The fact that the mobile phone market is changing isn’t a revelation. In fact, since the “cellular phone” became mainstream, the market has evolved so fast that most consumers find it difficult to keep up with the latest changes. Today’s mobile market shifts are so large and drastic, companies are having trouble adapting.

The Story of Apple
Every tech investor knows the story of Apple (NASDAQ:AAPL). Not long ago, as Apple was set to report quarterly earnings, the only question asked was, “How big will the earnings blowout be this quarter?” 

Today, it’s different. Going into the company’s Q3 earnings report on July 23, the company is forecast to report earnings of $35.02 billion—a year over year change of zero. And analysts’ biggest concern? IPhone sales.

A recent report published in Bloomberg Businessweek noted that Verizon (NYSE:VZ) may be obligated to purchase $23.5 billion worth of iPhones in 2013—twice what the company sold in 2012. This may leave Verizon on the hook for up to $14 billion worth of iPhone that it can’t sell. 

A guaranteed payment of $23.5 billion from one vendor sounds like a big win for Apple but the iPhone accounts for at least half of its revenue. Apple wants to see those phones in the hands of customers—not in boxes in a Verizon warehouse. 

Apple’s problems were easily explained away until recently. Samsung (OTC:SSNLF) was taking market share. The company produced phones that, at least for a while, everybody wanted. Much like the early versions of the iPhone, each update created a buying frenzy. Remember the popularity of the S3? Samsung’s latest phone, the S4, was greeted with the same muted response as the last few iPhones. 

SEE: The Industry Handbook: The Telecommunications Industry

Even more notable, the company recently pre-announced that when it reports earnings July 26, it would report operating profit in the range of $8.1 billion to $8.5 billion. Analysts were expecting $8.8 billion causing a selloff in the stock of nearly four percent on the news.

The Market has Changed
Both companies are still producing impressive earnings but not at the pace they once were. Why? Because consumers around the world can’t afford or no longer want to pay $600 for a high-end phone.

Stephane Richard, CEO of France Telecom, one of Europe’s largest wireless carriers said, “Selling a phone for $600 is getting more and more difficult.”
Noting that at one time, there would be long lines before the release of the latest iPhone, Richard said, “There are fewer early adopters, and probably with the next release of the iPhone this will be evident.” 

Richard noted that with the questionable European economy, consumers have cut down on discretionary purchases—the same trend that took place in the United States as the country struggled to recover from the now called, “Great Recession.” Then there is China. According to Daniel Levine, Executive Director of The Avant-Guide Institute, “In China and Southeast Asian markets, falling prices for good-performance handsets are making cheaper models more attractive.” He notes a different trend in Japan. “There is a culture of phone makers coming out with new models three or four times a year. Japanese consumers change phones as quickly as they change their style of clothes: seasonally.”

This shift toward cheaper phones has forced the premium companies to scramble to meet the demands of the more budget-minded consumer. Apple is expected to announce a budget iPhone later this year, Samsung is said to be working on budget models, and Nokia (NYSE:NOK) recently released a line of budget phones that start at $68. 

But how well these high-end companies will fare in the budget market isn’t clear. Apple isn’t known for products with the budget-minded consumer in mind and analysts aren’t convinced Samsung will make inroads either. Tong Yang Securities analyst Brian Park said, "There's still a big uncertainty about how Samsung will respond to the low-end market,"

They’re Just Too Good
In the race for companies to roll out the next game-changing phone, much of the large-scale innovation that once took place has slowed significantly and the lack of moving parts lengthens the upgrade cycle. Levine said, “Apple’s app-based multi-touch touchscreens were the great disruptors when they debuted a few years ago. Now mobile phone innovation is incremental and there is less of a need to trade up. If you bought a top-of-the line Samsung Galaxy Nexus two years ago, there is little reason to trade it in for this year's model because the latest hardware is not significantly better.”

Emerging Market Demand
Africa could be the next frontier for emerging market demand for mobile devices. In a country where electricity is expensive and Internet access is limited, much of the continent turns to Internet cafés where users log on to an Internet enabled computer for about $0.60 per hour.

Google (NASDAQ:GOOG) is sponsoring a tablet café in Dakar where 15 tablets have replaced traditional desktops. The lower power demand makes it cheaper for the café owner and the ease of use that comes with the tablet cuts down on the cost to the consumer. 

If Google has its way, soon, areas of the world where infrastructure isn’t in place for widespread Internet service will find access through its Project Loon. Google wants to launch thousands of balloons that will deliver Internet service to the 4.8 billion people who aren’t connected. It already successfully launched test balloons and was able to provide Internet service to a few test homes. This opens up a new market for budget-minded devices. 

If any country could forecast future African demand, it might be Kenya. According to The Economist, there are 74 mobile phones for every 100 Kenyans versus an African average of 65 and nearly 99 percent of Internet subscriptions are on mobile phones.

Although only 12 million of the country’s 40 million people use the Internet, Africa leads the world in the percent of Internet-connected users who adopt mobile payment technology. Nearly 70 percent versus China that is under 5 percent.

As more of the continent comes online, the demand for low cost mobile technology will increase—a goldmine for mobile device companies.

SEE: The Rise Of Africa

Take Action
The mobile landscape is changing and this time it’s consumer-led. As demand for traditional desktop and laptop computers continue their sharp decline, expect mobile phones and tablets to fill those voids but not at premium prices.

Consumers now expect more budget-minded devices and companies are scrambling to catch up. The best long-term plays will be those companies who meet the budget-minded demands in countries without a saturated market. Google is looking like a clear early winner.

In addition, don’t expect countries like the United States to remain immune from the budget-minded trend. Levine says, “As prices continue to drop in the United States and Europe, this behavior is a harbinger of things to come in rich countries as well.”

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