In developed markets, every other person already owns a smartphone. In emerging markets, penetration rates are much lower, but cheaper phones that cost under $100 are squeezing profit margins.
That was not the case during the last recession, when Apple's iPhone and Google's Android were still in their infancy. Smartphone demand remained strong even as sales of other electronics declined because consumers felt it was worthwhile to upgrade to a device with so much to more to give - touchscreens, email and full Web browsers.
Without a technology breakthrough such as touchscreen - made popular by the first iPhone in 2007 - people are in far less of a hurry to upgrade their phones this time around, analysts said.
That was evident from Apple's June quarterly results, which showed a much bigger hit from the European debt crisis than Wall Street expected.
"The economy is having an impact on all electronic goods. Even Apple, which did defy gravity in the last recession, is not escaping now," said Hudson Square Research analyst Daniel Ernst.
Smartphone users, who typically upgrade their phones every 18 to 24 months, are now holding on for three months longer than usual, according to Gartner analyst Carolina Milanesi.
"The reason to upgrade is less urgent" she said.
Price pressureOverall smartphone shipments rose 32 per cent in the second quarter, their slowest pace since 2009's 16 per cent increase, according to Strategy Analytics. The research firm forecast annual smartphone shipment growth would slow to 40 per cent in 2012 from 68 per cent in 2011 and ease further to 23 per cent in 2013.
Analysts say demand from emerging markets will support smartphone shipments even if the global economy takes a turn for the worse, but a growing supply of lower price devices from vendors such as Huawei Technologies and ZTE. will pressure prices even if the economy improves. "We're forecasting ASPs (average selling prices) to dip in 2013 and accelerate from there on," said Strategy Analytics analyst Neil Mawston. "If the economy continues to flat line or dip that will accelerate the move to lower cost models."
The popularity of Apple's iPhone and Samsung Electronics's Galaxy S will give these companies some pricing insulation, analysts said.
But there could be much more pressure for price cuts at already struggling smartphone vendors, such as LG Electronics, HTC, Nokia and BlackBerry maker Research In Motion.
"Apple and Samsung's ownership of the high-tier and intense price erosion means the fight among others will be cutthroat," said CCS Insight analyst Geoff Blaber.
The tough road ahead for smaller vendors became more apparent this week, when market leader Samsung reported its best quarterly smartphone sales in history as it outsold Apple and won customers from smaller rivals. Samsung's bigger size allowed it to drive down costs and still make a profit on phones that would generate a loss for smaller rivals.
Some of Apple's earnings miss was attributed to consumers postponing purchases in anticipation of a new iPhone model hitting store shelves this fall. LG did not have that excuse - its cellphone division, which accounts for around one-fifth of sales, posted a quarterly loss as competition forced LG to spend more on marketing for cheaper phones.
Less purchasing power
According to Gartner, about 35 per cent of an estimated 1.9 billion cellphones sold this year will be smartphones. Between 20 per cent and 25 per cent of people in the world already own smartphones, with the penetration rate rising to 50 per cent to 55 per cent in the United States.
"The first wave is selling expensive models to affluent buyers. The second wave is selling lower cost models to less affluent buyers," Strategy Analytic's Mawston said.
Gartner's Milanesi said Huawei and ZTE are in the best position among the lower-tier smartphone vendors.
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