What's going on? There are a lot of theories, but it's now clear that the market is hungry for another product category that can pick up the slowing growth Samsung and Apple are seeing with their top-tier phones.
But let's backtrack for a moment and examine why Samsung and Apple's smartphone businesses aren't growing like they used to.
First, there's the issue of smartphone penetration, meaning most people who want a top-of-the-line smartphone like the iPhone or Samsung Galaxy S4 already have one. That trend is the most apparent in North America and other Western countries. During Apple's earnings call on Tuesday, CEO Tim Cook said North American iPhone sales are contracting year over year:
In North America, we did not do as well, and this weighed our results. Our North American business contracted somewhat year over year. And if you look at the reason for this, one was that as we entered the quarter, and forecasted our iPhone sales, where we achieved what we thought, we actually sold more iPhone 5Ss than we projected.
Next, there's not much incentive for those who do have a smartphone to upgrade until a new model comes out or their carrier contract lets them get a new phone. For example, Verizon's smartphone activations were down last quarter, a sign that Apple and Samsung didn't do as well as expected in North America.
Meanwhile, take a look at Apple's other businesses. The iPod is basically dead, with sales shrinking more than 50% year over year. The iPad seems to be a wild card. It had a good quarter at the end of last year, but growth has been generally flat. Macs are still tiny.
Basically, the iPhone is Apple's lifeblood. Just look at this breakdown of the company's revenue by category if you need proof:
And here's a look at the iPhone's shrinking growth:
So, what's next?
One reason why Apple as a company has done so well is because it has a history of replacing one successful product with another. The iPhone replaced the iPod. The iPad is in the process of replacing the Mac. This ensures another company can't swoop in and out-innovate Apple. It's worked so far.
And we already have and idea of what's coming next.
Wearables: It's been widely reported that Apple is working on the so-called iWatch, a wearable watch-like computer for your wrist. There's a chance the iWatch launches by the end of 2014.
TV: While there are few hints that Apple will be able to launch a full TV set this year, there is a good chance the Apple TV set-top box will get a significant upgrade. 9to5Mac's Mark Gurman reports that a new Apple TV could launch during the first half of this year with a new user interface and an app store that lets you download games.
Giant phones: The Wall Street Journal reported last week that Apple will release two new iPhones with larger screens. Yes, that could fill a demand people have, but it likely won't make that huge of a difference in iPhone sales.
To be clear, this isn't to say Apple is in any sort of danger in the short term. But there is a clear trend that growth in Apple's core business, the iPhone, is slowing. A new product category, especially one like a wearable computer that could potentially replace or augment the iPhone, is the next logical step.