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Getting Smart: Consumers Give Smartphone Market a Lift

The U.S. smartphone market has entered a significant growth spurt. In recent months, consumers have snapped up these devices in record numbers, according to recent data from The NPD Group.

Specifically, October sales have soared 230 percent from January of this year – rising from 216,000 units to nearly 715,000. On a quarterly basis, smartphone sales have risen more than four percentage points to more than 6 percent of new phones sold in the past year.

This long-awaited growth for the smartphone market comes at a crucial time for carriers who have been anticipating wider smartphone adoption by consumers. For the past couple of years, carriers and their handset suppliers have been hoping more buyers would migrate to these devices, since smartphone owners tend to spend much more on wireless data than owners of other types of mobile phones. Greater usage of wireless data is important to long-term carrier survival, as data revenue replaces falling voice revenue.

Key Drivers
Some of the key drivers behind this growth in smartphone sales include the following:

Prices have declined 10 percent, on average, since January 2006.
More smartphone choices are now available. Some of the more popular models -- including Motorola Q, Palm Treo 700p, BlackBerry Pearl and Nokia’s E62 – have entered the market since the first of the year.
Smartphones meet the growing demand for personal e-mail functionality, usage of which has doubled since March 2006.
More robust devices are now capable of better handling of applications beyond e-mail (e.g., playing music and video).
Devices now boast significantly greater data storage capacity than standard phones, and many also provide slots for removable memory cards
Faster data networks are now more widely available, which means smartphone owners can take advantage of quicker data transfers and faster Web browsing.

Top Models
The best-selling smartphones in the past three months underscore a shifting market -- beyond Treos and BlackBerries. Motorola’s slender Q has come on particularly strong. Following is the list of the top-five best-selling smartphones (August – October 2006):

Motorola Q
Palm Treo 650
Verizon Wireless XV6700
Palm Treo 700p
BlackBerry 8700

Strong Marketing
New lower prices and improved marketing have both had an impact on sales. Verizon Wireless has mounted a steady campaign for the Motorola Q, featuring it prominently – and its attractive $99 price – in both print and television messages. Nokia’s E62, also selling for $99, has received a strong advertising push as well, since its launch by Cingular in September.

Welcome News
All of this is welcome news to carriers, not only because devices are selling in record volumes, but also because smartphone owners are more lucrative customers. Smartphone users spent $6.31 per month for wireless data, on average, in the third quarter compared to just $0.89 for owners of all types of handsets. With this whopping 609% difference in monthly revenue it’s no wonder that carriers covet smartphone users.

Looking Ahead
The next couple of quarters continue to look promising. A new version of the Q is widely anticipated, and Motorola is likely to upgrade the device and bring it to GSM carriers sometime in early 2007. A black version of the Q is rumored to be available soon from Sprint.

Similarly, Palm’s Treo 680, which just came on the market from Cingular, has the look of a winner. It is thinner, lighter and more affordable than other Treo models, with a selling price of $200. This sleeker handset should appeal to a broader customer base as well.

Two other smartphone newcomers are turning heads: T-Mobile’s Dash selling for $150, and Samsung’s slim BlackJack which sells for $200 at Cingular.

The next milestone will be crossed when smartphone sales exceed the 10 percent threshold of new-phone sales. Granted, that’s only an artificial target, but it will represent great progress for a one-time niche handset category that has struggled to move beyond mostly corporate users. Given the expected new models, and the strong push by carriers, a golden era for smartphones could be just around the corner.

- Neil Strother, Research Director, Mobile Devices, Content and Services