Leading Into The End Of An Era: Smartphones

We laud hero-leaders who take whole industries into extended growth periods: Bill Gates, Steve Jobs, Howard Schultz, Jeff Bezos, Jack Ma, maybe even Jack Welch, all come to mind, as creating unprecedented market capitalization based upon expansive market growth, for both their own organizations, and their peer competitors. Market contraction stories, on the other hand, are fewer. What about leaders who face the end of an industry era; what can we learn about them? Smartphones may offer us just such a case to examine; and could also be a part of the legacy test for Tim Cook as an innovator. As one observer has put it: “Cook’s legacy as an operator is already solidified as world class. His legacy as an innovator is going to hinge on how the Vision Pro plays out.” Surely, how well Apple finesses the changes to personal connectivity will also play a part.

There is growing evidence that smartphones are entering into late-maturity as an industry. Several consecutive years of industry slow-down in sales, and the plateauing of the industry’s growth trajectory, led The Economist, two years ago, to suggest that such data suggests “mounting evidence that the smartphone era is fading.” This is not surprising. Industries often exhibit wavelike generational change; technologies come, and technologies go. What is hot today, is not tomorrow. Progress in reaching, ever-more sophisticated, user-needs is device-agnostic, and users have surprisingly little sentimental attachment, or loyalty, to even old familiar devices, making the pursuit of change relentless. Surprise is always just around the corner.

As The Economist went on to speculate, even successful industries eventually reach an inflection point where “if and when the right product appears, the future may arrive very quickly.” In the late maturity period of many industry growth trajectories, the customers’ lives, and their customer experience expectations, are moving faster than a large, complex, multi-business business, can adequately respond to, opening-up a beachhead into an otherwise protected market, that can quickly be entered by simple, easily adoptable, minimal-function devices.

We might just be seeing this in smartphones, today. One of the first glimpses of such a possible “right product,” especially made to address a disaffected segment of the smartphone market, could be Rabbit’s R1, AI pocket companion; a minimalist-function, voice-activated, artificial intelligence enabler, employing a Large Action Model that allows the user to work with existing apps, employing voice instructions, which provide the user with a more convenient, simpler, AI function than is presently available from smart phone providers. If it, or something similar, was to catch-on and experience rapid adoption, smartphones could well become an excellent example of how broader disruption occurs. While it may boggle the contemporary mind to envision life without smartphones, unless you believe that history has truly ended, we should expect that at some point, some time, even smartphones will go the way of fax machines, VCR players, 35mm cameras and slide rules; reminding us, once again, of the wisdom of the wave metaphor.

How does this work with respect to leadership? After all, leadership is very much about change: anticipating change, creating change, and responding to it. Yet, some change comes completely out of the blue, and catches everyone by surprise. The recent popularization of artificial intelligence (AI), precipitated by the unexpected appearance of OpenAI’s ChatGPT, caught many industries by surprise, despite almost continuous debate about AI taking place all around us. Inevitably, personal connectivity will be affected by the power offered by AI, and smartphones, as the essential personal connectivity link, are likely to be early candidates for big surprise. You might think that the leadership of the leading smartphone behemoths, Apple and Samsung, would be on top of this, and would quickly be launching their own AI solutions or, if not, would be big enough to acquire, squash, or co-opt any such threats to their existing profitable market positions; but, that actually didn’t happen as fast, or as coherently, as one would have expected. In fact, it almost never does among well-established, market-leaders. As a result, very quickly, in months, not years, minimal-function alternatives to smart phones, are appearing, to bring AI-enabled activities quicker to a user-market hungry for such capabilities. Such could well be the beginning of considerable market turmoil.

Rabbit’s R1, AI pocket companion is exactly this; as is the Oura ring; and the somewhat pricier hu.ma.ne “ai pin,” that is affixed to your garments; all of which are built, explicitly, to cannibalize small, vulnerable, revenue streams formerly accruing to the smartphone. Not surprisingly, one of the two major smartphone players, Samsung has also announced a Galaxy ring to enter the fray, and there are even rumors of OpenAI CEO Sam Altman and, Apple’s iconic former head-designer, Jony Ive, collaborating on an unannounced mobile AI project. While these, and other, devices are attracting significant venture capital investment, and some are already selling units, they, themselves, should not be regarded so much as likely agents of disruption, but more as early-warning signals of impeding insurgency. They might be considered as the very first, tentative, confusing, beginnings to an entirely new wave.

There is a lot at stake here. The present smartphone era has been dominated by two firms since its beginning; and, today, each is heavily reliant upon smartphone revenues. Apple earns nearly fifty percent of its revenues from smartphones [Q4, 2023], while Samsung, with a vastly different overall business model, earns a smaller, but not insignificant, percentage from mobile communications. Neither firm will have any inclination to bow out gracefully. Yet, the risk is inevitable, and if this really is the beginning of a new S-curve generation of offerings, it is unlikely that either Apple, or Samsung, are going to be the originator of whatever new wave arises. As Peter Fisk so aptly recognized: “newness starts at the edge.”

How well these firms deal with new ideas will be the key to their sustained relevance. At the time of this article, Samsung has moved first to establish a quick AI-fix, with its new Galaxy S24 flagship series of smartphones, which promise a “new era of mobile AI,” by offering on-device, AI-augmentation of real-time chat transcribing and translation services, note-taking and organization, smart photo-editing, and gesture-guided search. Samsung’s great strength in this instance is its long dependence upon Google for keeping the Android operating system up to speed.

Unlike Samsung, Apple’s heritage has been marked, from its start, by the continuous pioneering of dramatically new market segments to probe the future; the Macintosh, itself, was a bold departure in the early days of personal computing, as was Lisa, which failed commercially. Apple’s iPod, iPad, watch, earbuds and now the $3,500 dollar Vision Pro headset, have all been daring efforts at rearrangement of existing markets. Nor is Apple staying put on AI. Apple has acquired twenty-one AI startups since 2017, and is recruiting heavily for AI expertise, of which half is in deep learning. It is spending lavishly on AI R&D, has developed new chips, and its forthcoming iOS 18 is expected to advance Apple’s ultimate goal to create truly mobile AI, that does not require a reliance on-cloud services.

The real Achilles heel of modern corporations, however, is not so much anticipating the future, as it is responding to the unpredictable; as mature organizational cultures so often choose inertia over action. Charlie Fine has argued that, in mature industries, it is the incumbents’ organizational complexity that fails them, rather than any lack of awareness of impending threats, or paucity of ideas about suitable responses. As product and service portfolios expand to accommodate ever-richer customer journeys, the complex organizations and integrated business models, they give life to, tie-up any organizational response in endless internal compliance discussions, while the external market continues to rush ahead. Minimal-function workarounds, no matter who the providers, offer quick ways for customers to fill “jobs in their lives” that would otherwise go unfulfilled. That is what handheld, and pinnable, AI enablers are, and to some extent Samsung’s AI-augmentation effort is, as well. As such, they are also threats to the status-quo ante in an industry, because, in their small way, they offer a new beginning, out of the prevailing limited variety situation that exists for both customers and suppliers.

“We have met the enemy, and he is us;” Walt Kelly’s reflection, to promote the first Earth Day, might just as aptly characterize the real challenge to so many successful firms who suddenly face unprecedented challenges, from unfamiliar competitors, in markets that are no longer as reliable as they once were. Repeatedly, when market-leaders fail, it is their organizations, and leadership, that let them down; not their intelligence, nor their employees.

Samsung has long had to deal with an OEM-originated culture that, while dependable and efficient, struggles to unleash dramatic consumer creativity. Already, some hints of engineering overload in employing the Galaxy S24’s AI software suggests that that such cultural issues still remain. To its credit, however, Samsung has worked with its partners, Google and Qualcomm, to quickly move to bring interesting and workable AI features to the marketplace; where speed is always an advantage.

Long regarded as a flexible, although large, organization, Apple has often been referred to has having a “starfish” organizational silhouette, which suggests a small center and many active arms. This is a good way to reduce vulnerability when significant change arises in any one business, but it comes at the cost of economies of scale, learning and a seamless customer experience across the entire product portfolio. Under Tim Cook, the emergence of a strong integrated product and service business-model has sought to overcome distance between Apple’s businesses, and has, in the process, generated considerable additional revenues, along with introducing more additional complexity than a starfish would suggest. The recent withdrawal, rather than compromise, of newer Apple Watch models, in the face of intellectual property challenges to its blood-oxygen sensing features, also suggests a possible absence of flexibility within its overall business model approach.

Even more ominous, is Apple’s growing reputation as a difficult partner, at the very time that so many of its products, especially Vision Pro, could benefit from being fed by new ideas from a robust ecosystem of knowledge contributors. Apple’s fabled walled-garden approach to controlling as much of the revenues being generated by its platforms as is possible, is the antithesis of the openness and co-creation associated with ecosystems, and coupled with a slow, integrated, business-model could well make Apple especially vulnerable to svelte, new, minimalist competitors, with few legacy positions to slow them down.

As always, leadership is about choice, and the ability of any successful, incumbent, market-leader, such as Apple or Samsung, to quickly explore potential new-generation industry S-curves is a key factor in sustaining market relevance. Over the next year or so, we will learn better if a new S-curve is, in fact, in the offing, and how well Samsung’s partnership approach compares with Apple’s “walled-garden” approach in preparing the firm for curve-jumping? We will also learn much about the power of consumer-brands in maintaining user loyalty, and we will, no doubt, be surprised by new entrants who are not even our anyone’s radar screen at this point in time.