A recent article in Business Insider indicates the time between replacements of mobile phones is starting to lengthen. Horror of horrors the upgrade cycle has reached 22 months. That is potentially very adverse for the manufacturers.
There are reasons for the time becoming longer of course.
The principal one is that the new phones, while different, are not a lot different from the recent old ones. It is possible now that the price to upgrade will not produce new satisfaction equal to its cost. That is the way cars went too.
Once upon a time, people with enough money traded cars every two or three years. In the early going they found it worthwhile. Today the time to hold a purchased new car is much longer because the differences in value to the customer are not significant enough to justify the price difference. The car companies made leasing a priority as the result of this.
Did leasing make them a lot of extra money. Seems not. They may have earned margin at the manufacturing level but gave it back with price incentives and financing costs that they absorbed. You don’t really believe money is and should be free when it finances consumer goods.
The end game is unknown with leasing, but it is safe to say that it is easier to start it than it is to stop.
In the past decade this question has become easier to answer. “Is a mobile phone a phone with computer capabilities or is it a computer that can phone?” It was difficult until about 2008, now it is simple. The phone part is nearly irrelevant.
Mobile phones have enjoyed a similar technology change to post war cars and it too seems to be coming to a close. When mobile phones were phones the change to providing email too was profound. Text was a marvel. Then came data. And Apps! A huge win for everyone.
There is the idea of diminishing marginal utility. Marginal utility is the extra you get with innovation or technology or anything really. When total utility is small, like the modern mobile telephones or cars of 1950, it is easy to get big increased utility with each new innovation. Someone could double their value by acquiring a new model.
Today however, in both cars and phones, the utility already present is huge and the changes add only tiny percentage of value increments.
We have not yet reached maturity in either the mobile phone or car industries, but the incremental changes are not as compelling as they were.
Most of the car companies that have ever existed have gone away. I expect the same will happen with handset makers.
I recall buying a Motorola phone in the late 80’s only to replace it with several Nokia models. Then a Blackberry. Then an iPhone. Now the iPhone is gone. The one I own now is more generic. I bought it for its sound and screen. All phones will surf the net, have many apps, provide email service and communicate with text.
Motorola and Nokia are part of other organizations now. Blackberry will soon follow. I wonder about Apple and maybe about Samsung. Their extra value added is shrinking and when you rely on scale to support yourself, diminishing marginal utility and the resulting lengthening of the replacement cycle cannot be good for you.
In the 80’s Apple made the mistake of proprietary operating systems and seem to be doing it again. Consumers and their suppliers prefer open source. Google and Android provide the threat that MS-DOS provided to Apple in 1983.
It used to be that new product could count on a decade long shelf life. Not so much today. I know that means something but I am not clear on what. Maybe life long careers and buy and hold investing are becoming obsolete ideas.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
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