Smartphones' Death Knell

Handsets are turning into commodity products as the chips that power them become more specialized.
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Remember when the release of a new mobile handset was exciting? When Siri's jokes were funny, curved screens were sexy, and your pulse quickened if Steve Jobs remembered one more thing?

Forget all that. Mobile phones are becoming as boring as PCs, televisions and washing machines.

Apple on Tuesday forecast its first fall in sales since 2003 amid signs the global smartphone market is approaching saturation. And take a look at Samsung Electronics' fourth-quarter and full-year results today: Annual operating income from the company's phone division has dipped below that from its semiconductor business for the first time since 2010, and looks to be headed lower still:

Hot Chip

Operating income at Samsung Electronics' operating divisions, annual

Source: Company reports

That defies the conventional wisdom in the electronics industry. Semiconductors are such low margin, undifferentiated products that they're traditionally seen as being closer to commodities such as copper and gasoline than consumer goods. Mobile phones, on the other hand, have for many years had the intangible ability to get buyers salivating, putting them in the same boat as Fendi bags and Piaget watches.

What Shall It Profit

Apple's operating margin has traditionally outstripped those of luxury goods companies

Source: Company reports

Note: Dotted lines indicate gaps in data due to companies' differing financial reporting dates

As Gadfly's Shira Ovide pointed out earlier this week, part of Apple's magic has long been its ability to ``get people to pay luxury prices for commodity goods". Its price premium over the competition appeared to defy gravity, allowing it to swallow up most of the profits for the industry as a whole 1 . But the annoying thing about laws of nature is their tendency to eventually reassert themselves.

Killing the Competition

Share of handset manufacturers' global operating income

Source: Bloomberg Intelligence

What Samsung's results reveal is a reversal of the trend that has hitherto supported its, and Apple's, profits. Smartphones increasingly resemble boxes of commodity components -- a display, a battery, a touchscreen, a few speakers and cameras and accelerometers. The real competitive advantage is being captured by the companies that can produce the best semiconductors to meet the devices' escalating power and processing demands. Chipmakers with a defensible technological advantage are able to make a success in this area -- Samsung's business, a leader in flash memory, had a 16 percent operating margin last year, versus 3 percent in the phones business.

That mirrors what's happening in the industry as a whole. Margins among members of a Bloomberg Intelligence index of handset makers are now well below those of another index of semiconductor manufacturers:

Who's Winning?

Trailing 12-month operating margin within indexes of companies exposed to smartphone sales

Source: Bloomberg Intelligence

None of this means we're going to stop buying smartphones tomorrow. Technology can have a surprisingly long afterlife, even when it's ceased to be hot -- Microsoft, for instance, posted some $38 billion in revenue last year from selling two antique software products known as Office and Windows.

But there was a time when coming up with, say, a new flat-panel display, was something to celebrate with glitzy product launches and secretive global viral marketing campaigns. Profits flowed out of panel manufacturers, and capital spending flowed back in as companies sought to develop the best cutting-edge technology. Nowadays, companies seem almost embarrassed to be making the things. Look deep into your mobile phone's crystal display, and that's the most plausible vision of the industry's future.

(Corrects labels on chart titled Who's Winning?)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. In the quarter ended March 31, 2014, when Blackberry's last major operating loss canceled out Samsung's profits, Apple's operating income accounted for 99.8 percent of the industry total.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Katrina Nicholas at

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