Operators see smartphones beginning to dominate handset sales - Rapid smartphone penetration continues as sales boom in developed markets

The high volume of smartphones currently being sold in developed regions has pushed smartphone penetration past 50 percent for some operators, while others expect smartphones to completely supersede non-smartphones within the next couple of years. However, the high cost of such devices is still a barrier to mass adoption in developing regions, and the removal of subsidies by some European operators combined with the introduction of upgrade fees by some US carriers also threaten to slow the take-up of smartphones in the developed world. In our latest research, we update the global picture in terms of smartphone penetration (as a percentage of connections as opposed to population), focusing on the key operator groups, countries and regions.

Smartphone adoption continues apace in Europe, with Vodafone stating in Q4 2011 that they are selling an increasing number of the devices in each quarter. Smartphone penetration has risen to 24 percent of the operator’s European customer base as of that quarter, from 16.7 percent a year earlier, driving higher mobile internet usage and therefore revenue. In its Q2 2011 results, Vodafone observed that a non-smartphone user upgrading to a smartphone would generate an average ARPU increase of between EUR 2 and EUR 10, depending on tariff tier, through increased data consumption. Subsequently, mobile internet revenue for the group increased by more than 50 percent year-on-year in Q4 2011.

Of the operator’s European operations, Vodafone UK has one of the highest levels of smartphone penetration at 39 percent, putting it slightly ahead of O2 (Telefónica) with 38 percent at the end of 2011. O2 has increased this figure from 29 percent in 2010, and with smartphones making up more than 95 percent of the operator’s handset sales in the contract segment during Q4 2011, the proportion is likely to rise further in 2012. Yet O2 will have to go some way to beat the UK’s fourth-largest operator, 3 (Hutchison) in terms of smartphone penetration. In November 2011, 3 announced that some 60 percent of its customers were smartphone users, up from just 30 percent a year earlier, and the operator expects the proportion to rise to 90 percent by the end of 2012 as the majority of its non-smartphone subscribers are due to upgrade their devices during the year. Thus 3 is in pole position to be the UK’s first all-smartphone operator, although the operator only makes up around 11 percent of total connections in the country.

At 7.5 million, Vodafone Germany has the same absolute number of smartphone subscribers as its British counterpart, although as the operator has a significantly higher total customer base in Germany (37.6 million compared to 19.3 million in the UK) smartphone penetration is much lower at 20 percent as of Q4 2011. This figure was up 2 percentage points quarter-on-quarter with smartphones accounting for 85 percent of the operator’s handset sales in the contract segment during the period, yet in percentage terms Vodafone has been eclipsed by O2 (Telefónica), whose CEO Rene Schuster stated in December 2011 that 90 percent of their total handset sales from Q3 2010 onwards had been smartphones. Notably, Schuster went on to say that he believed that smartphones would fully supplant normal mobile phones within two or three years.

As discussed in last week’s analysis piece, the release of the Apple iPhone 4S in Q4 2011 gave a major boost to smartphone sales for the major operators in the USA. Few operators in the country report overall smartphone penetration, but in terms of smartphone users as a proportion of contract subscribers, AT&T stood at 59 percent in Q1 2012 (some 41.2 million subscribers in absolute terms), up from 46 percent a year earlier. The operator has been at the forefront in terms of migrating users to smartphones and noted in its Q1 2012 presentation that the devices generate an additional 90% of revenue when compared to non-smartphones. Sprint currently has a higher smartphone contract penetration with 69 percent at Q1 2012 (albeit from a lower base), meanwhile Verizon Wireless’ contract smartphone penetration increased from 28 percent in 2010 to 44 percent at Q4 2011.

Elsewhere, Turkcell stated in its Q1 2012 results that it expects its smartphone penetration in Turkey to be around 20 percent at the end of financial year 2012, which will be significant as the operator has observed that data ARPU for its smartphone users is five times greater than that of non-smartphone users. In Russia, 12.4 percent of phones on the MTS network were smartphones in Q3 2011, while in Brazil, TIM reported rapid adoption of the devices, with penetration rising from 12.6 percent in Q1 2011 to 31.1 percent in Q1 2012. Finally in Africa, Vodacom South Africa had 4.8 million active smartphones on its network at the end of 2011 accounting for 18 percent of total connections, but the picture for the whole of the continent is quite different; according to Orange (France Telecom), only one in every 32 phones (or 3.1 percent) in Africa is a smartphone.

Calum Dewar, Analyst, GSMA Intelligence:

Our recent report on operator device portfolios found that more than two thirds (68 percent) of all handset models currently available from a selected group of 47 operators worldwide are 3G-enabled, a considerable uplift from the equivalent figure of 51 percent in 2010. The increasing availability of these 3G devices and the willingness of operators to subsidise them has driven the rapid adoption of smartphones as described above, although there is a significant disparity between developed markets (78 percent 3G-enabled devices on average) and developing economies (61 percent). These findings suggest that smartphone prices still have some way to fall before mass-market adoption of smartphones is likely to occur in regions such as Africa, where outside of South Africa smartphone penetration is currently negligible. Many of the smartphones that are currently available sit at the top end of the market, with a small (but increasing) amount at the lower end.

The cost of the devices is also threatening to slow smartphone adoption in developed markets, with Verizon recently becoming the last of the major operators in the USA to introduce a fee (of USD 30) for subscribers who upgrade their handsets. Some European carriers such as Vodafone and Telefónica in Spain have gone a step further and removed smartphone subsidies altogether, despite Telefónica’s observation in its Q4 2011 results that smartphone ARPU is 1.5 times that of non-smartphones across the group. Another challenge of high smartphone penetration is the potential loss in voice and messaging revenue to third-party services such as WhatsApp and Viber, which Telefónica has attempted to counter this week by launching its own TU Me messaging app. In the near future we expect more operators to reduce or terminate completely the subsidies that are eating into their profits, which will invariably slow the pace of smartphone migration.

Smartphone penetration, selected markets, 2011
Source: GSMA Intelligence