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Next in Tech | Ep. 185: Consumer Tech Evolution

Eric Hanselman

Welcome to Next in Tech, an S&P Global Market Intelligence podcast where the world of emerging tech lives. I'm your host, Eric Hanselman, Chief Analyst for Data and Insights at S&P Global Market Intelligence. And today, we're going to be talking about the evolving consumer technology landscape, a lot of the different facets in terms of what's taking place in that sphere, everything from connectivity extending all the way out to gaming and some of the transitions that are taking place. And to discuss it with me today is Neil Barbour, a member of the analyst team from the Kagan side of our business. Neil, welcome back to the podcast.

Neil Barbour

Hi, Eric. Thanks for having me on.

Eric Hanselman

Great to have you here. There is so much that is going on in technology in general that gets driven by broad public perceptions that get fueled by consumer technology and some of what's happening.

Eric Hanselman

There's a lot that you and your team have been working on for the research perspectives on this, but what's your take about where we are and the general situation we face in the consumer side?

Neil Barbour

Yes. So we cover a lot of connected devices from a shipments and installed base perspective, mapping out the trajectory of items like smart TV, streaming media players, smartphones, game consoles, revolving around this idea of delivering Internet streaming video to consumers, but also spreads out to this broader landscape of interactive home entertainment. And one of the primary things we saw happening is after a big pull forward of demand into the pandemic, once you account for supply chain, there was still a big uptake in device ownership once consumers could finally get their hands on those items.

There seems to be a flattening of demand in the near term. So we're sort of looking at things like device saturation, a certain amount of fatigue. There could be some uplift as inflation eases over the near term, but markets like North America and Western Europe, particularly for those core devices, and I'm thinking of smart TVs and smartphones, there's not a lot of big uplift there.

Eric Hanselman

So maybe some market softening maybe to an extent driven more than maybe some of the economic concerns that we've seen in the broad market.

Neil Barbour

Yes, that's right. And these -- particularly when you look at North America, that's where you have your concentration of early adopters and tech enthusiasts and not to mention that there's a really strong purchasing power in that market.

Eric Hanselman

And we've got a new iPhone to get people going, right?

Neil Barbour

That's exactly right. So the one thing we want to keep in mind over the next 18 months here is that there's going to be -- particularly from some of the larger vendors, and I have Apple in mind here and Alphabet is not far behind, is this foot on the gas for the on-device gen AI upgrade cycle. And we saw some of that yesterday from Apple during their event announcing the iPhone 16.

But what we want to really focus on right now, particularly in that 18-month story, is how much the on device is really going to be able to do. So during that presentation, you saw them demo a couple of things, and they were a little vague on the time line of when certain features would be rolled out. And I believe the wording was even when Apple Intelligence goes live next month, it will still be in beta.

So you're definitely going to see an ad campaign around some of these features. The question is whether they're going to manifest themselves as killer apps in the near term. And we're not particularly bullish on gen AI in the late 2024, 2025 time frame. We think they'll still be figuring out how to really push those features to consumers in a way that will drive the upgrade cycles.

Eric Hanselman

Well, we've seen this push all across end-user devices, right? We're now living in the age of the AI PC, however you want to attempt to define that. And it sounds like the point you're making is that the device manufacturers want to be able to push the idea that you need that whatever AI capacity is in the device and with an expectation that that's going to help drive device sales and maybe lift them out of, I guess, some of the lag they're seeing so far.

Neil Barbour

Right. And it's going to be an early adopter story. When you mention AI PCs, a lot of the consumers that are buying into that device class right now, they're paying a pretty hefty premium to do so in many cases. And perhaps on some level, they're doing so for things like battery upgrades or buying into the ARM ecosystem in general, which is Qualcomm's push into the AI PC. But when you look at Apple, they're not necessarily raising prices on this next class of iPhones just to buy into the gen AI era, the Apple Intelligence era, but iPhones themselves are premium devices and are priced above a lot of the other markets.

So it may be by the time some of -- they get some of the gen AI features ironed out, and I'm thinking of things like image manipulation, image generation, text editing, a better Siri, a better digital assistant. By the time they get those straightened out, perhaps some of those features will be able to filter down to the $500 phones or the $400 phones instead of being stuck at the $900 phones right now. So I mean there certainly is opportunity for the device vendors to improve revenue and margins. It's just not clear whether there will be a significant bump on shipments in the near term.

Eric Hanselman

I guess this is somewhat high end. And it sounds like what you're also identifying is that at least in the near-term, 18-month outlook, that -- I guess, what many have been identifying as the AI forcing function may not be that huge driver that everybody seems to be ginning up enthusiasm for, at least in terms of broad market impacts.

Neil Barbour

Right. Look, and it's hard to compare this to other previous movements in the market. Gen AI doesn't really operate like a ton of things that we've seen before. So when we sort of hold it up to other eras of forcing an upgrade cycle, it's not necessarily like you can look at this as comparable to the beginning of the smartphone era or the rollouts of certain GPS functionalities or anything like that.

So the proof of the pudding is in the tasting, so to speak. So when these functions come to market, consumers will respond how they'll respond. So it is hard to forecast for, but at this time, yes, we're not really seeing the -- we don't have baked into a lot of our forecast a big lift for AI.

Eric Hanselman

The AI pixie dust should be lifting all boats, right?

Neil Barbour

Right.

Eric Hanselman

Well, this is an interesting situation we find ourselves in right now, which is that we've got what is this huge wave of interest. And though, as you're pointing out, right now, on-device capabilities aren't a gating function for any of the meaningful capabilities that are out there, you've got the various collections of AI assistants and chatbots and things of that nature that can work just fine with the device infrastructure that we've got right now and the device capabilities that exist for most folks today.

Neil Barbour

That's right. Yes. And I would just mention that the Apple promise is to unify all of that power into one holistic platform, right? Like you don't have to be moving between different apps. Siri can drive the boat there. And your entry point into gen AI is just either talking to Siri or putting in some prompts or holding up your camera, so it can get details of the world around you. And from what we're seeing right now, it doesn't necessarily look like they have that entirely mapped out.

And then if you look over at what Alphabet is doing with the Pixel phone, it seems like what you're describing with the diffusion of gen AI across multiple apps is not really unifying that experience or making anybody's workflow or entertainment experiences all that easier. It's just making them -- adding extra clicks to things you might do anyways.

Eric Hanselman

Multiple different interfaces for multiple different things, so clearly, there is some benefit to having a manager of your AI environment in some form or fashion, although we'll have to see how people react to the idea of one Siri to rule them all. Time will tell.

Neil Barbour

Right. And I suppose the other -- the benefit of on-device gen AI is that you would have some level of privacy that you wouldn't have if you had to share your data with a large language model by sending it up into the cloud and then having it come back. And Apple, as they usually do, is -- are hammering away at their abilities to keep your data safe.

So -- and any on-device AI will be able to make that claim on some level. Whether or not they can bear that out or that's important to the average mass consumer, I mean, again, there are a lot of -- there are more questions than answers over the next 18 months. And we're hoping that this story will firm up in the 2-, 3-year period, by which point maybe replacement cycles have normalized anyways.

Eric Hanselman

Well -- and again, we're still seeing these various aftershocks that ripple through the markets for these various sets of impacts. I think we're still riding what is that set of resonances that are still coming out of the pandemic on a certain level, just in terms of refresh cycles, getting back to tech adoption patterns, a lot of things that are still causing a set of oscillations that may shake out. Chuck a handful of global elections into all this, and it makes for choppy seas.

Neil Barbour

Yes, exactly. And previous catalyst of driving an upgrade cycle, and I'm thinking specifically of maybe the smart home unification of devices where perhaps your smart TV or your smartphone would be a controlling factor for your lights or locking your doors. That didn't really happen for the mass consumer or at least it hasn't happened yet, and it's languishing in, I don't want to say a disillusionment trough, but there's a persistent cycle in tech like this, and I don't think I'm breaking any new ground here by saying stuff like this can be overestimated in the near term and underestimated in the long term.

And so there will be need to be a sea change in not only the technology itself and the sort of advantages it can provide, but also in user behavior and expectations. Certainly, Apple is going to help with that with a pretty big marketing campaign here over the next year, but we'll see how that settles out.

Eric Hanselman

Well, you raised an interesting point there about the rest of that consumer device ecosystem because we actually got into a conversation with Natalie Colakides and Mo Hamza a couple of episodes ago that was talking about home bandwidth access and the fact that, yes, there aren't these heavy-duty, bandwidth-consuming use cases today. But as the density of connected devices continues to grow, once we've got various home appliances, various home automation elements that are starting to kick this up, whether or not it happens to be the regular appliance market, home security, all that -- a whole collective set of things, there is that just incremental increase in the need for bandwidth within the home itself. But as you're pointing out, this is a long-term trend, but it will have influence over the long haul in this.

Neil Barbour

Yes. I think that's a great point, particularly for smart home goods, if they're going to be embedded as deeply as your refrigerator or your dishwasher. Those are not items you replace every 2 to 4 years. Those are items, if you're able, you wouldn't replace for 15 to 20 years, but you probably replace something more like a 10- to 12-year cadence. And perhaps it is even more severe than that where smart home truly has to be built into the home from the bones, from the ground up as you build a new home. And now you're talking perhaps a 30-year story.

And that can be particularly challenging, again, in markets like North America and Western Europe where population growth and broadband home growth isn't growing at a staggering rate. In fact, it's more or less flat. But if you start to look at APAC, and I'm thinking in terms of population growth, countries like India, perhaps the Philippines, and then for broadband subscription growth and broadband penetration, countries like China and Japan are making significant strides over the next 3 to 5 years, you start to see a pretty massive addressable audience come online for these connected devices. And that's where we're starting to look -- when we put our forecasts together, that's where we're starting to look at the growth opportunities.

Now if, let's say, 100 million, 200 million home -- broadband homes come online in APAC over the next 5 to 10 years, not every one of those are going to rush out and buy a smart TV or a streaming media device or an AR/VR headset, but there's definitely going to be, again, a massive opportunity for vendors to address this emerging class of consumers.

Eric Hanselman

Well, there are markets that are large enough that even a handful of percentage points in terms of adoption make a really big difference.

Neil Barbour

Yes. And there are other challenges, too. Part of the reason why streaming media devices and smart TVs were able to get a lot of traction, particularly in North America, but to a lesser extent, Western Europe, is that, again, the purchasing power is so strong in those markets that they are able to target advertising opportunities that defrays the cost of the device that the vendor then hopes to make up for in selling ad inventory on those platforms later.

So you sell someone a smart TV for $300, maybe it costs $400, so what you expect to make at least $100 over the lifetime of that consumer by serving them ads on -- when they turn on the TV, there's a home screen that they have to wait through, and sometimes they get pieces of the ad inventory inside of streaming services that run on top of the platform. Those opportunities might not be as robust in APAC right now. But as you're saying, that percentage points of an addressable audience, vendors are incentivized to find ways to get to those audiences and get that money and build that addressable market for when the advertising opportunities do emerge, then they're the boots on the ground that are getting that money.

Eric Hanselman

So what do you see as some of those drivers for that evolution? Clearly, ongoing digitization is a big part of that. Are there particular aspects that you're looking into?

Neil Barbour

In terms of better streaming advertising opportunities?

Eric Hanselman

Technology in general. I mean the streaming advertising piece is -- again, that's one of those questions about what's the overall value of the consumer market in terms of the attractiveness of being able to drive ads. Ad-supported streaming presumably in Asia Pac, again, still has the potential to be strong. But I think what you're trying to identify is it's still relatively early in that process.

Neil Barbour

Yes. I see what you're saying. Yes. And I think that many markets in APAC are still strong multichannel. They don't have the take rates that North America and Western Europe have, but they're -- increasingly, though, streaming is becoming more and more important to those APAC markets. And so consumers are going to gravitate toward Internet video one way or the other.

And so there -- vendors are going to be incentivized to meet the consumers where they're going. And how -- the ways they're going to do it is that they're just going to use more efficient components inside of the televisions. They're going to perhaps rely more on vendors in the region, thinking of Xiaomi, can better feed India hardware than could North America in many cases. So there are ways to get around what is maybe some of the existing pricing challenges for -- to serve the mass markets in, say, a country like India.

Eric Hanselman

That's interesting. Well, a lot of these topics are going to be coming up in a webinar that you're going to be part of as we start looking into the next couple of weeks. We'll actually be covering a lot of this.

Neil Barbour

Yes, that's right. Again, we're going to try to walk through in a little more detail what we're thinking of each of these devices that we cover. I would also underline that we have -- we are looking at devices like AR/VR headsets.

If you're thinking particularly in North America and Western Europe where those vendors are saying, well, we can't sell as many phones as we used to because we are -- we have pretty much sold a phone to everybody who lives there, and we're just living off of replacement cycles. We need to find new devices and new opportunities to push new users into the ecosystem, you can see a vendor like Apple say, well, why don't we try an AR/VR headset and see what it does, perhaps with the intention of looking down the road and saying, smart glasses may be our final play here.

But what's interesting is that we have a survey in the field earlier this year asking engagement with AR/VR headsets, and we saw that APAC was vastly more engaged with AR/VR than Western Europe or North America. So there seems to be disconnect between what vendors are serving right now and the mixed reality era, Apple Vision Pro, for instance, is now a $3,500 headset. Well, that's barely affordable for most people in Apple's core markets, much less in a lot of APAC markets. So as they bend that affordability curve back down, there could be a massive opportunity for some of these emerging devices to really pop in APAC.

Eric Hanselman

Interesting. Well, we keep hovering on the edge of what is that upswell in AR/VR tech adoption. They're getting to be more and greater levels of utilization. We start to see -- certainly finding a lot more application outside of consumer-only applications, so starting to push that way. Interesting, though, to see that in Asia Pacific, there's such a strong indication at the outset.

Neil Barbour

Yes. And what's interesting is we're also seeing some markets in APAC, and I'm thinking of China, in particular, making the transition from what was classically a very mobile-focused gaming population into higher-end gaming, by that, I mean PC and on-game consoles. And we see that in action right now, a game called Black Myth: Wukong, which was developed in China with Chinese consumers specifically in mind. And anecdotally, we're seeing a lot of increased console sales and excitement around this game, so it could be a catalytic moment in Chinese console gaming. And as we see some of that brain trust be pulled across to other platforms, potentially AR/VR and the metaverse, that opens up new potential sales vectors for these connected devices in APAC.

Eric Hanselman

And coming at a point in time where North American and European console sales, at least I think we can safely say, have been softening somewhat.

Neil Barbour

Yes, that's right. And perhaps a little paradoxically, that is also an effect of game consoles being somewhat prohibitively expensive even in their core markets. At this time, we would normally have seen a price cut on a device like a PlayStation 5 after being in the market for 3 or 4 years. We haven't seen that just yet. The PlayStation 5 Pro was announced yesterday at $700. So it's -- they're kind of going in the wrong direction there, but I suppose as -- if...

Eric Hanselman

Technology should get faster and cheaper, right, except in consoles.

Neil Barbour

Except in consoles, right. I imagine if they see a truly mass market opportunity that they could bend back toward the traditional model of selling consoles at a steeper loss or at least the specifications of a console, so that it can hit a broader base of consumers and then making up more of that money on the software sales thereafter.

Eric Hanselman

I mean this is something where, in the gaming industry in general, we're also seeing a little bit of slowdown. Interesting to see sort of where this all shifts and how this starts to move forward, right?

So if you think about some of those impacts on the Asia Pacific side, it sounds like there's potential uptake, both on the gaming side, a shift in what's taking place in transformation of the consumer device side, a set of things that, from Asia Pacific, make it all that much more interesting.

Neil Barbour

Definitely. I would note here that on the smartphone side, some of the uplift that we're seeing, particularly from broadband subscriptions -- that's not really in play there. Your cell phone doesn't run on a broadband subscription necessarily. It often runs on a mobile subscription. So some of the population growth should help that device segment over the forecast, but at the same time, APAC is also suffering from some of the saturation issues that plagues the North American and Western European markets, that is to say that most people already have a cell phone. And that's where vendors are really going to wrestle with, what can we do to bring more features down to $100 phone to force upgrades and feature phone markets, of which there are still a few in APAC, and what can we do to turn a 3- or 4-year upgrade cycle into a 2- to 3-year upgrade cycle. And that's probably where gen AI slots in as the...

Eric Hanselman

I was going to say the answer, of course, is AI.

Neil Barbour

Yes, is gen AI.

Eric Hanselman

Well -- but in all seriousness, it is. Talk about new functionality, some of those drivers that are going to push a shift towards higher-performance devices. There are a lot of attractive options that could be coming out of the -- that AI transformation.

Neil Barbour

Agreed.

Eric Hanselman

Interesting things. Well, a lot to chew on in terms of where both the market and the technology is headed. And once again, I'll remind our listeners about the upcoming webinar, and there'll be a link in the show notes, but appreciate all the perspectives on this, Neil. This has been great. Thanks for being back.

Neil Barbour

Great. Thanks, Eric.

Eric Hanselman

And that is it for this episode of Next in Tech. Thanks to our audience for staying with us, and thanks to our production team, including Sophie Carr, Feranmi Adeoshun and Kyra Smith on the marketing and events teams, and our agency partner, The 199. I hope you'll join us for our next episode where we're going to be delving into financial technologies in tech, looking at the business side of some of the payments activities that's taking place and the technology behind it. I hope you'll join us then because there is always something next in tech.