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Limited availability and adoption of compatible smartphones will stall 5G’s early momentum

Anticipation is building as mobile 5G networks will be widely deployed in the United States over the next couple of years. As the wireless market continues to shift to unlimited data plans, the capacity provided by 5G will enable operators to more cost-effectively offer these programs over the long term while better handling network congestion. Operators will also be able to capitalize on the cost efficiencies of mobile 5G by introducing new premium unlimited tiers, with incentives including higher data limits before speeds are throttled as well as increased data tiers for mobile hotspot coverage, both of which enhance plan value.

Chart showing initial mobile 5G timeline in the U.S. for AT&T, T-Mobile, Verizon and Sprint

Though operators are eager to realize the network efficiencies 5G will provide, they will not be able to reap these benefits until consumers migrate to 5G-compatible devices. Adoption of 5G smartphones will be hampered by lengthening device upgrade cycles in the U.S. as consumers are holding on to their devices for longer periods as features offered on new handsets are not deemed compelling enough to justify their rising price tags. Migration to 5G smartphones will also be slowed as certain flagship handsets, particularly the iPhone, will likely not offer 5G-capable models until 2020.

Perhaps the greatest hurdle to 5G smartphone adoption will be 5G itself, as the initial capabilities offered by the technology will not be a strong enough incentive for many customers to upgrade their devices. Although offering mobile 5G services will help to attract some subscribers craving faster speeds, the difference in user experience compared to LTE-Advanced will be minimal, at least initially. Early 5G smartphone customers will mostly benefit from reduced download times for large files such as high-definition video and advanced gaming applications, which will not be a significant enough incentive to encourage wide-scale purchases of 5G smartphones. Advanced consumer smartphone use cases requiring accelerated data speeds and ultra-low latency offered by 5G, such as augmented reality (AR)/virtual reality (VR), are still being developed and will not become commercially available until the early 2020s.

Graph showing postpaid upgrade rates for Sprint, T-Mobile, Verizon and AT&T for 2016, 2017 and estimated 2018

To foster 5G smartphone adoption, TBR expects U.S. operators will prolong the financing terms of their equipment installment plans — from two years to three years — to ease the cost of purchasing 5G smartphones as many devices will likely exceed a $1,000 price point. TBR also anticipates operators will become more reliant on device promotions, such as BOGO (buy one, get one) offers and significantly discounted handsets, to accelerate upgrade rates during the infancy of the 5G era. Though these promotions will pressure wireless margins in the short term, operators will justify these initiatives by the long-term network efficiencies they will ultimately realize from 5G smartphone adoption.

Chart showing announced 5G devices in the U.S. as of Dec. 5, 2018, for AT&T, Verizon, Sprint and T-Mobile

Samsung heads in the right direction

Samsung introduced its new Galaxy Note 9 smartphone and two other products at a big event, Samsung Unpacked 2018, at the Barclays Center in Brooklyn on Aug. 9. The Galaxy Note 9 is a beautiful thing. It is better than last year’s model in many ways, and it has new features, including a remote control built into its integral S-Pen. As with most new models of highly evolved technology products, the enhancements are only exciting if you care about well-conceived and well-executed, though incremental, product improvements. This isn’t Samsung’s fault; it is very hard to pack new and exciting functionality into a highly evolved but constrained form factor.

The newly introduced Galaxy Home Speaker is also impressive; just 160 units of the smart speaker filled a basketball arena with impressive sound, complete with thumping bass. It also has a promising integration of the Spotify music service. Additionally, the new Galaxy Watch looks like a high-end watch, not like Apple Watch’s cough lozenge look, and the rotating bezel is a much more satisfying user interface (UI) than the Apple stem-winder. Bixby, Samsung’s smart assistant, included in the smartphone, watch, and speaker, is much improved over past versions, and it will put you through to Google Assistant on the phone.

Taken individually, these products are superb examples of the best of modern consumer electronics products. Plus, there are synergies among them. The best example shown was continuous music playing from smartphone to speaker and from one speaker to another in different rooms. This cohesiveness, Samsung believes, is the future of consumer electronics — open integration to provide seamless intelligent experiences. We agree. Samsung has identified the direction in which these devices must evolve and makes that direction clear both to the outside world and to the company’s thousands of designers and engineers.

Samsung’s proclamation of this direction was unusually loud, but the company is not alone in pursuing this quest. The company’s vision is not very different from one that Apple first expressed when it introduced the iPod to accompany its line of Macintosh PCs, and that which Apple continues to pursue. Google is moving in this direction with both its hardware products and software platforms. Microsoft retreated from its efforts in this direction with its withdrawal from the smartphone market, but TBR believes the company will, at some point, re-enter that space. Finally, Amazon is a major contender, with its smart speakers, tablets and streaming devices.

There remains much to be done to deliver this effortless, seamless experience. Currently, bringing together different products to provide a seamless experience requires effort on the part of the customer. This is essentially systems integration at home, and in many cases the benefit does not outweigh the cost. To be successful, these systems must interoperate, but at the same time vendors want to demonstrate that they work “better together.” Services and devices from vendors other than Samsung, Apple, Microsoft, Google and Amazon must be easily integrated and provide a seamless experience.

The spoken UI is critical to the success of these integrated consumer platforms. Controlling the home environment with a smartphone provides great power and flexibility, but is not worth the hassle; wall switches are a better UI than an app. A smart speaker, however, one that knows your history and preferences, is both powerful and easy to access and use. The problem with spoken UIs is that there are too many of them, and each keeps a separate store of information about the user. Until this problem is solved, Samsung’s goal of a seamless intelligent experience will not be achieved, and while the market for intelligent home devices will continue to grow, it will not grow explosively until all of the integration problems are solved.

1Q18 device revenue results were boosted by market shifts and increasing ASPs in PCs and smartphones compared to a weaker 1Q17

HAMPTON, N.H. (July 13, 2018) — Technology Business Research, Inc.’s (TBR) 1Q18 Devices and Platforms Benchmark finds that there is ongoing revenue opportunity in both the PC and smartphone markets. Total benchmarked revenue increased 15.9% year-to-year to $112 billion despite indications of saturation in the high end of the PC market.

Total PC benchmarked revenue increased 12% year-to-year to $32 billion. Total PC benchmarked gross profit increased 10.4% year-to-year to $5 billion despite increasing component costs. “Despite speculation that the PC market is dead, major device OEMs have been able to successfully navigate the shifting market and generate healthy profits,” said TBR Analyst Dan Callahan. “Renewed appetite for premium PCs in enterprise — and PC OEMs shifting their go-to-market strategies to respond — has been the primary driver.”

Total benchmarked smartphone revenue increased 11% year-to-year to $72 billion. Total smartphone benchmarked gross profit increased 14.8% year-to-year to $23 billion. Smartphone OEMs are combating worldwide saturation by increasing average selling prices (ASPs). Apple’s gamble with a $1,000 smartphone paid off, as customers responded with demand, and Android peers are following suit.

Device as Service (DaaS), an expansion of the former PC as a Service market, is transforming into an offering aimed at supplanting traditional PC financing. The benchmark explores how HP Inc. was the first of the big three PC OEMs to capitalize on the emerging opportunity and has been the first with concrete outbound messaging to partners and customers. This has afforded the company a lead, but it is not cemented. Dell Technologies and Lenovo will use the path HP Inc. paved to introduce DaaS to the market and quickly solidify their own unique solutions. Lenovo and HP Inc. see opportunity beyond the PC in PC as a Service, thus the introduction of DaaS.

The DaaS opportunity remains mostly untapped. Customers and partners are still trying to understand how this service differs from traditional financing and are still kicking the tires on the analytics often attached by OEMs as the main selling point of DaaS.

TBR’s Devices and Platforms Benchmark provides insight on interrelated ecosystems, including device vendors, platform providers, supplier relations, and technology partners across the consumer and commercial spaces. TBR’s vendor-centric analysis speaks to industry trends, while market sizing illustrates opportunity. Our Devices and Platforms research includes PC, tablet and smartphone vendors; platform providers; and technology partners.

For additional information about this research or to arrange a one-on-one analyst briefing, please contact Dan Demers at +1 603.929.1166 or [email protected].

 

 

ABOUT TBR

Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, and telecom vendors and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to address client-specific issues further or information needs on an inquiry or proprietary consulting basis.

TBR has been empowering corporate decision makers since 1996. For more information please visit www.tbri.com.