Scott Valins and his wife, Liz, are New York-based graphic designers with all the latest gear at home: iPhones, iPads, a pair of high-powered Macs, an assortment of digital music players, portable speakers, and an Apple TV. And they only use a fraction of it. Their barely touched iPad Mini lies buried under some mail, and with a young child, they rarely have time to turn on the TV. Once early adopters, the couple has abandoned routine upgrades. “Most of the incremental changes now seem less revolutionary and less of a must-have anyway,” says Scott, the creator of photobook app CanDoBaby, whose primary personal computing device is an iPhone 5S that he doesn’t feel any need to replace.
The Valinses may be anomalies in the world of fervent Apple (AAPL) fans, who obsess over the latest features and line up outside stores for new releases even if last year’s model works fine. But it’s characteristic of a shift in consumer thinking that poses a problem for the tech industry. Seven years after the introduction of the iPhone, mobile devices are closer to commodities than novelties.
Call it the end of the beginning of the mobile revolution, an inevitable transition in which people start to give up on the grand (and expensive) experiment of tacking new gadgets onto their lives at regular intervals. We now know exactly where PCs are invaluable and where the usefulness of smartphones and tablets begins and ends. As a result, mobile prices are falling, and manufacturers are competing most fiercely at the bottom. “We are seeing the top of the market start to contract, with all the growth happening on the low end,” says Ryan Reith, program director of research firm IDC.
The features that used to distinguish new releases—such as processor speed and screen quality—are becoming more standard across the industry, pushing prices down further. IDC reports that the average price for smartphones fell from $335 in 2012 to $314 this year and projects it will sink to $267 by 2018. Even Apple isn’t immune: The average selling price of the iPhone was $652 in 2011 and $607 in 2013, according to data compiled by Bloomberg. The drop in average sales price is the biggest problem facing the established mobile industry, because at global scale, operational mistakes can have big consequences and drooping margins make it tougher to recover from a misstep. “People no longer think it’s cool to pay up, and that’s a dangerous precedent,” says Anand Srinivasan, a mobile technology analyst at Bloomberg Intelligence. On Oct. 30, Samsung (005930:KS), the worldwide Android device leader, posted its lowest quarterly profit since 2011 as it lost market share to a host of cheaper local smartphone makers in China and India.
Google (GOOG), the skipper of the Android operating system, has responded by attacking both ends of the smartphone market. This year it worked with Motorola (992:HK), which it owned until October, to produce the Nexus 6, a phone with a jumbo high-definition screen and a workhorse Qualcomm (QCOM) processor that has 14 times the power of the chip in the original Google Nexus smartphone from 2010. The price tag is $649 without a contract. Google clearly hopes the large display and new features, such as a battery that can get eight hours of juice from a 15-minute charge, will encourage Android owners to act more like Apple fans and pony up for a premium phone.
Google has also invested in the low end of the market to counteract Chinese makers such as Xiaomi, whose Mi4 smartphone starts at $320 without a contract and runs its own tailored version of Android without any of Google’s apps. In September, Google formally introduced Android One, a version of its operating system that allows manufacturers in countries such as India to make cheap Android phones capable of running Google’s latest OS and standard apps. “It’s a way to rope in all this fragmentation on the low end and make the experience better overall,” says Srinivasan.
The forces of commodification are even more intense for tablets. Four years ago, the devices promised to rejuvenate magazines and newspapers and offer a new platform for game makers. Now tablets are too often the things you’re too lazy to go find while reading e-mail in bed or browsing the Web on your phone. Apple’s iPad business is contracting, too; the average selling price of an iPad, which launched at $665 in 2010, was $450 last year, thanks in part to the introduction of the cheaper iPad Mini in late 2012. “It’s a device that is less mobile than we originally thought,” IDC’s Reith says of tablets generally. “You could also do all the same things on the phone, particularly once the screen size got bigger.” Scott Valins’s sentiment is a common one: “As a family, the tablet is the one thing we have left behind. We’ve found everything we’ve needed on our smartphones.”
Industry executives are reluctant to concede that the markets for high-end, high-priced phones and tablets are in permanent decline. They say people still replace their phones every two years, vs. 5½ years for a PC, so there are always opportunities to wow them with new features. “There may be some signs of profit changes in the smartphone industry, but people are still working hard to push the boundaries,” says Sundar Pichai, a Google senior vice president and chief of its Android division.
Pichai also notes that new devices beyond phones and tablets could give the market a boost. Tech companies are preparing to put smart dashboards into cars, wireless appliances into homes, and various Internet-connected accessories onto our bodies. These gadgets may restore novelty and bring back higher prices. The Apple Watch will start at $349 when it goes on sale next year, and deluxe models could cost hundreds more. One of the most popular smartwatches running Android is Motorola’s Moto 360, which sports a round display (most are square) and costs $250—about $50 more than comparable watches from LG (066570:KS) and Samsung. “Maybe smartphones have taken the same trajectory” as other computing devices, such as PCs, Pichai says. “There is the excitement about wearables, Android TV, and Android for autos. If anything, it’s a constant struggle to make sure we are innovating at a frantic pace.”
Regular folks like Valins will have to decide whether they’re ready to start lining up for the latest devices again. “Every time I see a new gadget, I have to think about whether I necessarily need it,” he says. “When you add in everything that comes with it—the new contracts, the hassle—it seems like the money is probably better spent elsewhere. If it definitely seems like a have-to-own, I may put it on the list for next year.”
