Smartphone Upgrades Slow as WOW Factor Fades

We humans bore easily. And we are not particularly polite about expressing our feelings.

There was a time, about two years ago, when design was declared the triumphant determinant of corporate success. People have always cared about how they looked as well as how their homes, cars and other appurtenances of contemporary life came across. But then we got really religious about it, which is to say, people would pay a premium for something that looked cooler than a competitor's entry.

And to some extent that moment had an impact. But we are not fools or such slaves to fashion that we will throw away a perfectly good device in order to pay a lot more in upfront price and carrying costs to receive marginal improvements in service or utility.

There is also the not insignificant fact that seems to escape the attention of many business executives and government officials, which is that the vast majority of middle class citizens are suffering through their second to fourth decade of income decline.

The net effect of all this is that people are simply not buying as many new phone upgrades as the manufacturers and telecoms thought they would. Early slavish devotion to the latest new offering from Apple or others, captured with wicked precision in Samsung ads, was mistaken for an annuity that would continue to pay out despite the declining significance of new features, the rising prices for the disappointing innovations and the reduced ability of people to pay a growing share of their constrained budgets for relatively meaningless enhancements.

The result has been felt at the retail and investment level. Microsoft just took a $900 million charge due to disappointing sales of the Surface line. Those who appear to feel personally offended by the decline in Apple's stock price are focused on the company's historical technological prowess but failed to see that the market for devices priced well above market may be saturated. Even Samsung is seeing volumes plateau.

As the old saying goes, you can fool some of the people some of the time. Tech and finance have been each other's best enablers, but unless their policies begin to reflect the needs of the consumers who drove their success in the past, the future could be a tad less brilliant. JL

Spencer Ante reports in the Wall Street Journal:

Fewer people are upgrading their smartphones—a trend that could make it harder for companies from AT&T Inc. to Apple Inc. to keep up the pace of revenue growth

The rates at which American cellphone users have traded in their devices for more advanced models have declined over the last few years, according to analysts at UBS UBSN.VX +0.81%AG. They turned negative last year, when about 68 million people upgraded their phones in the U.S., down more than 9% from a year earlier.

Last year, 68 million people in the U.S. upgraded their phones, down 9%.

UBS predicts upgrades will fall again this year. AT&T and T-Mobile US Inc. TMUS +0.20%have introduced plans in recent days to make it easier for subscribers to trade up to new phones if they are willing to give up the usual carrier subsidies. But it remains to be seen whether customers will bite.

There are two components to the trend: With smartphone penetration approaching 70% of contract subscribers last year in the U.S., there are fewer customers left to upgrade to the Internet-ready devices and data plans. And among existing smartphone owners, fewer are seeing the need to buy the latest Apple iPhone or Samsung 005930.SE -1.47%Galaxy as the pace of innovation slows.

Conner Green of Huntsville, Ala., said he won't upgrade his Samsung Galaxy S2 smartphone because he isn't eligible and it would be too expensive to do so. But he has also been less impressed with the latest models from handset makers.

"They haven't thrown anything out that's just like, 'Wow,' " said Mr. Green, who is 26. "There is a cycle every four or five years. It will be a few years before a breakthrough and people buy phones like when Apple first introduced the iPhone," he said.

Of course, the industry continues to bring in a lot of money. Leading smartphone maker Samsung Electronics Co. said early this month that it expects to report a 44% to 50% rise in profit for the quarter ended June 30. Apple's profit fell in the quarter ended March 30 from a year earlier, but landed at $9.55 billion.

Moreover, industry analysts still expect smartphones to see strong gains overseas. Strategy Analytics estimates 48% growth in smartphone shipments this year in emerging markets.

But the slowdown in the U.S. has rattled investors. Shares in Apple have dropped 19% so far this year, as investors grow concerned about slowing iPhone growth and the flattening of the innovation curve. Samsung's stock is down nearly 15% this year after the company's profit outlook disappointed investors and raised concerns that sales of its high-end Galaxy S4 haven't been as strong as expected.

The issue of upgrades is complex for U.S. carriers. They benefit greatly when subscribers move from basic phones to smartphones and start paying more for data—a key source of revenue growth in recent years.

But they suffer when contract subscribers that already have smartphones trade up to new ones, forcing them to pay subsidies that can reach around $400 per device.

To protect profits, carriers have been making it harder for customers to upgrade by assessing new fees and extending the time before they are allowed to buy new models. The new plans rolled out by AT&T and T-Mobile aim to split the difference by allowing more frequent upgrades as long as subscribers give up the subsidy.

AT&T spokesman Brad Burns said the company has room to add more digital devices to its network and to grow in other areas like wireless home services, connected cars and higher levels of mobile Internet use.

Convincing subscribers that they need the latest phone may get harder as devices become more advanced.

Kevin Packingham, chief product officer of Samsung Telecommunications America, rejects the notion that innovation has slowed down. But he acknowledged that recent advances such as more powerful computer chips and software that let consumers attach sound clips to pictures are less obvious to users than earlier developments like larger screens.

T-Mobile US Chief Executive John Legere believes new technologies will inevitably emerge and spur more growth.

"I heard this same assessment by the equipment manufacturers right before Apple launched the iPhone that we've seen everything we could see," said Mr. Legere, a telecom industry veteran. "There is a whole new generation of wearable devices coming that are going to have some impact on the industry."

A number of companies are making big bets that he is right. Satellite TV provider Dish Network Corp. DISH +1.50%has been buying up spectrum and looking for deals that could get it into the wireless business. SoftBank Corp. 9984.TO -0.31%of Japan just paid $21.6 billion to acquire control of No. 3 U.S. carrier Sprint Nextel Corp. S -3.31%

SoftBank director Ron Fisher, who will become vice chairman of Sprint's board, said the mobile Internet still has lots of room for growth in areas of payments, commerce and media.

Still, the industry may need to find a new engine.

"Everybody has got a smartphone," UBS analyst John Hodulik said.