Smartphone shipments explode, raising capacity questions

Carriers are selling more than networks can support, and users are willing to pay for ever-more comprehensive plans, ABI says

Smartphone sales are exploding, which poses long-term questions about wireless network capacity as users show a willingness to pay for ever-bigger data plans.

The pace of smartphone shipments is "extraordinary," jumping by 50 per cent in the second quarter of 2010 over the same quarter in 2009, ABI Research said on Tuesday.

"We're seeing ridiculous growth in smartphones," said ABI analyst Michael Morgan in an interview.

ABI calculated that smartphones made up 19 per cent of all wireless phones that shipped to carriers in the second quarter of this year. Morgan said ABI estimates that smartphones will account for 40 per cent of all wireless phones shipped by 2016, he said.

According to ABI, 61.8 million smartphones, such as the iPhone 4 and the HTC Droid Incredible running the Android OS, shipped in the second quarter. About 321.2 million cell phones of all types shipped in the quarter, Morgan said.

In the second quarter of 2009, ABI said that manufacturers shipped 269.1 million cell phones, including 41.4 million smartphones. The smartphone shipments were 50 per cent higher than the year-earlier quarter and 12 per cent higher than the first quarter of 2010, Morgan added.

Morgan predicted smartphone growth will continue to surge to about 77 million-plus in the current third quarter, or 23 per cent higher than the previous period.

ABI did say it wonders how long such smartphone growth can last, especially with widely reported network capacity problems that the researcher says is "sucking the value out" of the mobile market.

LTE, a 4G wireless technology that uses wireless spectrum more efficiently, should arrive in the U.S. on Verizon Wireless networks later this year and on AT&T's in 2011, Morgan noted. Metro PCS has already launched LTE in three markets and Wimax 4G is in the process of being deployed by Sprint Nextel and Clearwire in U.S. 55 markets.

Tiered pricing plans for heavy data users with smartphones have emerged in the last six months in the U.S., limiting the "all-you-can-eat" users, but ultimately raising further questions about supply and demand for data capacity, Morgan added. "Smartphones are hitting the networks and pulling more data and doing more than ever before," Morgan said.

What will happen with tiered data plans, he predicted, is that users of ordinary voice and texting cell phones, often called feature phones, will see they can add tremendous functionality by initially buying a smartphone, and then quickly be convinced to move from $15 a month data plans to more comprehensive $30 a month plans.

"It's called gaslighting, and it means the carrier gets you hooked and maybe you become a heavy data user," Morgan said. "You are already addicted to the smartphone and will want to move up in data."

Morgan also noted that carriers in the U.S. are selling more smartphones than their networks can support. "When it comes to carriers, the decisions are coming from the marketing and business folks who do the advertising and sales to customers, so all they care about is loading the cart and forgetting the horse," he said.

The horse in Morgan's metaphor is the network, managed by the carriers' network engineers "who are viewed as a cost center and are not driving the high-level decision-making." He said carriers are trying to get as many customers on data plans as they can and "putting in as little as possible toward network improvements," even with many billions of dollars being spent on network growth a year.

"Unfortunately, this smartphone growth is so fast that the carriers need to worry about the horse, especially in the U.S.," Morgan said.

Customers do seem willing to pay for the comprehensive data plans, sometimes paying up to $2,000 a year for voice, data and messaging plans to carriers.

"Every time somebody gets a smartphone, it changes you," he said of the market psychology. "I used to just get voice. Now I have Facebook, e-mail and texting, and I'm downloading apps in the background. No wonder I might go from a $15 data plan to $30 a month, since I need the capacity," Morgan said.

Morgan said the rapid growth of smartphone shipments and sales has "reached an inflection point" as the upward curve continues to steepen. "Smartphone shipments have always been growing, but now [the growth curve] is steepening faster. We'll probably have 60 per cent year-over-year growth at the end of 2010," Morgan said.

Morgan predicted that smartphone growth will slow to 25 per cent in 2011 compared to 2010, since carriers will have "filled the demand vacuum."

At that point, the wide array of smartphone OS's will probably "boil down to three or perhaps four key operating systems," Morgan added.

Regarding data capacity with more and more smartphones using more data for the foreseeable future, Morgan said all the carriers worry publicly about spectrum efficiency and whether federal regulations will permit using more of the spectrum for wireless consumers.

Yet, at the same time, carriers continue to sell cheaper smartphones, some for $150 even without a long-term service contract, and add greater choices in data plans to attract more users.

"This growth is getting away from us," Morgan said.

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Tags BI ResearchMobile and WirelesstelecommunicationNetworkingPhonessmartphoneswirelessmobilewireless networkingAppleconsumer electronicsABI research

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