The low-end smartphone market is booming. Here’s what it means

Nokia this week posted record sales of its Lumia lineup during the third quarter thanks largely to surging demand in North America for budget smartphones including the Lumia 520 (which sells as the 521 in the U.S.). Similarly, Samsung recently posted record quarterly profits in the third quarter due in large part to booming sales of its low- to mid-range smartphones.  Meanwhile, Apple saw its share of the worldwide smartphone market slip in the third quarter even as the the iPhone 5S and iPhone 5C combined to sell 9 million units during their launch weekend, marking a record for new iPhone sales.

As those figures indicate, the market for low-end smartphones – the kind that often are free when packaged with a two-year voice and data plan – has quietly caught fire. That’s true not only in the exploding emerging markets where a low price point is crucial, but also in North America as longtime feature phone users finally succumb to more sophisticated phones (and the lucrative data plans carriers increasingly push). That trend will grow in the coming years, ABI Research predicted in April, with low-cost handsets accounting for nearly half of the smartphone market by 2018, up from 28 percent last year. Here are some thoughts on that growing trend:

  • Android is sure to continue to benefit from surging sales of low-end smartphones, while Apple simply doesn’t compete there. I expect Windows Phone to increasingly tap that market (particularly in North America and Western Europe), with Microsoft positioning its platform as an affordable, attractive alternative to the world’s most popular mobile OS. The low end of the smartphone market isn’t Microsoft’s ultimate aim, to be sure, but gaining a foothold there should help it tackle more lucrative users. And that will help the pricey Nokia acquisition pay dividends.
  • Increasing competition at the low end could spell trouble for the new crop of operating systems just beginning to come to market. Firefox OS, for instance, is aimed directly at that segment, but smartphones running the HTML5-based platform may not have the technological muscle or the supporting app ecosystem to compete with low-cost handsets running Android or Windows Phone. The cutthroat market may help explain why Samsung recently slowed development of its Tizen platform, and it could spell trouble for newcomers like Ubuntu and Jolla.
  • Manufacturers’ margins are getting crushed, so it’s more important than ever for vendors to look to provide their own services and ecosystems rather than simply churning out devices to shore up the bottom line. Nokia got a lifeline when Microsoft agreed to acquire it, while Samsung is making a bold move in this area by co-opting Android and building its own ecosystem atop Google’s homegrown operating system. Meanwhile, vendors like HTC – which so far has declined to compete in the low end – will struggle mightily to generate profits on hardware alone.
  • Samsung’s success depends largely on its standing as the dominant manufacturer of Android gadgets, but Apple is an aberration among handset vendors because the iPhone – including, yes, the iPhone 5C – deliver hefty profit margins. Apple could increase its market share by filling out its portfolio with a truly entry-level iPhone, which would surely increase its presence in emerging markets and probably even in North America, but the increased market share may not translate into profits. So if Tim Cook stays true to his word and refuses to get into the trenches, Apple’s market share will almost surely plateau. But as Apple knows very well from the PC business, a small share of the overall market doesn’t necessarily equate to small profits.
  • The high end of the smartphone market is pretty much locked up – for now. The iPhone and Samsung’s Galaxy line all but dominate the most expensive smartphone segment, and growth at that end will be limited compared to the opposite end. So any manufacturer hoping to make a dent over the next year or two will likely have to bring a revolutionary device to market: A dramatically new user interface, for instance, or perhaps a compelling, flexible display.