Top Smartphone Operating Systems, Forecast Market Share and CAGR, 2013-2017
2013 Market Share
2017 Market Share
That is about one smart phone for every four of the projected 7.4 billion people on earth. Approximately 1.2 billion of those people will be under 9 years old and unlikely to be buying many smart phones, so the projection suggests a mature market by 2017.
In any event, taking it at face value, the question is "what does it mean for the key smart phone suppliers?"
In the case of Apple (NASDAQ:AAPL), IDC forecasts market share to be 17.9% in 2017, relatively flat to 2013. That share would translate into about 300 million iPhones shipped that year. With a very likely reduction in average selling prices (ASP's) to somewhere around $500 and a 35% margin rate, smart phones could contribute $52.5 billion to Apple's operating margin in 2017. Of course many Apple investors are accustomed to thinking of iPhones as more like $600 ASP devices with over 50% margin rates, and if that were the case iPhones would contribute profit margins of around $90 billion. Whatever your assumption, these are big numbers.
Windows phones are projected to have 10.2% of the market by 2017, or about 170 million devices. Microsoft (NASDAQ:MSFT) earns about $40 per phone so the contribution to Microsoft profits from the devices will be a relatively paltry $7 billion, nothing to sneeze at however, and probably about $6 billion more than Microsoft earns from phones today.
BlackBerry (NASDAQ:BBRY) is forecast to hang onto 1.7% of the market, or about 29 million phones. If these forecasts are reasonable, BlackBerry is likely to be a niche player but in all likelihood a profitable one.
The foregoing pretty well summarizes the conventional wisdom.
I think otherwise. It is useful to do a bit of sensitivity testing.
Suppose the fortunes of war shift a bit and I think they will. First, it is useful to point out that in August Gartner estimated Apple's 2013 market share for the June quarter was 14.2%, a fair bit below the 16.9% IDC has for the full year. IDC's own data for the June quarter put Apple's share at 13.1%.
Moreover, Apple has been steadily losing share in smartphones for some time now. Recent reports suggest iPhone shipments for the current quarter will fall some 6.2 million units from last year.
At the same time, Windows phone sales growth at 77% is outpacing the market growth of 51% and iPhone sales growth of only 20%. Let's have a peek at what happens if that trend continues through 2017.
Assume, for example, that the 2017 figures show Apple with 14% of the market and Windows with a similar amount. Apple would ship 240 million iPhones and at the $500 ASP iPhone revenues would be $120 billion. At the 35% margin rate the iPhone would contribute about $42 billion of margin. Windows phone sales would also be 240 million and with a $40 contribution per phone the added margin to Microsoft totals almost $10 billion.
Flat $40 per phone
Note: Dollar figures in billions.
However you look at it, Apple would garner the lion's share of the profits when compared to Microsoft. But if you look at in relation to today's situation, and consider how much better off or worse off each company would be than they are today, you might agree with me that Microsoft is the better investment.
In the quarter just ended Apple shipped 31.2 million iPhones at an ASP of about $585 for iPhone revenue of $18 billion. If you annualize the quarter you see Apple with $72 billion of iPhone revenue contributing (at an assumed 55% margin) almost $40 billion of margin. Depending on your assumption on market share and margin rates in 2017, and using mine for illustration, Apple iPhone contribution could range from $42 billion to $90 billion. For my money, the $42 to $52 billion range is the more likely outcome. These are pretty solid results, but in my opinion are already in the stock price.
For Microsoft, on the other hand, smart phone margins of $7 to $10 billion represent a substantial improvement and, unlike Apple, Microsoft does not depend on the smart phone segment for its income.
IDC has a forecast, but neither they nor you nor I can tell what the 2017 smart phone market will look like. We can just guess. As investors, we then put our money behind our best guess and wait and see.
The point is that market share matters, ASP's matter and margin rates matter. Apple is exposed to risk on each front since it lives and dies on premium pricing for what it considers to be a premium product in a market where - when you are talking of unit sales in the billions - premium prices are not within the means of most of the 1.7 billion consumers IDC expects to buy a smartphone in 2017.
Disclosure: I am long MSFT and short AAPL, both through options. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.