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Analyst Angle: The future of the Apple iPhone

Cries that the Apple iPhone market is saturated are overblown, with opportunities in new markets, new technologies and new software set to spur growth

It has been reported in the press that Apple has reached its peak of market adoption since the sales of the iPhone in the last quarter were down compared with the sales in the same quarter last year. Often, new high tech “toys” get rapid adoption only to see them reach a peak and then slowly die off. Are lower annual quarterly sales the signal that Apple continued increase in unit sales are behind them and we’ll watch future iPhone sales continue to fall into oblivion? Absolutely not. Here’s why.

New underserved markets

Apple CEOP Tim Cook’s recent visit to India points to a very large market of over 1 billion people that are currently underserved. Apple will likely build a factory in India and open a number of stores. Plus, there are a number of other underserved markets like Indonesia, Brazil and Africa. Those markets alone could more than double the market for the iPhone.

New technology

It’s easy to see there are a number of features driven by advanced technology that will help the iPhone market continue to grow. Look at some of the advanced features in Android smartphones. Imaging can certainly be improved (as I mentioned previously) to include the ability to focus an image to any point in a photo, 3D imaging, special effects, low light, optical zoom and other features in DSLR cameras.
Sound is also a greenfield opportunity: cutting out background noise, providing high-definition sound in a voice call and adding sounds. Displays will get brighter and work better in direct sunlight. Wireless data speeds will greatly increase as operators migrate to aggregating multiple channels. And, storage will continue to increase. I’m sure some future iPhone will have terabytes of storage (one terabyte is equal to 1,000 gigabytes).

Services

Apple has begun to report service revenue coming through iPhones. It’s just the start of what could become an equal or greater part of the entire revenue mix. Apple recently announced developers will retain a greater portion of service revenue primarily coming in the form of subscription revenue. Apple’s current requirement is that subscription revenues have to be present for more than 1 year in order for the developer to realize the higher share of revenue. Eventually, I expect that requirement to completely go away (as it already has in Google Play).
We’ll see sponsored services come into play as well where someone like The Weather Channel will provide new services sponsored by a partner like IBM. There is no way I could possibly image all the service revenue opportunities that happen in the coming years.

New pricing

Over the past couple of years, we’ve already seen the unbundling of the device cost from the wireless operator services. There are numerous pricing opportunities for Apple to deploy for the iPhone with the biggest (in my mind) being making it very financially attractive for iPhone customers to automatically get an upgrade to the next generation iPhone when it’s announced. Thus, you’d pay a monthly fee and the iPhone would be automatically upgraded when the next generation is announced. One example would be if the user signs up for the annual upgrade program, they might get some of the first year’s cost waived if the user signs a five year automatic upgrade program.

Software

With any mention of the future of the iPhone, the software has to be included as it could be argued much of the future enhancements to the iPhone comes from software rather than hardware, although in fact, it is a combination of both hardware and software that make the total offering more attractive.
The recent announcement of 3D touch is a good example of true innovation: it enables a set of direct features to be visible and selected just from the amount of presume the user places on the display. Other new, innovative software innovations will continue to drive additional growth for the iPhone.
From these, it seems pretty clear there is plenty of upside available to Apple to see at least a two-times improvement in market opportunity and, possibly, three-times to five-times increase in annual sales. If Apple’s retain 40% of worldwide market share, it could see a total installed base someday of 7 billion devices multiplied by 90% able to use a smartphone multiplied by 40% market share, which equals 2.5 billion units that would, in turn, yield annual turnover of about 40% per year or 1 billion units sold per year. It is obvious it will take many years – perhaps 25 or more years – for Apple to reach this point.
When (or if) Apple ever reached market saturation, they can look to service revenues to be a growth opportunity for many years to come. And the increase in revenue for services could go on for many decades after that.
The smartphone isn’t going away. It may morph into becoming more than it is today, but it seems like this major utility will evolve into becoming as important as a person’s wallet or purse had become over the past hundreds of years. Don’t even think the smartphone is going away. Like money, it may become a device embedded into our society. You’ll get a new version every year or two, but the contents and services will live on.
So, don’t fret, the future of the smartphone and, in particular, the iPhone is healthy. And, in the short term, the iPhone will see many glorious days and years to come.
gerry purdy
J. Gerry Purdy, Ph.D., is the principal analyst with Mobilocity LLC and a research affiliate with Frost & Sullivan. He is a nationally recognized industry authority who focuses on monitoring and analyzing emerging trends, technologies and market behavior in mobile computing and wireless data communications devices, software and services. Purdy is an “edge of network” analyst looking at devices, applications and services as well as wireless connectivity to those devices. He provides critical insights regarding mobile and wireless devices, wireless data communications and connection to the infrastructure that powers the data in wireless handheld devices. Purdy continues to be affiliated with the venture capital industry as well. He spent five years as a venture adviser for Diamondhead Ventures in Menlo Park, California, where he identified, attracted and recommended investments in emerging companies in the mobile and wireless industry. Purdy has had a prior affiliation with East Peak Advisors and, subsequently, following their acquisition, with FBR Capital Markets. Purdy advises young companies that are preparing to raise venture capital, and has been a member of the program advisory board of the Consumer Electronics Association that produces CES, one of the largest trade shows in the world. He is a frequent moderator at CTIA conferences and GSM Mobile World Congress. Prior to funding Mobilocity, Purdy was chief mobility analyst with Compass Intelligence. Prior to that, he owned MobileTrax LLC and enjoyed successful stints at Frost & Sullivan and Dataquest (a division of Gartner) among other companies.
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