How the smartphone is killing the PC by Brian Arthur

The smartphones in our pockets are far more powerful than the desktop computers we dreamed of in the 1980s. This year they are outselling PCs – and soon they could replace our wallets as well

Smartphones allow you to do almost everything a PC can do – and make calls as well. Photograph: Alamy

When he was diagnosed with Type 2 diabetes last summer, Tim Smith was given a blood sugar monitor, and a notebook with a pencil. The monitor, obviously, to test his sugar levels; the notebook to note them down so he could tell his doctor.

Given his job in IT for Sainsbury's, Smith wasn't about to use something so low-tech as pencil and paper. "I would have lost it or torn it," he says. A few years ago, he says, he probably would have taken the readings and entered them in an Excel spreadsheet on his PC, to make pretty graphs.

But this was 2010, and so he turned to his smartphone, and quickly found an app – Glucose Buddy – that let him take his readings anywhere he liked. They'd be uploaded to the internet, so he could access them any time. Graphs? Of course. Alarms to remind him to take a reading? If he wanted. Advice on diet? Available for a cheap upgrade to the free app.

Smith is just one of the millions of people around the world who now own a smartphone, and the number is growing rapidly. In the first three months of this year, just under half of all the 45m mobile phones sold in western Europe fell into that category – able to browse the web, send and receive email, and run custom-written apps. That's as well as storing contacts and calendars, sending text messages and (how quaint) making phone calls. Worldwide, smartphones represent 24% of all mobiles sold worldwide between January and March – up from 15% a year before. The tipping point when they make up 50% may only be a year or so away. And before the end of the decade, every phone sold will be what we'd now call a smartphone.

Smith's use of his iPhone is typical of the way smartphones are used: to connect to the internet, hold data, run programs, organize our lives. They're fast replacing what we perhaps wrongly thought was an embedded part of our lives: the PC. Notice what Smith, an IT professional, didn't do: he didn't use a PC, and he didn't fire up Microsoft's Excel spreadsheet program. That's indicative of a huge shift that's coming to computing, and was behind Microsoft's $8bn splurge in May when it bought the Skype internet telephone service, and behind the rumors that Microsoft is going to buy Nokia, the Finnish company that makes the most mobile handsets and smartphones.

In this shift, there was an earthquake at the end of 2010. PCs had always sold far more than smartphones (which only date back to 2003 or so). In the first three months of 2010, 85m PCs were sold worldwide, compared with 55m smartphones. Optimistic analysts forecast that the crossover might happen in 2012. Instead, by the last three months of 2010, 94m PCs were sold – and 100m smartphones. Analysts believe that this trend will never reverse. (It continued in the first quarter of this year: 82m PCs, 100m smartphones.)

"Smartphones will keep growing in sales approaching the billion-plus levels of total handset sales before this decade is done," says Tomi Ahonen, a former Nokia executive who now has his own mobile industry consultancy. "The trend of PC sales is stagnant or at best modest growth, selling around 300m per year."

Microsoft is concerned about what is happening with mobile, because it knows it is the future, and threatens the two PC-based monopolies – Windows and Office – that have earned it billions over the past couple of decades.

The change that smartphones bring is computing power in the palm of our hands or in our pockets. It is internet connectivity almost anywhere on earth. That's going to have profound effects. Horace Dediu, another former Nokia executive who now runs the consultancy Asymco, says: "Besides being powerful, they're going to be ubiquitous. Not only in the hands of nearly every person on the planet, but also with them, or by them, all day long. They will be more popular than TVs and more intimate than wallets."

They're going to do far more than wallets (although they can already serve that function: a system called NFC, for Near Field Communications, is being built into smartphones and will let you pay for small items with the press of a button). All the things you can now do with a smartphone would have seemed like science-fiction only a decade ago: translate signs, translate words, take voice input and search the web, recognize a face, add another layer to reality showing you the quickest way to a tube or restaurant or the history of your immediate surroundings, show you where your friends are in real time, tell you what your friends think of a restaurant you're standing outside, show you where you are on a map, navigate you while you drive, contact the Starship Enterprise. Well, perhaps not the last one. Even so, "A smartphone today would have been the most powerful computer in the world in 1985," observes Dediu. In fact, today's phones have about the same raw processing power as a laptop from 10 years ago. And every year they close the gap.

The element of personalization and intimacy takes smartphones beyond what we've had before. Our mobile phone used just to be a repository of our phone contacts, some photos and texts. Now it's our emails as well, our photos, our Twitter and Facebook accounts (and, by proxy, friends), plus all those apps and games that we've downloaded to give it our own personal experience.

Yet ironically these new, more powerful phones are more not less disposable than the "feature phones" they are replacing. Ten years ago, if your phone was stolen, you faced a nightmarish fortnight trying to get your friends' numbers into your replacement phone's address book. As for the photos, videos, games and ringtones (remember ringtones? Record companies do, wistfully) you had stored? Gone for ever.

Not so nowadays. The other week a friend had her iPhone stolen from her hand as she walked down the street. After a brief attempt to catch the thief, she wiped the phone remotely from her computer. Then she called her mobile carrier and reported the phone stolen. The next day she picked up a fresh one and installed all her old apps, emails, contacts and photos on it. Within a few hours, she was back at status quo ante. See if you can manage that if your PC is stolen or its hard drive dies.

Smartphones' really dramatic effect though will be on people in developing countries, where electricity supplies may be expensive or discontinuous, and the cost of a PC prohibitive, says Carolina Milanesi, who studies the mobile market for the research company Gartner. "Look at what a difference internet cafes have made in developing countries. Now imagine everyone having that capability – surfing the web, having an email address – in the palm of their hand." And even the thirstiest smartphone only needs charging once a day, and consumes less electricity than a PC. Says Ahonen: "The mass market consumer will increasingly find the smartphone is 'good enough' for most PC types of uses – similar to how the camera phone was good enough to replace most cheap consumer cameras, and the clock on the phone replacing wristwatches, and so on."

Some might doubt the economic benefits of the smartphone in remote lands. But even normal mobiles can make a huge difference. For example, ocean fishermen in Africa discovered they could phone ahead to coastal markets to find the best prices for their catches. Imagine an app that fed that data directly to their phone: the benefits would multiply for a comparatively small extra cost. And that's before you start thinking about using them for healthcare. For Smith in the UK, uploading his blood sugar levels is a convenience; in a country where medical help is a day's trek away, it could be a lifesaver.

For that reason, Milanesi suggests, PC penetration in those countries may never reach the levels it did in the west. You don't need a PC on your desktop when you have the equivalent in your hand. "People are still thinking that the 1.1bn smartphones that will be out there in 2015 will all cost $600 [£370]," she says. "But we'll get to 1.1bn because some of them will only cost $75 [£46]."

Or even less, suggests Ahonen: "If we take today's top phones with a 3.5in screen, 3G, Wi-Fi, 8-megapixel camera, full web browser – that kind of phone will cost $10 to sell profitably in 10 years. That means that anyone on the planet – even the poorest in Africa, Sri Lanka, Bangladesh, Bolivia, Paraguay etc. – if they can afford a $25 phone today, they can easily afford what we consider a top smartphone of today – and buy that as a new device – in far less than 10 years."

It's also much easier and cheaper to add internet connectivity over a mobile network than to build physical telephone lines: countries such as China and India with their vast and distributed populations have far more penetration of mobile systems than of fixed phone lines. That's part of the reason why smartphones – especially cheap ones based on Google's free Android mobile operating system, and made in their millions by "white box" firms – are taking off in those countries.

And that's where Microsoft gets edgy. For most people in the west its name is synonymous with computing: Windows powers at least 95% of all PCs. For every PC sold, Microsoft's finances suggest it gets $56.50 in revenue, and makes $39.90 in profit – because once it's made one copy of Windows, it can make 100m for barely any extra cost. That's the joy of monopoly.

But on mobile phones, Microsoft hasn't been able to get any traction. Its new Windows Phone OS, launched in October, was on 1.6m handsets out of that 100m sold, less than 2%. Its Windows Mobile product sold more but is officially being shunted off into the shadows and hasn't been updated for two years.

Instead the dominant share belongs to Google, which gives Android away in return for providing its services – search, maps, access to apps in its "Market" (equivalent to Apple's App Store). It gets users for its search engine and adverts; mobile handset makers get a free, flexible product. Android now powers more than a third of all smartphones sold from various manufacturers, and the proportion is expected to keep rising. Google expects searches from mobile to exceed searches from PCs in 2013 – though that might happen sooner.

Yet Nokia, which kicked off the smartphone business with its N9000 "Communicator" years ago, isn't thriving. The competition – from Apple at the high end and Android at the low end – is chewing up its business so badly that when Stephen Elop, a Canadian ex-Microsoft executive (previously in charge of the Office division), took over as chief executive in September, he decided that its software wasn't up to the job – and signed a huge deal to put Windows Phone on future Nokia smartphones. As part of the dowry, all those phones will use its Bing search engine; but it is to pay Nokia billions of dollars in return.

With the PC market showing early signs of a global slowdown, might this be Microsoft's salvation? The trouble is it might not yield much in the way of profits. Compared with that near-$40 in profit per PC, each Windows Phone handset license generates about $15 revenue. Profits? Not really.

In that context, Microsoft's $8.5bn purchase of Skype looks like a plan to try to capture revenues from future smartphone users who already use the service to avoid high overseas phone call charges. The fact that the Skype purchase had strong support from Bill Gates, one of the technology's true visionaries who can see the landscape some distance off, means that is probably a big part of the plan. Compared with the money from putting Windows on PCs, the money from Skype and Windows Phone looks like slim pickings. But it might be all Microsoft is left with. There's no guarantee, after all, that giant companies will continue to be so.

What does Milanesi think the effect will be on society of the broader spread of smartphones? The analyst becomes less effusive and more reflective. "I think we're becoming worse at communicating with people because of these devices," she says. "Look around a restaurant or coffee bar at how many people, couples even, are sitting across from each other and they're both looking down at their mobiles."

Of course you'd never dream of getting your chunky laptop out in such circumstances. But because your smartphone is smaller, more personal, its promise of new information is more seductive. And so we use it.

"There's a part of this that's useful, where you get information where and when you need it – such as maps or prices," says Milanesi. "But then there's also the aspect where my eyes are constantly diverted by a little screen. And we lose that human side of ourselves, which I think is quite worrying."

It's a strange vision of a connected world where we're all a little more disconnected. One thing is certain though: we're all going to have one.