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See the best of Reuters photography. See more | Photo caption London's opening Highlights from the Opening Ceremony of the London 2012 Olympic Games. Slideshow The Olympic Village Where the athletes will live during the London Olympics. Slideshow Analysis: Apple sounds warning bell for smartphone industry Tweet Share this Email Print Related News Apple, Samsung take patent fight to crucial California trial Fri, Jul 27 2012 Smartphones power record Samsung profit of $5.9 billion during Apple lull Fri, Jul 27 2012 Apple's invincibility fades on iPhone miss, global woes Thu, Jul 26 2012 China's "millet" phone maker hits nearly $1 billion in first half sales Thu, Jul 26 2012 Apple blames rare miss on new iPhone anticipation, economy Wed, Jul 25 2012 Related Topics Tech » Small Business » Media » People walk past a closed shop, which will be opened and inaugurated as the largest Apple store in southern Europe on July 28, at Passeig de Gracia, in Barcelona July 26, 2012. The iPhone revolutionized the smartphone industry, driving Apple's expansion into Europe and China and, after just half a decade, yields about half its annual $100 billion revenue haul. Credit: Reuters/Albert Gea By Sinead Carew and Tarmo Virki Sun Jul 29, 2012 10:59am EDT (Reuters) - If Apple Inc's weaker-than-expected quarterly result is anything to go by, the global smartphone industry is a lot more vulnerable to economic shocks these days than during the 2008-2009 financial crisis. In developed markets, every other person already owns a smartphone. In emerging markets, penetration rates are much lower, but cheaper phones that cost under $100 are squeezing profit margins. That was not the case during the last recession, when Apple's iPhone and Google Inc's Android were still in their infancy. Smartphone demand remained strong even as sales of other electronics declined because consumers felt it was worthwhile to upgrade to a device with so much to more to give - touchscreens, email and full Web browsers. Without a technology breakthrough such as touchscreen - made popular by the first iPhone in 2007 - people are in far less of a hurry to upgrade their phones this time around, analysts said. That was evident from Apple's June quarterly results, which showed a much bigger hit from the European debt crisis than Wall Street expected. "The economy is having an impact on all electronic goods. Even Apple, which did defy gravity in the last recession, is not escaping now," said Hudson Square Research analyst Daniel Ernst. Smartphone users, who typically upgrade their phones every 18 to 24 months, are now holding on for three months longer than usual, according to Gartner analyst Carolina Milanesi. "The reason to upgrade is less urgent" she said. PRICE PRESSURE Overall smartphone shipments rose 32 percent in the second quarter, their slowest pace since 2009's 16 percent increase, according to Strategy Analytics. The research firm forecast annual smartphone shipment growth would slow to 40 percent in 2012 from 68 percent in 2011 and ease further to 23 percent in 2013. Analysts say demand from emerging markets will support smartphone shipments even if the global economy takes a turn for the worse, but a growing supply of lower price devices from vendors such as Huawei Technologies Co Ltd and ZTE Corp will pressure prices even if the economy improves. "We're forecasting ASPs (average selling prices) to dip in 2013 and accelerate from there on," said Strategy Analytics analyst Neil Mawston. "If the economy continues to flat line or dip that will accelerate the move to lower cost models." The popularity of Apple's iPhone and Samsung Electronics Co Ltd's Galaxy S will give these companies some pricing insulation, analysts said. But there could be much more pressure for price cuts at already struggling smartphone vendors, such as LG Electronics Inc, HTC Corp, Nokia Oyj and BlackBerry maker Research In Motion Ltd. "Apple and Samsung's ownership of the high-tier and intense price erosion means the fight among others will be cutthroat," said CCS Insight analyst Geoff Blaber. The tough road ahead for smaller vendors became more apparent this week, when market leader Samsung reported its best quarterly smartphone sales in history as it outsold Apple and won customers from smaller rivals. Samsung's bigger size allowed it to drive down costs and still make a profit on phones that would generate a loss for smaller rivals. Some of Apple's earnings miss was attributed to consumers postponing purchases in anticipation of a new iPhone model hitting store shelves this fall. LG did not have that excuse - its cellphone division, which accounts for around one-fifth of sales, posted a quarterly loss as competition forced LG to spend more on marketing for cheaper phones. LESS PURCHASING POWER According to Gartner, about 35 percent of an estimated 1.9 billion cellphones sold this year will be smartphones. Between 20 percent and 25 percent of people in the world already own smartphones, with the penetration rate rising to 50 percent to 55 percent in the United States. "The first wave is selling expensive models to affluent buyers. The second wave is selling lower cost models to less affluent buyers," Strategy Analytic's Mawston said. Gartner's Milanesi said Huawei and ZTE are in the best position among the lower-tier smartphone vendors. "If price is the first driver I'm going to pick the Chinese," said Milanesi, who said LG and HTC are most vulnerable to price declines as they "need more to stand out." Also putting pressure on handset makers are the wireless service providers on which they are heavily dependent in many regions such as Europe and the United States for promotions. Carriers often subsidize phones to encourage their customers to commit to long term contracts. In Europe, some operators such as Telefonica have been dropping subsidies entirely. The top three U.S. operators, Verizon Wireless, AT&T Inc and Sprint Nextel Corp have all been improving profit margins because they cut down on their subsidy costs by offering customers upgrades less frequently. If consumers do have to cut spending because of the weak economy, IDC analyst Ramon Llamas said: "There's smartphone available for just about every single budget out there." (Reporting by Sinead Carew in New York and Tarmo Virki in Helsinki; editing by Tiffany Wu and Andre Grenon) Tech Small Business Media Related Quotes and News Company Price Related News Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/ Comments (2) JamVee wrote: Edition: U.S. Africa Arabic Argentina Brazil Canada China France Germany India Italy Japan Latin America Mexico Russia Spain United Kingdom Back to top Reuters.com Business Markets World Politics Technology Opinion Money Pictures Videos Site Index Legal Bankruptcy Law California Legal New York Legal Securities Law Support & Contact Support Corrections Connect with Reuters Twitter Facebook LinkedIn RSS Podcast Newsletters Mobile About Privacy Policy Terms of Use AdChoices Copyright Our Flagship financial information platform incorporating Reuters Insider An ultra-low latency infrastructure for electronic trading and data distribution A connected approach to governance, risk and compliance Our next generation legal research platform Our global tax workstation Thomsonreuters.com About Thomson Reuters Investor Relations Careers Contact Us Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. 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