Shocking Numbers from the Global Smartphone Market Point to a Clear Future

Shocking state of smartphone market

There are hundreds of smartphone manufacturers around the globe. The list of mobile phone manufacturers page on Wikipedia runs for nearly 13 pages, so it’s clearly a competitive market. Considering this omnipresent competition, one might be tempted to think that is an extremely profitable business to be in. After all, smartphone vendors shipped 343.3 million phones in the second quarter of 2016, which means more than 100 million smartphones are sold around the world every month.

The Smartphone Market is Huge, but Is It Profitable?

LG reported an operating loss of $132 million during the second quarter, while Samsung’s IT and Mobile division reported $3.83 billion in profits during the same period. Xiaomi, touted as the “Apple Killer from China”, is reeling from a sales slowdown, and the company posted losses in the billions last year.

Taiwanese major HTC, which has been making losses for quite some time now, posted $133 million loss during the second quarter. Lenovo, the world’s largest PC maker, which ventured into the smartphone world by buying Motorola from Google for $3 billion, says that the company’s mobile division will not make a profit before fiscal half beginning in October 2017.

So there are only two companies that we can be sure of being in the smartphone manufacturing business and staying profitable – Apple and Samsung. Both are players who operate at the top end of the smartphone segment, but Samsung straddles multiple market segments.

Samsung does not report standalone operating profit numbers for its smartphone unit, but what we have is their IT and Mobile division, which includes smartphones and tablets. This unit posted an operating profit of KRW 0.10 trillion as the company was burned by burning Note 7’s around the world, but it remains profitable for Samsung. The company posted KRW 2.4 trillion in operating profits in 3Q-15 and KRW 4.32 trillion in 2Q-16.

Apple sold 211.88 million iPhones in fiscal 2016, (between Sep 2015 – Oct 2016), resulting in $136.7 billion in net sales. Though Apple doesn’t give out the operating profit numbers for its smartphone segment on a standalone basis, it’s a well-known secret that the company enjoys a strong double-digit margin.

So, if you take Apple and Samsung out of the equation, the entire smartphone industry is buried in red, with not one smartphone maker that is likely to either make a profit or stay in profit for the next several years.

Who’s Making Money in the Smartphone Market?

Keeping that in mind, if we now tell you that according to BMO Capital Markets Analyst Tim Long, Apple accounted for 103.6% of smartphone industry’s operating profits in the third quarter of the current fiscal, you will no longer look at these numbers with suspicion. All it means is that the majority of smartphone makers are operating at a loss, and Samsung didn’t have such a great quarter either.

Strategy Consulting, another research firm of repute, came out with a bit more conservative estimate, saying that Apple captured 91% of operating profits of the smartphone industry during the third quarter.

Whether you take the data from these two firms or consider the numbers we’ve provided above, one thing is clear: Apple remains the king of the smartphone world, and is practically untouchable when it comes to profitability.

What’s the Fate of the Majority of Smartphone Makers?

You cannot operate a business at a loss indefinitely, unless you’re like Amazon or Salesforce and showing top line growth that is impressive enough to assuage all your investors’ doubts. Sooner or later, many of these smartphone makers will either close shop or sell out to another company. We’ve already seen this happen before with Motorola and Nokia, both of which have changed hands at least twice. We’re also seeing Xiaomi – the Apple of China’s eye – going into free fall. Businesses essentially search for profits, and accept losses along the way if they can get to a high plane in the future; but if the mountain starts to become too steep, then abandoning the journey might be their only choice.

To make things worse, smartphone sales have already slowed down around the world. With penetration levels in developed markets at a very high rate – for example, the United States and the United Kingdom, where penetration level is around 80% – the number of hands that you can push a smartphone into are becoming fewer and fewer with every additional user added to the ranks. The smaller players in the smartphone market – and the ones currently bleeding money – will have to move aside sooner or later. As a result, the big will get bigger and the small are going to become smaller – or altogether non-existent.

Is There Space for New Players?

Google and, soon, Microsoft, with their own new smartphone agendas have tapped into the market at the fag end of the golden age of smartphones. Can they grow big enough and profitable enough to seriously compete with Apple? In fact, can Samsung make gains by next year and close the gap between themselves and the market leader?

Surprisingly, the answer to those questions could actually be a “Yes”. With all of them now sharpening their knives to carve into the premium segment, Apple is in for some stiff competition. Besides these few, the more resilient of smartphone makers that are Amazon-like in their profitability strategies will also survive by carving a niche for themselves in their respective markets, such as China and India.

If it’s taken 10 years for hundreds of smartphone makers to go to market with their products, the next 10 years will be the crucible in which their products and their very businesses undergo trial by fire. Who will survive, who will be wiped out and who will end up being profitable? That’s not an easy question to answer, but what we estimate is that there won’t be more that a select handful of operators in each of the smartphone market segments beyond the next decade.