So I think the most annoying and misquoted fact about smartphones is the infamous market share number. Some think that the high-end is being contested by Samsung (OTC:SSNLF), and Apple (NASDAQ:AAPL) is in heaps of trouble because of this fact. Others believe that Apple is absolutely dominating the high-end and is leaving no room for entrants into the space, which is … also a sad over-exaggeration.
Throughout the course of this article, I'm going to try and explore the topic of market share as objectively as possible. The business school argument is that higher market share will generally result in better returns on investment. But in the specific instance of mobile, perhaps having lower market share may still result in higher returns on investment.
Market share figures
In the United States almost every technology guru was talking about the impending doom of iOS as Android (NASDAQ:GOOG) continued to penetrate into the market. Heck, we even thought that the Samsung Galaxy S4 would be a substantial foe to the iPhone 5 and 5S (wrong).
With Apple's share price dropping substantially, everyone was mentioning Android's rising market share statistics as a way to detract investors from owning Apple stock. In fact, I couldn't recall an article that didn't mention Android's rising market share figure as an indication for further weakness in Apple's business. Of course, the "sophisticated investors" figured out that if people were willing to lineup for Apple iPhone launches, but not for Samsung Galaxy launches, that perhaps Apple must be doing something right. Of course that sounds almost rhetorical, or perhaps anecdotal, but it turned out that fanaticism was actually a pretty good forward indicator.
Android market share continued to climb in 2012 before it eventually peaked in November of 2012. Apple shareholders started to exit the stock in droves in Q3 2012, just as Android's market share was peaking. It was in the middle of 2013 where Apple's stock eventually bottomed out near a double bottom at around $380 to $400 per share. Android market share figures continued to decline throughout 2013, with iOS making consistent gains (United States).
In Q3 Apple's iPhone 5S product launch was a blowout. The fanaticism continued for iPhone and died down for Android OEMs in 2013. From July to December Apple's stock price advanced from $400 per share to $560 per share.
Market share forecast
Historically it has been shown that Android's market share eventually peaks at a very high number then drops substantially (based on U.S. data). In other words, Android's market share figure looks similar to a parabola curve. This implies that a quadratic function could be a great way to model Android's global mobile market share going forward.
The quadratic formula for Android's global market share figure is M(NYSE:Y) = -4.475(Y)² + 41.365(Y) - 11.775. The Y input is years since 2010 with the M output representing market share. The model has an R squared of .999 implying that the accuracy of the line is very consistent with the actual data. Using this quadratic model we can arrive at a Q3 2014, and Q3 2015 global market share forecast.
Note: 2010 to 2013 data is from IDC, the quadratic extrapolation is based on 2010 to 2013 data.
Since quadratic formulas are always curved I can only use the model to extrapolate up to two years. This implies that beyond a year or two, parabolas are almost always inaccurate, unless if used to model real world phenomena (perhaps the effects of gravity on a ball being thrown up).
I assume that market share will continue to grow to 83.18% in 2014 before it starts to decline to 75.13% in 2015. I believe Android's global market share will follow a similar pattern to the United States. At some point it will peak and then subside. I use a parabola to model this type of event because it's objective and it gives me an actual number to work with.
The decline of Android is pretty much inevitable as users rarely upgrade their mobile operating system to the latest version. Currently only 1.1% of users are on Android 4.4, which is subpar when compared to the distribution figures for Windows 8 (3.17%), and iOS 7 (74.1%).
This indicates that users have very little interest in the Android platform. This also indicates that Android's market share could be susceptible to Windows Mobile 8 or iOS. Android's durable advantage isn't driven by the power of its software, but more because of the marketing dollars that OEMs [Samsung, LG (NYSE:LG), Sony (NYSE:SNE) and HTC (OTC:HTCCY)] have spent in order to maintain or grow market share. This is partially why Samsung may move to Tizen and break away from Android. If in the event that occurs, Android's market share figure may fall even further than what my two year model suggests.
Mobile average selling price and market share
For the most part Samsung sells more than twice as many phones as Apple at half the price. This can be illustrated by the two graphics below.
At 80.356 million units at an average selling price of $300, Samsung generated $24.1 billion in revenue (Q3 2013). In comparison Apple at 30.33 million units with an average selling price of $650 generated $19.7 billion in revenue (Q3 2013). The actual GAAP numbers are slightly different, but close enough to be somewhat accurate.
Samsung's strategy is to sell more phones and to optimize profitability. Apple's strategy has been to sell fewer phones at a higher price in order to protect the quality of its brand. As a result Samsung takes 53% and Apple takes 56% of operating profit in the phone space in Q3 2013, according to Canaccord Genuity. Apple earns slightly more profit than Samsung with its premium product strategy.
In summary I believe that market share figures can be heavily misleading. Apple doesn't need a lot of market share in order to generate profitability. Even with limited market share, Apple has more operating profits in the phone space than Samsung. This is likely to continue as Apple has been able to gain distribution with NTT Docomo (NYSE:DCM), and China Mobile (NYSE:CHL).
Going forward Android's market share will decline due to historic patterns along with Samsung's rumored transition to the Tizen mobile operating system. Android 4.4 hasn't generated a whole lot of excitement, which further supports my expectation of falling Android market share by 2015.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.