Peter Misek is a partner at the Business Development Bank of Canada’s Venture IT Fund.
The Consumer Electronics Show is an annual exposition that attracts well over 100,000 visitors to Las Vegas at the beginning of each year. I attended the show annually for roughly 10 years to see the unveiling of the latest tech gadgets. But not this year.
In the past, there were great televisions, game consoles, wearables, smartphones and 3-D printers. The first high-definition TV blew the crowd away, causing a sensation and a powerful reason to buy a new screen that the industry profited from. The first really good and really cheap Android device, five years ago, dramatically altered the adoption curve for mobile computing and how we use smartphones. There were also busts and quasi-busts – 3-D TVs never really caught on, for example.
The smartphones and wearables announced and shown each year would cause the mainstream press to salivate and speculate about what was cool or uncool. But the past two years have seen something else. There has been a shift, caused by the mere lack of a wow factor from physical gadgets. While the show was used by executives of major manufacturers to unveil new hardware to line up partnerships and deals, it is now being increasingly used to showcase integrated services and software.
This shift has been gaining real momentum in the past few months, as the entire industry has come to the realization that the smartphone market, the major driver of profitability in the consumer electronics space, has matured and, in major developed countries, approached saturation. As cool as they are, wearables have largely failed to live up to the hype, leaving a growth gap for manufacturers. I don’t own an Apple Watch and feel no need to.
For the past nine years, the pace of smartphone growth has allowed component suppliers, screen suppliers, telcos and others to reap a tidal wave of profits from the mobilization and mass consumerization of computing. But like all waves, the crest recedes into a trough until the next breakthrough. Research and recent conversations with global telcos, hardware manufacturers and component suppliers indicate that smartphone sales have slowed dramatically in the past six months. Anecdotes from wireless dealers have demonstrated slower activations and rising inventories.
Executives are now universally acknowledging some interesting data, where they were once dismissive. Smartphone penetration now exceeds 90 per cent in North America, Western Europe, Australia and Japan. Chinese penetration is over 80 per cent. That means new subscribers are most likely to come from India, Africa, the Middle East, Southeast Asia, South America and Eastern Europe. The trouble is that the demographics aren’t as favourable in those areas, where gross domestic product per capita is a fraction of mature markets. These are markets for $50 smartphones, not $500 smartphones.
It also means that the average age or length of time a user owns a smartphone is likely to increase, from the less than two years we saw in North America in the late 2000s to well over two years now. Samsung Electronics’ revenue growth has gone from more than 10 per cent in 2013 to contraction in 2014. Sales growth for Apple’s iPhone was over 50 per cent in fiscal 2015 but is expected to slow to roughly 5 per cent in 2016.
For public investors, this means that winners and losers are likely to be determined by those who attack new markets, introduce new services and innovate the fastest on the next breakthrough. The two major breakthroughs I think are most probable in the near future are foldable screens and projected screens with gesture control, such as you might remember from the movie Minority Report. However, both likely remain years away, with scaling and technology issues that are still unresolved.
For private investors, venture capitalists and startups, it likely means a change in the mobile app boom. Just as the average age of a smartphone is likely to rise, the probability of users continuing to adopt new apps is also likely to decline, creating a higher bar for successful companies. New applications have to provide real utility and value to users. For investors, this may mean higher amounts of capital will be required. For the business world, it may mean tackling problems in a more fundamental way.
On the services side, the most interesting trends I am seeing are pretty well known and obvious: integrated content services, lifestyle services, social services and the like. On the business side, the challenges and friction are enormous, but so is the opportunity. To me, this makes them more interesting.
For example, a startup I was recently exposed to, Auto1, has been transforming the automotive industry in Europe, and will now likely do so in North America. It leverages the pervasive power of mobile computing and the enormous friction in used-car markets. Used cars represent one of the largest pools of profitability for auto dealerships. Imagine going to a car lot, having someone scan your car using a smartphone or a tablet, and give you a cash offer five minutes later? Imagine that technology linking in real time to government databases, service shops, auction houses and dealer inventories, assessing value and offering an auction for mobile users less than a couple of hours later. It means inventory could almost always be sold within hours. It could also mean up to 30 per cent more money for your used car.
As my peers in the venture capital world have said: “Software is eating the world, mobile is eating software.” And so mobile software that targets areas of deep industry friction, such as used cars, mobile payments and loans, is likely to be the next tidal wave.
Back to CES. Why don’t I need to go? Because these services are already available on my phone today. Discovering them is very difficult in the cacophony of Las Vegas and the electronics show. Will I go again another year? Absolutely – but I will focus much more on meeting the executives who gather there, and much less on the conference halls and the gadgets.
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