Smartphone growth is slowing rapidly, but feature phone surprise aids Nokia

Smartphone Market Growth Analysis Q4 2012
Smartphone Market Growth Analysis Q4 2012

One fascinating thing about IDC’s report on handset sales in the fourth quarter of 2012 was that smartphone sales growth declined to 36%, which was three points below the projected 39% growth rate. That 36% may still sound like a big number… except that a year earlier, smartphone growth was 55%, far above the 40% growth firms had projected. That is the discrepancy that may well be causing headaches for a number of companies, from Apple (AAPL) to LG (066570).

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Just one year ago, smartphone growth surprised industry experts by 15 percentage points — but by the Christmas quarter last year, the growth rate had slowed down by 19 points. The rapidity of that slow-down can make production planning tricky indeed.

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IDC’s numbers also reveal an even more interesting tidbit about an overlooked aspect of the handset market: the feature phone market.

Feature phone sales declined to 263 million units in Q4 2012. But a year earlier, feature phone sales were 269.6 million units. This means that the feature phone sales dipped just 2.5% year-over-year. This is an astonishingly small decline. IDC probably left the feature phone discussion out of its handset market press release precisely because the rate of decline does not fit the industry narrative.

Smartphone sales growth is coming down from its Q4 2011 peak faster than projected, yet feature phone sales are not declining as steeply as expected. This means that the world is moving towards smartphone-driven handset volumes on a slower schedule than most companies planned for. And this is the gap that Nokia (NOK) is currently trying to exploit.

Vendors like Motorola, Sony (SNE) and LG may have pulled out of the feature phone market too early, leaving Nokia with the chance to attain feature phone volume growth simply by gaining market share faster than the overall industry shrinks. It is not that hard to hit 3% market share growth in an industry that is shrinking by 2.5% if all other major brands have practically abandoned the field.

Of course, feature phone ASP erosion is fierce, meaning that even maintaining steady volumes can lead to a 15% annual revenue decline. This was reflected in Nokia’s Christmas quarter, where revenue performance in the Asia-Pacific and Latin American markets was markedly weaker than volume performances.

Nevertheless, maintaining robust feature phone volumes until cheap Windows Phones arrive gives Nokia a narrow bridge to viability.

For vendors like Motorola, HTC (2498), LG and RIM (RIMM), the smartphone growth slowdown is bad news indeed. Samsung’s (005930) volumes are exploding and Apple is plotting ways to accelerate emerging market sales. If global smartphone volume growth slows down below 30% by summer, an industry shake-out is inevitable. The current number of major brands has only been made possible by 40%-plus growth in 2011 and early 2012.

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