While Rivals Jockey for Market Share, Apple Bathes in Profits 14 comments
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By MG Siegler
Market share is probably the easiest and most often used point of comparison between competing products. It makes sense: If something has a large share of the market, it’s probably doing well. But that doesn’t always mean that it’s doing better than something with less market share, especially from a business perspective.
I bring this up because Wednesday brought some very interesting numbers from the research firm, Strategy Analytics. According to them, Apple (AAPL) has surpassed Nokia (NOK) as the most profitable phone maker in the world. I’ll throw some numbers at you in a second to show why this is really incredible, but the key takeaway is that this is why, at the end of the day, Apple wins.
While the press and rivals obsess over market share, Apple quietly comes in and makes an insane amount of money. It’s the same in the computer industry. Small market share, huge amount of money. The most important thing for all of these companies is the bottom line. Apple wins that battle.
According to the report, Apple made $1.6 billion in operating profit off of the iPhone in Q3. Nokia, meanwhile, made $1.1 billion. Let’s put this in perspective. Recent numbers suggest Nokia controls roughly 35% of the worldwide handset market. Apple? About 2.5%.
Not 25%. Two point five percent.
Since the launch of the iPhone in 2007, just about everyone has been clamoring for more variety in Apple’s offering. People wanted iPhone minis, they wanted CDMA iPhones, etc. But Apple stuck to its guns and has basically sold one phone, which it could manufacture efficiently, when rivals like Nokia are busy peddling dozens. Sure, there are a few variations on the iPhone (included memory, and now the 3G/3GS), but basically, it’s one phone that is pulling in hundreds of millions of dollars of more profit than the market leader.
To people who follow Apple closely, this should be absolutely no surprise. It’s the same thing it does in the computer industry. Despite having a much smaller market share than its rivals, it makes more money than most of them. The key, of course, is that Apple maintains its high profit margins, while the competitors shuffle to battle each other for market share.
That’s not to say that Apple doesn’t care about market share for either its computers or the iPhone, it undoubtedly does. But it’s a secondary goal to running a successful business. A business which is now absolutely thriving in an awful worldwide economic environment.
If Apple wanted to boost its computer market share, it could do so in a heartbeat simply by slashing into its margins and chopping hundreds of dollars off its machines. That’s why those “I’m a PC” shopping commercials this summer were humorous. They’re attacking Apple for not competing in segments (low cost PCs) that it has absolutely no desire to compete in. Would those commercials be effective if Apple chose to sell a $500 MacBook? No, because Lauren probably would have bought it (remember, her first stop was the Apple store).
Most consumers obviously shouldn’t like the idea that a company is purposely charging more for its product to keep its margins high. But Apple has a winning proposition for that because it builds machines of such high quality that to many users it seems like they should cost more than they actually do. Or as Apple COO Tim Cook put it in a earnings call over the summer, “Our goal is not to build the most computers. It’s to build the best.” When you do that, apparently you can keep your margins high and in turn, make insane profits.
The iPhone is a bit different because Apple has a partner that it has convinced to pay it an insane amount of money for each device sold and then subsidize the cost of it for consumers. Remember that when the iPhone first came out it was $600. That’s the price Apple clearly felt comfortable setting for it to maintain what it thought was a good margin.
That price, of course, was ridiculous (though, admittedly, myself and plenty of others paid it). A few months later, Apple realized this too, and slashed a couple hundred dollars off the price, thus slashing it margins. But then they figured out a better way. Previously, they had been getting a cut of every monthly AT&T iPhone contract. But with the iPhone 3G, Apple decided to give all that money to AT&T in exchange for one upfront payment, and the promise that AT&T would subsidize the cost of the phone down to $199 (and $299). Jackpot.
So basically, Apple is now making a huge margin on every iPhone sold, while AT&T more or less picks up the tab. (Don’t feel too bad for them, they still make plenty on those monthly contracts.) Now you see why Apple doesn’t mind that exclusive agreement even while us consumers bitch to no end? There are 1.6 billion reasons why they like that deal (okay, probably some smaller percentage of that, but still).
And because Apple makes all of this money, they have money to pour into making that next great product. A product that will likely be high quality — and sell with a high margin. Hopefully some of that $34 billion in cash (with no debt) is being poured into finalizing the tablet as we speak.
This influx of profit also allows Apple to take the plunge into new markets, like it did with the iPhone. Earlier today, blogger John Gruber recalled what former Palm CEO Ed Colligan said when he heard that computers makers like Apple could enter the phone market:
"We’ve learned and struggled for a few years here figuring out how to make a decent phone,” he said. “PC guys are not going to just figure this out. They’re not going to just walk in.”
Not only did they walk in, they walked in, changed the landscape, and have what now appears to be the best business model industry-wide.
Just as with the computer industry, while all its rivals were busy jockeying for market share, Apple secured the high ground and figured out the best way to bathe in profits.
[images: Touchstone Pictures and flickr/jaci xiii]
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This article has 14 comments:
They just keep skating to where the puck is going.
"That’s not to say that Apple doesn’t care about market share for either its computers or the iPhone, it undoubtedly does. But it’s a secondary goal to running a successful business." Apple doesn't sell junk, period. They don't have a $300 Netbook, maybe out of flimsy plastic; they have a quality iPhone, that does most of what you'd want to do on a Netbook-- but fits in your pocket. And, they have a line of excellent laptops at various price points.
Apple has a modern, UNIX-based OS. MSFT had YEARS to update THEIR OS, and all they spewed out is Win 7: warmed over Win XP, with more eye-candy. None of the security or performance a UNIX-based OS would provide.
For example, I have a friend in college who only uses his laptop for Office, the Internet, and listening to music. Somehow he was (and is still) convinced a $2800 Mac was a great purchase. No other company can ever compete with a userbase like this.
People are sold on the notion that going Apple is a lifestyle change. Yes they're quality products, but that's not why Apple is doing so well.
Skating to where the puck is going... really it's again a matter of marketing. The iPod is another example of something sleek and elegant that provided no advantages over existing products (actually provided a disadvantage due to the proprietary nature of iTunes) despite a vastly superior price. But nobody had dominated that industry yet and cultureally penetrated it... and so people buying iPods had never even heard of MP3 players.
It's very similar with the iPhone although when ti was released it was definitely the superior product around. But people buying iPhones had never even heard the word smartphone before. Apple has competitors but it's customers aren't even aware of them. The culture that was built around Apple it was leads them to being able to pull of these insane margins, not the quality of the product (although of course it would have been impossible without the quality).
Computers and electronics play such a huge role in our lives, and Apple was the first (and still the only) company to successfully take the personal nature of laptops and phones and truly let people feel like they became part of their identity and personality and joined a counterculture. The only company I can really think of who genuinely tried to do this was Sony with the PSP.
And it's a sticky culture. iPods lead to iTunes and iPhones lead to the App store. Nothing goes through an Apple product without Apple getting a cut. But nobody complains because they don't want Apple to have competition. It'll never matter that they can't upload songs from their iPod to a Dell laptop.
A lot of you guys here focus on quality quality quality of the product to explain these margins but it's really not that simple. Maybe the adult Apple usebase is different, but being removed from college I got to watch this Apple culture exploded amongst my age group first hand over the past several years.
It's not a new mentality either. Clothing or sunglass company's profit margins have been based on the cultural penetration of the brand for a long time. It's just new to electronics and Apple is cleaning up.
When good design is combined with a warmly satisfying interface to generate cachet,
and sales staff who actually KNOW what they're selling are combined with incomparable support (the Genius Bars are not hyperbolically named) then
consumers are willing to pay more ... to get more.
My home network has an iMac (15 months old), an very old, single processor Dell desktop, and a 16" laptop "running?" Vista - a purchase I regret after less than 3 months. The iMac found, and seamlessly connected to my network (after asking for the WEP) 45 seconds out of the box; the Dell drops the link twice a day; and I've spent over 7 hours on the phone with Cisco trying to get around their inability to write an interface (for their own video cameras) that works with Vista.
I may have saved $450 by resisting Apple's 4 figure price - OK $999 - for its 13 inch Macbook, but I won't ever again underestimate the value of speaking face to face with Apple support in a local store compared to dealing with an ESL script reader in Mumbai, Bejing, or Manila.
On Nov 12 08:15 AM SusanGrisanti wrote:
> Apple has had 'First To Market' Advantage for decades. When a good
> product is consistent & first to market it usually has to do
> less to stay on top.
On Nov 11 01:11 PM Shaftsinker wrote:
> It's just brilliant marketing really.
Not really. It's providing a end-to-end ecosystem that makes it dramatically easier for the end user to do what they want instead of fighting to get the technology to do what it should do. This is the point that so many missed in the iPod story - and it sounds like you still don't understand it.
> The iPod is another example of something sleek and
> elegant that provided no advantages over existing products (actually
> provided a disadvantage due to the proprietary nature of iTunes)
> despite a vastly superior price. But nobody had dominated that industry
> yet and cultureally penetrated it... and so people buying iPods had
> never even heard of MP3 players.
The iPod was easier to use and easier to manage your music on. iTunes was easier to manage your music on your computer on. And iTunes Music Store was a brand new concept that again worked seamlessly with your iPod. It was a vastly superior ecosystem that allowed Apple to dominate the MP3 player market - one that none of their competitors has yet to approach 8 years later.
Ease of use is a significantly important feature. It completely explains the Flip Video phenomenon - low tech, but ultra easy to use. When you see hundreds of YouTube videos of 2 year olds using an iPhone because it is that easy and intuitive to use, it's a HUGE competitive advantage.
> Nothing goes through an Apple product without Apple
> getting a cut. But nobody complains because they don't want Apple
> to have competition.
Wrong. A) there are people who complain all the time (mostly tech geeks and journalists). B) most Apple users WANT Apple to have competition so that it keeps them from getting stagnant with their product. But Apple users are also so satisfied with their products that they would rarely consider moving away from them.
> A lot of you guys here focus on quality quality quality of the product
> to explain these margins but it's really not that simple. Maybe the
> adult Apple usebase is different, but being removed from college
> I got to watch this Apple culture exploded amongst my age group first
> hand over the past several years.
It's ease of use. It's lack of frustration. It's technology that doesn't interfere with you doing what you want to do. This is what sets Apple apart, far more than quality.
This is what "JUST" ignores:
brilliant world leading:
- sw and hw engineering
- bricks and mortar retail experience
- iTunes and Apps Store content delivery
- multitouch
- genius bar and telephone support
- Operating System
- mobile and Mac design
- leading edge tech intros
- malware security
- OS SDK
- and the upcoming iTablet will extend the advantage Apple has.
i've gone with hard core PC people to the Apple Store in King of Prussia, PA and every time it was a great experience for them and they bought an Apple product.
this is a company that knows what it's doing and is doing it superbly. It will 'live long and prosper' when some will not.
For a buy and hold stock investor in tech, Apple is certainly the safest investment. Yes, i do love Apple. It's made me a lot of $$ while i play games on my iPhone.
Steve.
So if you look at the smart phone market (not all phones) then Apple also has quite good (and growing) share.
I read a similar item a while back claiming that Apple had the lions share of over $1,000 laptops in the US.
This is Apple's good fortune. The message is not that they don't compete in the sub $600 market, it's that they have little competition in the over $1,000 market. Which would you rather be in?
Probably Sony should have been their natural competitor but Sony never really got established in the computer business. I think they didn't have a clear vision of what they wanted to be. Some time back I visited their sales office in Japan and we saw Unix workstations as well as all sorts of windows towers and laptops. So they definitely had their chance at that business.