . . . . . . ( 21 %) . . . . . . Apple
5 . . . . Windows Phone . . 45 M . . . . 2 % . . . . . . (   3 %) . . . . . . Microsoft(Nokia), Samsung, HTC
4 . . . . Blackberry . . . . . .  33 M . . . . 2 % . . . . . . (   4 %) . . . . . . Blackberry
3 . . . . Symbian . . . . . . .  15 M . . . . 1 % . . . . . . (   5 %) . . . . . . Nokia
Others . . . . . . . . . . . . . .  11 M . . . . 2 %
TOTAL Installed Base . 2,110 M smartphones in use at end of Q4, 2014
Source: TomiAhonen Almanac 2015
This data may be freely used and repeated

Returning to Gartner data. So we have about 174 million used smartphones that our family and friends use. Out of the total installed base of active smartphones that is 8%. And if we counted that the world sold 1.3 Billion new smartphones last year, in reality 1.47 Billion people last year received a new or second hand smartphone. The digital opportunity is essentially 8% larger than most sources have been reporting (except that readers of the CDB blog have known this the longest as I've been the expert to first introduce and measure this bizarre phenomenon of the second hand phone concept to the industry. And it turns out, I've apparently been darn accurate in estimating that market too haha)

Thats pretty awesome and truly rare to be able to verify that kind of hard-to-find number. Thank you Gartner for the data points. And on the CDB blog, I continue to share any info I find. Incidentially, if you have missed it, my brand new keynote presentation I just gave at the World Summit Awards in Abu Dhabi a few weeks ago is now up on Slideshare. It has (as always) plenty of new stats too and lots of interesting case studies as well as some smartphone industry forecasts.

Finally If you need more info on the handset market in 2014, get the TomiAhonen Phone Book 2014 

Comments

[Wayne Borean]

Then there's a guys like me, who are still using an iPhone 3GS. Hey, it works fine, why replace it?

Wayne

[Tomi T Ahonen]

Hi Wayne

LOL yeah. Well, I did write that the 3GS was the first iPhone that was a proper smartphone with the bugs removed from the attempts to do it all. So you picked a good one from the pack. But at some point you should TRY a larger screen iPhone, you'll be amazed and then its no going back. Pictures, videos, websites, ebooks...

Tomi :-)

[adi purbakala]

@Tomi

Real question is how soon you (and other here) buy new phone. What do you to old phone.

[RottenApple]

Another question is how the replacement cycle will develop, now that the major features (CPU power, screen size, memory (well, except Apple, of course) have mostly been maxed out, save for minor incremental upgrades.

Will replacement cycles stay this short or will they increase because the incentive to upgrade will certainly be less than in recent years? 18-20 months seems awfully short to me, considering the quality of current hardware. It was similar with PCs 10 years ago but due to slowdown of performance increases the average use span has significantly increased.

[Michael Scharf]

Smartphones sold 12 months to October 2013 = 757 million
23% handed down to family and friends = 174 million
Approximately 35% out of service (recycled or in a desk drawer) = 265 million

What happened to the other 318 million phones? These would be the ones traded back to the carriers or sold by the first owner. If half of these are in use today, that's another 160 million phones.

[Maggan]

@RottenApple

Yeah, the replacement cycle seems awfully short to me. I get to buy computers, tablets and phone as part of my job, but even so I'm using an iPhone 4s (3 years old now) and my wife is using my old iPhone 3G (5 years old now).

But then again, as long as the incentives from the carriers is to offer a new phone for "free" or "cheap" by hiding the costs in the contract, many customers will trade to a new phone at the earliest opportunity. Why use an old phone, when you can get a new one and keep paying the same as before?

It's a strange market.

/Maggan

[RottenApple]

@Baron95:

Let's see. I still have my doubts over the watch. None of the iPhone users I know from work shows the slightest interest for it so its market chances will definitely a lot lower than the iPhone.

The rest? Depends on how the iPhone fares. You seem to make your projections from the US business model. The problem with that is just - it doesn't make upgrading financially viable but just hides the cost of the upgrades in the contract.

So, in parts of the world where that model is not popular this won't work and once we reach feature saturation this will certainly be an aspect for the carriers to fight over.
Once one competitor starts aggressively pushing alternative contract plans without a phone, customers may just choose to switch to options that leave the phone out and go for subsidy-less contracts with their old phone.

For the carriers it doesn't really matter if they sell a contract with subsidized phone or a contract without subsidies for a price that got the phone costs factored out, if the phone-less business model starts becoming more attractive.

As for Android, well... I think Android users are smarter than to be fooled by such rip-offs.

Regarding the 'careful' introduction of new features, Apple is playing a dangerous game here, constantly pressuring people to upgrade. If they tap that well often enough it may just dry out at some point. Until now the advances in basic features were large enough from each generation to the next that it worked, we'll see if this continues with smaller increments.

[Lullz]

@RottenApple

"You seem to make your projections from the US business model."

Or Japanese?

Traditionally the electronics market has been quite often, but not always, conquered by those companies who have been able to release the most dominant end models that have become mid range products soon enough. Now it's questionable if Apple is able to conquer the mid range, but they are currently mostly dominating the high end. At least more than any other manufacturer.

The dominant high end model is usually the most desired one and if that product is available as a mid range solution, it has the chance to sell in really high volumes. This doesn't only apply to mobile phones.

[Tomi T Ahonen]

Hi adi, Rotten, Michael, Maggan, Baron and Lullz

About the replacement cycle. The global average replacement cycle for all phones has been rather steady but gradually growing and is now near 24 months (was at its fastest under 18 months, I had it pegged at a peak of 16 months). But we have not had a replacement cycle number for smartphones separate from all phones in a very long time. That is part of the excellent and very rare info that Gartner has calculated and shared. So in my new PhoneBook 2014, I report the global average handset replacement cycle for year 2014 to be 22 months. And for smartphones it is faster, partly because of those enthusiast 'geeks' who replace their phones in a year or less - 13% of all smartphone owners ie 8% of all phone owners.

Can we expect a slowing-down of the replacment cycle, probably yes, but not rapidly. If its 18-20 months for smartphones now (lets take the mid point ie 19 months) then in two years that might be up to 21 months, and by year 2020 maybe 24 months, but we should be thinking 'roughly 2 years, a little under' as the average replacement cycle for smartphones into the near future.

Now, the dumbphone replacement cycle can also be calculated out now, so if total average is 22 months, and for smartphones its 19 months, and 2/3 of handset sales are now smartphones, then for dumbphones its 28 months. Thats two years and 4 months, the average time that a dumbphone buyer today holds on to that ultracheap basic phone of very basic functionality.

Can we expect that replacement cycle eventually slows down a lot as all phones become smartphones and seem to now harmonize on an iPhone-clone look and feel? I think that is reasonable to expect. The early era of the PC had a lot of evolution and tech races in various components from storage to display to multimedia ability to connectivity. But at the advent of the laptop, a 'standardized package' appeared and after that matured - in about a decade - and then the laptop sales hit large enough volumes that their prices became competitive with desktops (another decade) we arrived at the modern times for laptops where you don't really need to upgrade your laptop until its screen cracks or the battery really runs dead and you start to think, maybe that old war-horse needs to be replaced... (in my case its the keyboard haha, I hit the keys so hard, I always have to have the keyboards replaced every few years and then they start to run out of new replacement keyboards several years after that laptop model is no longer made...). We can see it with the long life that Windows XP had in the installed base, people found it 'good enough' and no real reason to go upgrade. I'm talking about consumers obviously not enterprise customers..

With that it does seem like the smartphone has now achieved both those stages. The form factor has now found its sweet spot, the iPhone and clones. And the price is now low enough that majority of all phones sold are smartphones. Unless different form factors arrive to allow significant innovations, then we are probably at some kind of stage of evolution, where slight increments are added but a 5 year old smartphone is still perfectly fine (for most users, not geeks). Who really needs a larger camera than the 8mp - 20mp range we see today. Going to 50mp or 100mp will not matter for most users, only for some cameranerds. Same with screen. The size of our clothing and physically our fingers, hands, dictates pretty well where a single-handed device (phablet) can exist and where the break comes to two-handed devices (tablets). We are just about at that limit now. We tried the pico projector phones, they went nowhere. And after retina display, there isn't really much more to be gained from ever sharper displays - on the phone. Yeah, we can have TV out with superduper high resolutions but again, the phone itself is near an evolutionary end-state. If the TV development into 3D had worked out as a major revolution in TV programming then we could expect the 3D glassless displays to be the next big thing in smartphones like LG tried, but that fizzled out fast. Bendables I don't think are that 'necessary' either, seem more like a gimmick.

So some will always want the latest and greatest (within their budgetary limits). The industry is going more towards fashion elements (colors, thanks Nokia) that help sell 'this season's fashion' models, Apple joined this trend a few years ago. So some will want to be seen to have the latest. But the replacement cycles will probably grow longer, only not at a very rapid pace. Now, SEPARATE from the evolution of the phone is the expansion of the market. If we have to save a week of our income to be able to afford to buy a new top-end smartphone today, its no biggie and we can easily afford another. But only 2 Billion people people on the planet are middle class, and they essentially match the footprint of the installed base of smartphones today (not really yet, because many of us have 2 smartphones). So then we are at the bottom end and someone barely in the middle class might need to save two months of his or her earnings just to be able to afford a low-end smartphone. That consumer would need to consider very closely is there any reason to buy a new phone two years later, or to wait a year further before the big savings effort to afford the next smartphone. Remember these don't have credit cards for example, they have to pay full cash price on the unsubsidised smartphone. So THAT transition as more of those who now own a dumbphone but whose next phone purchase will be a basic Android smartphone, that population will push up the replacement cycle average to closer to where the global handset average now is (22 months) rather than the 19 months of all smartphones. That is the big driver of what will push up the replacement cycle statistic for smartphones in the next years.

Tomi Ahonen :-)

[Tomi T Ahonen]

Now to specific questions

adi - haha, they go to friends and family

Michael - good point and yeah, that is the very rough calculation but in reality it is probably less. Many of the phones taken in as trade-ins are not worth attempting to fix or resell. So only CURRENTLY popular brands and their better and recent models would be shipped onto the second hand market. And in that market, there will be a far larger percentage of phones shown in second hand stores that are never sold, eventually are scrapped. But to balance it out, we have the whole 'used phones dealership' model where people come in, hand in an old phone selling it for cash, or replacing an OLD used phone for a less old but still used phone, ie 'upgrading' the used phone. Think of used car salesmen. This is a big industry in the Emerging World and all markets and malls have such phone booths that buy and sell used phones. Remember this is the best-selling consumer tech of all time, so more devices are in the wild than cars or TVs or PCs etc. And for most humans, their mobile phone is their most valuable possession (globally, this is mostly due to Emerging World).

So the Gartner study was only for smartphones out of the rich world (USA and Germany) and the 41% who 'sold on' their smartphone, part were given back to the dealer as trade-ins etc and part were sold into second hand market mostly through eBay and such options. Part of the phones that go to the dealers will be refurbished and returned to the Western market such as used as the warranty replacement phones (you don't get a new phone in that case, you get a refurbished phone) but a significant part is exported to the Emerging World via a wholesale international used phones market. American phones end up in Mexico while French phones end up in Algeria and Dubai phones end up in Pakistan etc. I hope to get some info at some point more about this market so we could calculate how many used phones are bought and sold. Gartner reported 56 million REFURBISHED used phones were sold in 2014 (ie 4% of the total sold) but that is under-counting the second hand resold smartphones market as it ignores unrefurbished but sold, used phones. So the total used phones sold market - different from hand-me-down used smartphones - is going to be bigger than 56 million units in 2014 but will probably be signficantly less than the number you had, half of all that are returned. A very VERY rough ballpark would be 100 million I would say and these in turn will have a lesser average life too, as they are already older models that have some wear, and their buyer will be wishing to get a newer/better phone soon even if that is another used phone.

But yeah, there is a market still that needs to be measured and counted, hopefully we get more data on it, but we know the floor level - it is definitely more than 56 million smartphones in 2014 or 4%. It could be in very rough terms about twice that..

Tomi Ahonen :-)

[Tomi T Ahonen]

/Maggan

About the 2 year contracts and subsidised phones. Yeah, that is a powerful element to drive the replacement, kind of forces consumers to accept a new phone every 2 years. And for those with two contracts on two rival networks, it means they get a new phone every year, on alternate years from each of the two carriers. Three trends eat away at this tradition. First is the invention of the prepaid account (invented simultaneously in Spain and Italy about 2 decades ago). Today the vast majority of all mobile phone accounts are prepaid accounts that have no subsidised phones attached to the deal. Secondly we have the trend away from handset subsidies overall. This is a slower trend but its also only going one way, away from subsidies. In many industrialized advanced countries like Italy, Belgium, South Korea etc there are no handset subsidies even with contract customers. And lastly there is the idea that consumers can have a cheaper contract if they hold onto their own phone (or bought it from somewhere else like an online store - eg Xiaomi - or brought it as an unlocked phone from a rival network). Even the USA just passed some new FCC rules that allow consumers to unlock their phones and thus reduce some of the utterly silly 'economics' of the subsidised phone.

So yes, it does exist and powers the replacement cycle to some degree, but the replacement cycles (on longer term analysis) stay remarkably consistent with or without handset subsidies and when subsidies are suddenly eliminated like for example they did in South Korea, the effect to the handset market is only brief and the market returns to same statistics even without the subsidies (in terms of new sales, replacement cycles etc).

Baron - on the accessory side. Good points but then the cycles of those accessories will likely be FAR longer than the actual phones. Look at accessories on most other tech we've used. We bought the printer for the PC, we replaced the PC several times but the old trusty printer just gets a new cartridge and its good to go. The accessory 'game' was pretty well perfected by the SLR/DSLR camera guys, so you bought a new Canon camera body when you wanted some added power into your photography for some technical ability, but the lenses you had, the tripods and flashguns etc would all still fit the new camera body, and you kept all your past accessories. Until at some big technical break, a total new lens series came along, then you had to uprgrade most of that. Similar to how handsets had their chargers when they were not using the standard USB connector. The Nokia charger would work on all Nokias (yeah old charger plug/new charger plug but you know what I mean) and when you bought a new phone, the old charger would still work. For travelling road warriors with two phones, this was an incentive to standardize on one brand of phone (only one recharger needed). And soon you'd have drawers full of Nokia rechargers so you could keep one at the office, another in your bedroom, yet another spare in your car, and so forth.. Oh and that reminds me of the car kits. Again accessories that lasted several generations of phones.

So yeah, the accessory game is a clever bit to boost the bottom line - accessories can usually be sold at far higher profit margins than the basic smartphone itself. But there aren't many accessories most of us are willing to own and use. The Bluetooth earpiece was a fad thats gone. I think the Apple Watch will be a similar short-lived fad (two product cycles from Apple then shut it down) but that remains to be seen. What else? We've had Bluetooth foldable keyboards, they sell in trivial numbers. The accessory lenses that attach to the phone? Gimmicks. Even batteries, thanks to the iPhone, the removable battery as an accessory is an endangered species. Something like a quarter of all smartphones sold already have non-removable batteries. Yes an accessory market is out there but its modest in size and most users so far have not found any accessory type that they want to have (that reaches half of all smartphone users in scale). The nearest thing probably is the selfie stick and it won't reach 10% of smartphone users haha...

Rotten - on the carriers, they are smart people who know which side of their bread is buttered. They know fully well that the subsidy model warps the market in many ways and most importantly, it strengthens the consumer connection to the handset brand while diminishing the power of the carrier/operator. Everywhere that I've discussed this with operator/carrier management they all know very well, a handset subsidy model is poison for carrier banding and loyalty and it helps drive churn. So all carriers/operators want to get away from it. Their only problem is that its the classic prisoner's dilemma. What is good for all together is not good for one, alone. Ie if all prisoners riot, they can take over the prison any time they want. That is why the prison guards get so brutal in dealing with individual transgressions of rules in essentially any prison around the world. Anyway, to operators, that is why they either move VERY slowly, slightly less subsidy this year than last year - like in China. Its usually the smallest operator/carrier who moves alone to differentiate - like T-Mobile in the USA. Or the carriers/operators get together as an industry and put a stop to it, together, asking the regulator to outlaw the practise for all - like they did for example in South Korea.

So you are correct that from a business angle (under most cases) the carrier doesn't care if it includes a handset bundle in a 2 year contract, tacks on the interest for the payment plan, adds a small bit of insurance to cover those who will abandon the contract but keep the phone for whatever reason, bankruptcy, moving out of the country, death.. But in some cases - we just saw it in Hong Kong - the profits made by selling handsets actually drove the profits of the operator itself who was struggling to make money on the telecoms business. That is a different angle, how a good retail strategy - location location location - of shops and the new iPhone 6 models - drove profits of the retail business, while the telecoms 'base' business is in trouble. Similar to how petrol stations can be on thin margins selling gasoline but make big profits selling milk and beer and cigarettes from the store at the gas station.

Tomi Ahonen :-)

[Tomi T Ahonen]

Lullz - yeah, that is the 'strategy advice' I have been promoting on this blog for Apple for years. I don't mean that Apple should go fight in the 100 dollar price range. There is no profit there. But Apple could bring its super-premium smartphone model range down to something around the 300 dollar range, still above the global average price of smartphones, but as an 'entry level' premium smartphone, similar to how BMW and Mercedes and Porsche have brought cheaper models to near the average price of cars, but still above it, but selling in vastly greater numbers than their flagship model cars at the top end of the price.

I do think that one hundred years from now, when this century is reviewed, then the business analysts will use the Apple iPhone as a case study of how to fail to capture an opportunity when it was staring you in the face and you held all the aces to win. You know I've been writing that Apple's iPhone is headed to about 10% market share, similar to what the Macintosh has had in the PC world (under 10% actually for the Mac historically). Today in the USA, the iPhone has over 40% market share. App developers and various other related partners in the ecosystem who are based in the USA, will think the iPhone position 'at home' will be replicated in the world soon. In reality the numbers are going in the opposite diretion. Apple had a peak market share of 23.9% for one quarter, Q1 of 2012, but its share has been coming down ever since and today the annual market share is at 14.8%. Those partners in the ecosystem are mostly either truly believing that the REALITY in the world is far better than it really is (that Apple has say 20% of the world - and growing) or they believe that wherever it may be now, it will soon grow again (because China... and nonsense follows)

This blog deals with the facts not the myths. We are FAR ahead of the curve on understanding the mobile industry overall, and the smartphone market in particular, at this blog. The discussion here in our comments is second to none on the planet about mobile. So we just need to let the laggard American market catch up to reality, in a couple of years they too will know that Apple is only a niche, its real market share is pretty darn close to 10% by that time in the global scale, and then when that reality sinks in, many stop developing for the iPhone - just like now as the reality sinks in about Windows Phone, the developers and partners are jumping off that sinking ship.

I don't mean the iPhone will die like Windows Phone has died. No. But the iPhone will only be a niche if it can't do better than 10% of the market. If Apple had 20% of the global market, that is a different story. Then any one 'hit model' could theoretically jump that to 30% in any one year (pushing Android down to under 70%) and its still a real race. At 20% where iPhone owners are the richest among smartphone owners, there is plenty of a market for most apps, where there would be less total users vs Android but the users are richer, thus willing to spend more. At 10% that is no longer a valid argument, and then only some regional markets would continue as sustainable like the USA, Australia, Japan etc.

Now consider the alternative. IF Apple introduced a PREMIUM smartphone in the mid-price range, but priced ABOVE the global average price. Like what a BMW 1 Series for example, outrageously expensive car in that size just to get the BMW badge, but its a great driver's car... So make it a proper iPhone, but make it physically smaller, so its obvious to the naked eye that this is the 'entry level model' not the flagship. Use lesser materials plastic rather than metal as they did with the 5C. But price it at say 400 dollars in today's money. Give it one feature from the 6 Series that isn't on the current 5 Series (NFC and Apple Pay). Otherwise spec it like a 5S so its guts will cost half what they did on the 5C two years ago. That means they can sell it with obscene profit levels per phone today. As it doesn't have the big screen, it won't cannibalize the 6 Series buyers. But it would bring TONS of new buyers to the iPhone family who can't afford 700 dollars for a new smartphone but can just about afford 400 dollars. The iPhone for the Emerging World markets... And some of those will so fall in love with their iPhone, that in the future they WILL upgrade to the next big-screen flagship. While others will buy other Apple toys like iPads, Apple Watches etc...

For the most part, this 'iPhone Nano' strategy would not cannibalize iPhone flagship sales but would expand iPhone reach to buyers who can't afford to join the iReligion today. As the iPhone loyalty is second to none, these will also remain loyal iSheep for the rest of their lives. But using this strategy, if Apple did that 4 years ago when I was advocating it, they would easily own 20% of the market today. Even if they did it today, they could get to 15% which is far FAR better than 10%. Note, these phones would sell to customers who otherwise won't buy an iPhone and the Nano model would still have the same profit margin as the top line flagship iPhones, so this would be a huge boost to Apple corporate profitablity too.

So yeah, I think its an 'obvious' strategy that any sane CEO would have done years agao, but Apple in its infinite wisdom rather just focuses on short-term profits to be temporarily the most profitable company on the planet, while abandoning a strong position for the rest of the century. I think that is short-sighted, but what do I know...

PS - yea, anyone wanting to respond to these points, YES you may discuss Apple profits in this context...

Tomi Ahonen :-)

[AndThisWillBeToo]

@Tomi
"We've had Bluetooth foldable keyboards, they sell in trivial numbers."

Why low sales? Is it because Elop pushed Nokia to use windows Phone that does not support those?

[Tomi T Ahonen]

AndThis

Haha you know I'd love to blame everything on Elop but no, that has nothing to do with his mistakes. We see it globally, today the standard is Android and there are Android Bluetooth folding keyboard (and iOS ones) in many handset stores but maybe one or two models and not selling at all. Its a weird little corner of the industry in the forgotten accessories. I am sure the bluetooth keyboard sales go mostly to tablets not smartphones and even there its a tiny slice.

Back when Nokia still did its Symbian BT keyboard, I wanted to buy one at one point. I went to one of the many Nokia stores in Hong Kong, and asked for it. They didn't have it in stock. I asked if they could see if another had it. They checked and only one store in Hong Kong had one model in stock. That store was far from where I was, so I decided to wait and soon was flying to London I thought I'd buy one at the Heathrow T5 Nokia store. But that was just early 2011 and by the time my London trip came, Nokia had just had its February 11 moment, and when I arrived at the Nokia store, there was no Symbian keyboards in stock and none more were to be coming. It was then a discontinued model no longer in the catalog.

I have a third party foldable Bluetooth keyboard (my third) that I use a couple of times per year. As a gadget freak I often scan the shelves at my fave gadget stores in many of the shopping mecchas and a BT keyboard is usually seen but one model, very rarely even two models and they tend to be in the far corners and clearly dusty packaging etc, this is a product that does not move in any kind of volume.

Tomi Ahonen :-)

[Maggan]

@tomi

It's difficult to accept your reasoning that the most profitable company in like forever, which is defying expectations for what anyone would think is possible when it comes to profits, would have been even MORE profitable pursuing another strategy.

Apple had 93% of the profits last quarter, and has hovered around 80% for a while. So for them to make more profit, they would have to approach 100% profit share or more. So is it really probable that all other suppliers would have lost money, should Apple have done a "nano iPhone"?

Also, Apple has constraints on how many phones they can have manufactured. Yet they sell all they make.

So, if manufacturing is a constraint, then forgoing sales of the higher priced phones to produce a cheaper phones, would mean less money for Apple. Less profit as well, probably.

If you can only make 50 million expensive phones and sell them all, why would Apple make 30 million expensive and 20 million cheaper phones? (as an example, not real numbers)

/M

[Tomi T Ahonen]

/Maggan

Good points. First, yes, if there was a manufacturing constraint, yes that is a valid concern and would be foolish trade-off. Except its not Apple's factory, the Foxconn part of Hon Hai is a contract-manufacturer who makes gadgets for many brands and takes its orders and fulfills them. It isn't anywhere near capacity (but its building feverishly more). Apple is BY FAR its most profitable and largest customer. The 'choice' that you described is not Apple's choice, it is Foxconn's choice, if they are at a bottleneck, they should drop their lesser clients and only do Apple haha... No, Apple is not constrained by capacity - they ARE constrainted by annual volume commitments that they have to negotiate with their supplier, so once they decide on a production level that is roughly the level they need to also sell (plus/minus probably 10% without much of a penalty).

Secondly, on the 93% of profits calculation. That is a misleading number because it is a 'net profit' not 'share of profit' number. It includes all the loss-making companies. So when you add all of Samsung's profits and the modest profits from LG ad Huawei and many others who also made profits, their total is more than 100%, something like 120%. Then there are those who make losses, like Microsoft/Nokia, Sony, Motorola etc and those have to be subtracted to get to 100%. So no, Apple did not make 93% of all profits earned in the smartphone industry. Its more like 70%.

But yeah, there definitely is a lot of profit left on the table. Apple is being very cautious. I think too cautious. And they are also making the wrong choice. If its the choice of maximizing profit at the cost of market share, or the choice of maximizing market share at reasonable (still industry-leading) profit - the LONG TERM gain is OBVIOUSLY the latter. But that would mean some shrinking of Apple's gargantuan profits it now is reporting. Some Apple investors would be disappointed and say Tim Cook is no Steve Jobs. He is living in Jobs's shadow haha... But the long term damage is being done now, as Apple abandons share it could now steal but later won't be able to win when those users are settled into Android. I am saying, in year 2100 when I am comfortably dead, and some MBA professors study the biggest strategic blunders of the 2000s century, they will say Apple blew it in 'typical 1900s century greed mentality' of extreme short-termism, maximising temporary profits at the expense of long term viability. And the opposite will be Google who played for the long win all along, even as it didn't always produce astronomical profits in some given quarter..

To resolve this matter will take decades not years but the 10 year anniversary of the iPhone comes in summer 2017 and we - /Maggan you and me - can take our first glimpse at it then, and probably on 5 to 10 year intervals - I'll be here for a couple of decades on this blog still - we can revisit that ultralong prediction. Obviously I won't be alive to be ridiculed in year 2100 when someone could consider Tomi's bizarre prediction from 2015..

Tomi Ahonen :-)

[Maggan]

@tomi

Your analysis hinges on the phone being the end game. I think that the phone is only the beginning. In 100 years people will be looking back at our quaint brick phones, wondering why anyone was interested in "winning" that race, because in 100 years the big thing is not having a phone at all, instead relying on something radically different from what we see today.

But let's revisit this in 100 years. I've set an alarm in my calendar! :-D

/M

[baron99]

Many thanks for the numbers Tomi. ....and you have the most accurate, useful and trustworthy analysis. I really appreciate all the hard work you put into your blog.

On another topic I noticed the statistics tell us that microsoft WP is still "all in" with an ever declining market share. It's reinforcing the same old story NO ONE WANTS A WINDOWS PHONE! :-)

[Catriona]

@Tomi, of course Tim Cook is no Steve Jobs. People like Steve Jobs come around once a generation, if that. That's why Jobs told him never to ask "what would Steve do?" But he's been a good CEO. Profits have never fallen and the company is riding high. I mention those because you brought them up.

Anyway, I think the Watch will do well. The rumor is the Edition will go for $5-10 grand and account for most of the revenue. Maybe it will flop, but I doubt it. I want one (in rose gold, as a gift from an investment banker significant other, please). :)

[Tomi T Ahonen]

LeeBase

yeah iPhone has longest life cycle also Blackberry serves far longer than average. Old Nokia used to do so too (huge second hand market) but not Windows Phone obviously...

Tomi Ahonen :-)