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Software, services to drive growth in smartphone industry — Counterpoint

Longer replacement cycles of smartphone hardware prompted vendors such as Apple to maximize their software services by creating an exclusive system for their customers. Counterpoint Technology (Counterpoint) sees that software and services will drive smartphone revenues through the next 10 years.

A blog penned by Hanish Bhatia, senior analyst at Counterpoint Technology, a global industry analysis firm headquartered in Asia, highlighted how smartphones will remain a central device of choice for consumers, who use them to pay, shop, and even work. OEMs (original equipment manufacturers) are exploring opportunities not only to keep the brands afloat but also to thrive in the growing competitive market.

Smartphone hardware revenues have grown at 4% CAGR during 2015-2021, while service revenues have grown at 23% CAGR in the case of iOS and 12% in the case of Android. Services revenue is a big part of the iOS story,” Bhatia wrote. “But Android falls behind by a huge margin. At current growth rates, Apple’s service revenues could overtake hardware revenues between 2028-30.”

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According to Counterpoint Technology, the global smartphone market generated $530 billion of revenue in hardware and apps and services. Hardware accounted for more than 85% of these revenues, apps and services the remainder.

Apple has seamlessly built its ecosystem anchored on exclusivity which gives its consumers access to its suite of services. It has successfully looped customers with subscription-based services through Apple Watch, Apple Music, Apple TV, and more.

Service ecosystem

“Apple envisions hardware as a medium to target daily consumer needs such as health, gaming, utility, finance, entertainment, etc.,” Bhatia wrote. “Obviously, Apple makes its own hardware, but the motivation to do hardware is driven by fat margins and its walled garden approach to services.”

On the other hand, Bhatia wrote that Android’s offerings not only lack exclusivity but they are also “poorly bundled.”

“The efforts to build a service ecosystem are scattered with each OEM trying to build its own,” he wrote. “From LeEco to Xiaomi to Samsung, each OEMs made efforts to create an ecosystem of finance, entertainment, and health services. This is not sustainable as switching among Android OEMs remains high aside from very few OEMs.”

Bhatia also pointed out that the lack of scale in the Android system restricts smartphone users from adopting other apps and services.

“Google makes most of its revenue from its core search-driven advertising business, but it can do much better when it comes to services,” Bhatia said. “In the case of Android, the hardware void is mostly filled by OEM partners, but that shouldn’t be seen as a drawback, rather an advantage because as hardware margins in Android market are razor thin. Therefore, Google must focus on building a unified service ecosystem that cuts across all Android users and brings the Android community together. It ticks all the boxes to stack up against Apple’s service, app, and search ecosystem.”