The smartphone market is saturated. What features will make you willing to pay for them in the future?

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Recently, foreign media published an article saying that the smartphone market has entered a stage of stagnant growth. Where will the mobile field go next? The future of smartphones may be more flexible and changeable than you think. Software services will become more and more important, and various components and functional services will be flexibly integrated into other emerging digital touchpoints in homes, cars, and even public spaces.

The following is the main content of the article:

iPhone XR's Value Proposition

Late last month, Apple officially launched pre-orders for the iPhone XR, adding a new model to the iPhone lineup. The first wave of reviews from consumer electronics sites unanimously praised the phone’s performance and were keen to point out that it was much cheaper than the ultra-premium-priced iPhone XS. The media’s narrative seemed to be that the XR was the latest “low-cost” iPhone, positioned similarly to previous years’ iPhone 5c and iPhone SE — two relatively inexpensive iPhones designed to appeal to price-sensitive consumers, especially in emerging markets.

However, it is important to note that the starting price of the iPhone XR is still $50 higher than that of the iPhone 8. The launch of the iPhone X series last year significantly pushed up the average selling price (ASP) of the iPhone, ushering in the era of $1,000 phones. The iPhone XR will not reduce the ASP of the iPhone series to the level before the iPhone X was launched. Therefore, although global smartphone sales fell 9% at the beginning of this year, the largest quarterly decline in history, Apple did not lower the ASP of its flagship product line to cater to the low-end smartphone market.

Instead, as industry analyst Neil Cybart has pointedly noted, Apple seems happy to allow the growing “gray market” — refurbished, used iPhones — to expand its user base in the low- and mid-range markets. Apple has all the key ingredients needed to keep the gray market for iPhones functioning, which partly explains why it has so confidently increased the average selling price of the iPhone, in the process causing the entire smartphone market to follow suit.

However, a key advantage Apple has over its competitors in the grey market is that their devices tend to have the highest resale value, and there is always a steady flow of old iPhones into the grey market due to early upgrade programs offered by mobile operators and Apple's own iPhone Upgrade Program. After a year or two, the iPhone XR will be priced down, making it a great choice in cost-sensitive markets such as India.

Smartphone market growth stagnates

After more than a decade of epoch-making rapid growth, the smartphone market has entered a period of stagnant growth as user growth slows. In fact, market research firm IDC estimates that global smartphone sales will decline slightly by 0.2% year-on-year in 2018, before returning to a slower annual growth rate of about 3% between 2019 and 2022. Most Western countries, plus China, have reached market saturation, and rising average selling prices continue to suppress growth across the market. A Pew Research Center survey this year showed that 77% of Americans own a smartphone, up from 35% in 2011.

The slowdown is partly due to longer upgrade cycles, with users waiting longer to upgrade to the latest flagship device. In addition to device durability, the increasing familiarity of smartphone designs and the lack of breakthrough software features are two major factors that are causing people to extend upgrade cycles. Yes, processor chips are getting faster and smarter, and screens are getting brighter and bigger, but in terms of user experience, the near-ubiquitous smartphone seems to have reached a point of diminishing returns.

Indeed, on flagship smartphones, the camera is one place where you’ll still see noticeable upgrades, especially over a 2- to 3-year timeframe (which aligns with most people’s replacement cycle). Even so, the cameras on the latest flagship models are good enough for mainstream users. It’s been a great thing to get phones capable of taking pro-level photos and videos right out of the box, but the innovations that have pushed cameras into the spotlight, like computational photography (think bokeh effects on the new iPhones) and visual search, are additional AI software features added to those “good enough” cameras. This means that better cameras alone are unlikely to drive future smartphone growth, even as camera-based features become increasingly prominent on mobile devices.

While certain segments are still willing to pay top dollar for premium features, they now expect their devices to last longer and perform better than previous generations of the same device that cost much less just a few years ago. When that value proposition isn’t met, most people seem happy to stick with their current device until it stops working. In short, as we enter the heyday of the mobile era, smartphones have become less exciting for many people.

Software services are becoming increasingly important

Don’t get me wrong, when we say smartphones have become less exciting, we don’t mean that people have lost interest in them. Quite the opposite. We’ve become more and more addicted to them. According to a 2017 Deloitte survey, the average smartphone user now checks their phone 47 times a day, and 47% of smartphone owners have tried to limit their usage.

But it’s not the smartphones themselves that we’re addicted to; it’s the apps and services that run on them that we’re addicted to. Social media is designed to be addictive, and many apps employ short-term, dopamine-driven feedback loops to keep users coming back for more. Smartphones themselves may have stagnated in terms of design and user experience, but mobile apps and services are now the main attraction, whether they’re paid or not. In other words, when hardware upgrades stagnate, software becomes the key factor in determining the mobile user experience.

But not all smartphone manufacturers are well-positioned to profit from the growing importance of mobile services, as most only control the hardware side of the equation. In contrast, Apple enjoys complete control over its hardware and software, allowing it to fully integrate its services (including iTunes, Apple Music, the App Store, iCloud, Apple Pay, and iMessage) into every aspect of the iPhone user experience. These services are great for locking in existing users within Apple’s ecosystem and providing a consistent experience across devices. It’s no surprise, then, that these services accounted for 18% of total revenue in Apple’s most recent quarter, reaching an all-time high of $9.5 billion.

Some tech critics who recognize that the iPhone XR is not a low-cost option often mistakenly portray the colorful new model as a desperate move by Apple: hoping to squeeze more revenue from existing users by increasing the average selling price. While that view may be correct, it ignores Apple's grand strategy for iPhone growth. The increase in average selling prices is only coming from one-time transactions, which are happening less frequently as consumers upgrade their phones longer. The real growth is coming from Android phone users switching to iOS and Apple's thriving services business.

Being the default service on iOS devices gives Apple's services a powerful platform to acquire new users. For example, Apple Music's user base has surged to more than 50 million (including paid and free trial users) in May this year, up from less than 20 million a year ago. As of July this year, it reportedly had more paid users in the United States than Spotify, the long-time leader in streaming music. If the latest report from technology website The Information is true, Apple has another magic weapon: it is preparing to launch a new TV service in the United States in the first half of 2019 and roll it out around the world in the following months. This will undoubtedly further consolidate Apple's service-hardware symbiosis, especially considering that Apple device users will reportedly be able to access Apple's high-quality original content for free.

Of course, service integration is becoming increasingly important in the smartphone experience, something that has been seen by other smartphone manufacturers as well. In response to the rapid growth of Apple Music, Samsung and Spotify have reached a long-term partnership agreement that will make Spotify the preferred streaming music service for all Samsung devices, from smartphones to smart speakers and TVs. Xiaomi is also actively promoting its users to try its range of mobile services, including the Xiaomi App Store, Xiaomi Browser, Xiaomi Music and Xiaomi Video, which generated 10% of its revenue in 2017. As smartphone market growth stagnates, mobile-based services will become a key value driver.

As smartphone market growth stagnates, mobile-based services will become a key value driver.

Future value drivers

Beyond services, watch for the potential for the rollout of 5G networks and advances in mobile augmented reality to unlock new value drivers for smartphones. While some of Apple’s competitors are still trying to come up with new designs to compete with the iPhone, those alone may not be enough to create new value drivers.

Experimentation around smartphone form factor design is likely to continue, with Samsung, Royole Technology, and Huawei all trying to create "foldable" phones that can fold tablet-sized screens into pocket-sized ones. But as previous failed experiments in modular accessories and dual screens have shown, hardware form factor novelty alone is unlikely to stimulate a new round of rapid growth in the smartphone market. Sure, foldable smartphones sound cool in theory, but in an era when most flagship phones are already too big for some people to use one-handed, it's hard to imagine what additional value a larger foldable screen can bring to the mobile experience.

Right now, 5G connectivity is a new value driver that’s poised to spur the next super upgrade cycle for smartphones. As industry insiders explain — similar to how the upgrade from 3G to 4G LTE enabled data-hungry apps like Snapchat and Instagram to go mainstream and gave rise to the Stories content format — the speed boost 5G will undoubtedly bring new opportunities to digital media and consumer technology. Mobile 4K and even 8K streaming video, whether live or not, will become the new resolution standard for online video, but even more exciting is the possibility of delivering high-quality augmented reality and virtual reality content to smartphones or portable headsets. When your phone can access the internet at faster speeds, more content consumption seems inevitable.

Another new value driver is augmented reality. The rapid development and adoption of mobile augmented reality is already expanding the smartphone experience and redefining what smartphones can do. Thanks to advances in computer vision and machine learning, mobile cameras will soon be more than just a camera tool. Instead, with ever-improving cameras, mobile augmented reality can enable entirely new smartphone experiences that further blur the line between the digital and real worlds. As developers find the right product-market fit for mobile augmented reality apps in the coming years, augmented reality is likely to become the next big differentiator and value driver for mobile devices.

In a way, these two future value drivers complement each other perfectly. Advanced AR experiences, especially real-time experiences for groups, require reliable and high-speed 5G connections to operate; in turn, the adoption of 5G among the mainstream public will also depend on whether mobile operators can clearly communicate the benefits of faster wireless networks, one of which is access to advanced mobile AR experiences. These two factors will continue to drive the smartphone market together.

The future of mobility is flexible

5G and mobile augmented reality are expected to bring new growth to the smartphone market in the next decade. At the same time, as the personal computing world transitions to the post-mobile era, we are also likely to see mobile technology gradually separate and merge with various IoT and wearable devices. The future of mobile devices is flexible and changeable, as various components and functions of smartphones are separated from the phone itself and integrated into our lives - whether it is smart glasses, smart headphones, or smart watches - and the world around us consisting of connected devices.

Early signs of this flexible future are already emerging. At its recent hardware event, Google unveiled an interesting new product, the Pixel Stand, a wireless charging station that activates a special user interface on the Pixel phone, turning it into a smart speaker with a vertical display and Google Assistant. It intentionally blurs the line between mobile devices and smart homes, making the new Pixel phone a flexible device that delivers two completely different digital experiences.

The rise of connected cars presents another important flexible integration scenario for smartphones. Millions of drivers already rely on smartphones for in-car entertainment and navigation, and it’s not hard to see how smartphones will be further integrated into the future of mobility. For example, Uber already has a feature called “Passenger Music Experience” that allows users to play music from the Uber app by connecting to a paid account with Pandora or Spotify. Separately, BMW has created a personal digital assistant that is designed to seamlessly connect your car and your smartphone to provide a complete and coherent mobility experience.

As smartphones gain processing power, they are fully capable of plugging into a variety of scenarios and providing users with a variety of different experiences as needed. Some would even say that, to some extent, smartphones are already merging with wearable accessories. Due to technical limitations in battery and chip manufacturing, most smart watches on the market are still driven by smartphones. Given this, most emerging wearable devices, smart glasses or smart clothing will probably also rely on the processing power of mobile phones, at least in the early stages of their birth. Therefore, when mobile phones and wearable devices can work together to create a tightly integrated user experience, it is difficult and futile to clearly distinguish between the two.

Eventually, many of the needs met by smartphones today may be met by wearable ambient computing devices, eliminating the need to carry a miniature supercomputer in one’s pocket. But until then, expect mobile devices to become a more flexible concept that can be flexibly integrated with other emerging digital touchpoints in the home, car, and even public spaces, either as a source of processing power or simply for authentication on demand.

For brand marketers, this means that an omnichannel model that reaches audiences on any device will be the best way to future-proof your media strategy. Mobile is diversifying and is no longer a one-size-fits-all media channel. Throughout the second half of the mobile era, it will change marketers' media plans around this evolving behavior. Brands can explore new consumer touchpoints such as wearable devices and smart homes to maintain customer relationships and continue to deliver value to them. Most importantly, brands need to remain flexible to respond to changes in consumer expectations brought about by increasingly flexible mobile experiences.