In the last quarter of 2012, half of all phones sold on earth were smartphones. Of the rest, a quarter were sold to people with very low incomes, who can only afford $10-$20 for a phone, and the other quarter to people who will eventually afford a smartphone, but only at prices under $150.
In other words, the top two thirds of the potential market for smartphones is now buying one, and the remaining growth in volume will almost all be at the low end.
This means that the first phase of the smartphone industry is close to ending: the greater proportion of featurephone buyers have been converted to smartphones. This has happened so fast that perhaps 90% of current Android owners are still on their first one, and 70% of iPhone owners.
The second phase is ongoing replacement: what are those people's second and third phones? As the industry moves on from converting featurephone buyers to fighting for replacement purchases, what happens to value? Growth for any given manufacturer necessarily becomes a matter of taking sales away from other smartphone manufacturers, not featurephone manufacturers (i.e. Nokia). Moreover, Moore's Law is at work, driving down prices; you can now get a 4.5" dual core Android phone from Huawei for just $200, and one from a generic Chinese manufacturer for $120-$150.
This is clearly a challenge for any handset OEM, but especially for one at the high end. There are fewer and fewer new high-end buyers coming into the market and the ones you sold to in the past may increasingly be tempted by ever improving cheaper phones. So a high-end phone maker risks losing sales if it stays at the high-end, or losing margin if it makes cheaper phones, or both.
In case it isn' t obvious, this is the essence of the bear story for Apple. There's lots of froth and nonsense swirling around as well, but this is a perfectly coherent and intelligent story. It isn't that Apple is losing sales to Android (it isn't, at least not yet) - it's that the high-end market itself may be close to tapped out.
Of course, the big problem with calling a structural change like this is timing. Blackberry provides a perfect example. It was easy to say that the iPhone and Android would destroy that business, but when? The chart below shows the moment when Blackberry sales started falling, but there's no terribly obvious reason why it was that quarter and not six months earlier or later. People lost a lot of money shorting RIM in 2010, when the threat from the iPhone looked obvious.
This timing issue prompts a lot of the fevered atmosphere around Apple. This quarter might be down because of timing and product cycles, or a combination of other non-structural short-term issues, and the growth might zoom onwards. But on the other hand, we might be at that May 2011 moment, and everything from now on might be downwards.
What makes this really fun, of course, is that though we are clearly at the end of one phase of market development, the scenario outlined above isn't remotely the only possible one. Hence the volatility: is this just another cyclical downturn (in revenue, gross margin, unit sales or whatever indicator you want to look at), or is this the moment of collapse? Because Apple is cyclical, and has been increasingly so. Is the dip this quarter the dip before another jump upwards, or the start of a slope downwards?
Smartphones sales may be approaching saturation (especially in the USA), but iPhone sales at the end of 2012 were just 10% of global phone sales - and 17% of global contract sales, which is more relevant since it reflects the subsidised market (of course, the possible decline of subsidies is another, rather separate bear story for any handset sold for over $200).
Is 17% the total potential market for a premium phone? Will market share only move from $600 phones to $300 phones, and never the other way? That might be the case if phones were fungible commodities, but they clearly aren't - otherwise $600 Android phones wouldn't sell at all. It is entirely possible that the premium phone market is here to stay, and that it could expand significantly.
So, it is possible that we are approaching a tipping point, with the phone business moving into a post-saturation, deflationary environment in which premium phones are a rapidly shrinking market. In this case, each hint of a slowdown is another piece of the mosaic showing the imminent collapse. But it is also possible that Apple will retain its 20% share of smartphones indefinitely, or even grow it, even at a $600+ ASP. Don't worry. It'll all be clear in a few years.
As an aside, it's not quite clear what all this will mean for Apple, but it should be very clear what it means for any mid-tier Android OEMs...