SINGAPORE (July 23): First came the smartphone. It wasn’t an immediate hit. There were the early adopters, but the device was not much more than a mobile phone with PDA functions. Smartphone popularity didn’t really take off until Apple gave the world the iPhone in 2007. Its elegant design and touch screen interface was so intuitive and user-friendly that it revolutionised the mobile phone industry and laid the foundation for all smartphones to come.
Crucially, it also changed the way we live by connecting the phone to the internet and vastly expanded its functionality via the App Store.
For the next decade, it was all about convincing ever more users and connecting them to the internet. Like the smartphone, mobile internet take-up was initially slow, owing to infrastructure and bandwidth limitations. But, with the rollout of 3G and then 4G technologies as well as increasing proliferation of WiFi networks, enhanced user experience drove adoption rates.
The smartphone has changed our lives with every iteration and it is still evolving. But device sales have stagnated. The replacement cycle is lengthening as incremental benefits from the latest models of smartphones decline. After a decade of double-digit growth, new smartphone shipments ended flattish in 2017 (see Chart 1).
The growth in the number of global internet users too is slowing, with market penetration rates now exceeding half the world’s population (see Chart 2). Looking ahead, incremental gain will be harder to come by, taking into account spending power and infrastructure for the remaining half of the population.
Margins under pressure
What’s next? And what are the implications? For starters, the outlook for hardware manufacturers is not great. Aside from Apple, manufacturers have all had to cope with rapidly declining margins as the smartphone becomes increasingly commoditised. Profitability will continue to fall and volume sales growth is tapering off.
Similarly, margins for mobile telcos have been under pressure for some years now as penetration rates reached saturation. In Singapore and Malaysia, mobile penetration is well over 100%. At the same time, telcos have had to maintain a huge capital expenditure to keep up with new technologies.
Notably, the number of hours being spent on the smartphone is still rising, with increasing usefulness (services) through innovation, better connectivity and speed as well as falling data costs (see Chart 3).
There are significantly more people spending more time accessing the internet via smartphones than desktop and laptops combined.
Not surprisingly, companies — including hardware manufacturers and telcos — are all pivoting towards the same goal: to monetise usage, through apps and platforms.
Case in point: Most analysts believe Apple services — including Apple Music, iCloud, Apple Pay and App Store — will be the main growth driver for the foreseeable future even though the iPhone is currently its biggest earnings contributor.
Little wonder, then, that there is a rush to create apps and platforms to tap this growing and likely lucrative market. Huge investments are being poured into creating mobile video content, gaming, digital payment networks, e-commerce, ride-hailing, social networking and so on.
One of the biggest success stories in this space is Tencent Holdings’ WeChat. It started as a mobile chat app in 2011 (China’s version of WhatsApp) that soon extended to in-app gaming and now offers a vast array of ever-expanding services built around its mobile payment. One could order food delivery, pay utility bills, book cleaning services, hail rides, transfer money to friends, shop online and pay for practically everything else offline without ever leaving the app.
Grab, the Singapore-based ride-hailing service provider, is only the latest to embrace this strategy. It wants to emulate WeChat as a “one-stop super app” by folding third-party developers onto its platform.
Malaysian telco operator, DiGi.Com, too has jumped into the fray, launching its own mobile wallet (called vcash) in late-2017 and tying up with hundreds of merchants nationwide.
Xiaomi Corp tried very hard to sell itself as an internet services company instead of a hardware firm during its pre-IPO marketing, though investor response was lukewarm. The stock made its debut on the Hong Kong Stock Exchange this month and has risen in price, but its market valuation remains far below the company’s initial goal.
Only a few winners
Clearly, not all will succeed. This market is still in its infancy and highly fragmented, but it will eventually narrow down to a few big winners as well as a handful of niche players.
As huge as the China market is, as well as being the most progressive mobile payments market in the world, it is dominated by just two players. Platforms with the biggest and stickiest user base will have the edge.
The smartphone market created great fortunes for innovators such as Apple and Samsung Electronics Co, made household brand names of Xiaomi and Huawei and propelled manufacturers such as Foxconn Technology Co into billion-dollar companies.
Similarly, it would be hard to overstate the value created by the smartphone-internet evolution for users.
Aside from great convenience, we have heard much about how the near-frictionless platform meant efficient price discovery and competition that led to consumer product prices being lower than they would have been.
Less often talked about is how it facilitated the gravitation towards a subscription economy from one of ownership, with the consequence of creating natural monopolies. How this will be dealt with by governments and society will be a source of great friction and challenge in the years ahead.
More and more people are forsaking the ownership (and clutter) of books, DVDs and CDs for anytime, anywhere, unlimited access to endless libraries with a monthly subscription to Netflix, Spotify, Amazon Prime, Kindle and the like.
While the entertainment industry best epitomises this trend, it is certainly not alone. For instance, car manufacturers are getting into the game, investing heavily in electric and autonomous vehicles in preparation for rolling out on-demand ride services such as Uber and Grab as well as fleet vehicles for a monthly subscription.
This generational shift is driven not just by changing lifestyle and preferences, but also very likely a function of affordability.
Today’s young people are, by most yardsticks, poorer than their forebears. Youth unemployment is often the highest among the working-age population in many countries. Anecdotal evidence shows that millennials are, on average, earning less than Generation Xers did at their age.
Affordability may not be an issue affecting just the younger generation. In Malaysia, home ownership is increasingly beyond the reach of the average person. Household debt has been trending higher, income growth sluggish and savings rate declining (see Chart 4).
In a way, the subscription economy is the other side of the coin that is the sharing economy, which is where owners make more efficient use of their assets.
The subscription economy allows us to satisfy wants and needs (utility, choice, flexibility, innovation) without the hassles and upfront costs that are the burden of ownership.
In the digital future, we may choose to own nothing. After all, we came into this world with nothing and we will leave with nothing.
Our basket of stocks for the Global Portfolio continued to recover in the past week, gaining 2.3% and lifting total returns to 3.8% since inception. As a result, this portfolio is now once again outperforming the MSCI World Return index, which is up 3% over the same period.
Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore
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