March 28, 2013

Rumor is Apple is going to report its first negative income growth since 2003. Some say this is a sign that something about the iPhone is broken. I would say that there’s nothing broken if what we’re seeing here is basic market saturation.

Prior to the iPhone, the phone carriers had this issue where everyone already had a cell phone. My late grandfather in law, who was hard of hearing, had bad eyesight and missing part of a finger from a tractor incident, had a cell phone. Everyone had a cell phone. So there wasn’t this massive growth anymore because they weren’t doubling customers every quarter based on how no one had a cell phone and then everyone went and bought one. Same way Microsoft was on this exponential growth thing because no one had a computer except for computer geeks, then everyone went out and bought one, and they almost all had a Microsoft OS on them.

What the carriers needed to grow, then, was to steal customers away from other carriers. This is why they kept doing gimmicky things. This is why they fought tooth and nail on that “taking your cell phone number with you” thing. And this is why a desperate company named AT&T let a computer and MP3 player company come in and not only put their new iPhone product on AT&T’s network, but they got AT&T to let them keep complete control over it. And this was after they had made the same pitch to Verizon and Verizon told them to go fuck themselves.

When Apple wanted to get into the phone market people said they were nuts because the cell phone market was saturated. And it was. But if you think about it, Apple wasn’t getting into the cell phone market, they were getting into the smartphone market. Everyone had a cell phone that made phone calls. These phones would also do things like take real shitty photos and play a small number of overpriced shitty games from the carrier. Very few people had a smartphone. And companies like Microsoft had been trying to get people to buy one for years. Blackberries were seen as things executives had to use. Apple placed this big bet that a whole bunch of people would want to have these PDA-sized things that ran apps and web pages to hold up to their heads.

And they were right – eventually. Once the 3G came out and got subsidized by AT&T (remember that the first one wasn’t) and apps became a thing they sold truckloads of these things. And then it was on. Suddenly the cell phone market didn’t matter as much as the smartphone market. Or another way of putting it was that now it was a race to convince everyone that they needed to upgrade their cell phones to smartphones. All the handset makers were shitting their beds because they had been making crappy handset after crappy handset (largely because the carriers had them by the balls and didn’t let them try much else because all these things were were cheap ways to get customers locked in) and here comes this distant second place computer manufacturer with a huge first mover advantage.

Fortunately Google had purchased a company with a crazy idea to make an open source embedded OS based on Linux and hey, everyone can use it for free. Knock yourself out. Fuck, we’ll pay you if you let us control parts of it – namely the advertising. So a dozen hardware companies lucked out because there was an OS most of the way there they could just use for free or cheap. Microsoft got so scared they pulled off the most coordinated technical maneuver in their history by stringing every piece of technology and software they’ve ever done into a “new” operating system which they named Windows Phone 7. It was such a radical departure from the “WIMP on a phone” paradigm that the average person thinks they re-wrote everything from scratch. Of course, the next thing they did was to put this same interface and paradigm on their main operating system, giving them a solid entry against the iPad (which, incidentally, threw Android a curveball because all these handset makers suddenly had to try and shit out tablets as well as coming up with competitive handheld hardware) but cannibalizing the perception of desktop users in the process. And RIM? They were so in denial that anything had changed and resistant to the market shift that their developer tools make command-line compilers look appealing, and their new WP7-like rebirth? It finally came out… last fucking week.

So where was I going with this? Simple – at some point the smartphone market will hit the same saturation point as the cell phone market was circa 2007. When that’s occurred it’s going to be the same thing again, except that it will be the hardware and OS makers doing the slogging. When everyone has a smartphone the only way Apple gets more users on iOS is to lure people from Android. And the only way Google gets more people on Android is to lure people from iOS. And the only way Microsoft gets more users on to WP7 WP8 is to hope to hell that BlackBerry 10 is a flop and RIM BlackBerry finally goes down the drain they’ve been circling for years now and somehow get the corporate market on board (which might not work as most of the world has moved to a BYOD paradigm).

Of course, the definition of “everyone has a smartphone” is murky. My parents don’t have a smartphone. Don’t want one either. When their cell phones die they just go get new cheap feature phones. Probably whatever the local AT&T place has for free with a contract. Not everyone wants a computer in their pocket. So the mobile market knows there’s more customers to convert to smartphones, they just don’t know how many of them they can ever get. My parents could get an iPhone 4 free on contract right now but they don’t want one. Their eyes are bad so most of the appeal of the thing is gone. And they want to open up something and hit numbers, not unlock with a swipe and figure out which of the icons looks like a phone.

So I think what will happen is that smartphone innovation will plateau once we’ve hit as close to smartphone market saturation as we can and then once the only way to get smartphone customers is to lure people away (or back) from other platforms is to out-do them. And we may have started that plateau now.