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In the October Vanity Fair, the magazine offers us its list of “New Establishment” leaders. In the entry on Steve Ballmer, the magazine whacked the Microsoft (NASDAQ:MSFT) CEO for what it felt was a bad call:

BROKEN CRYSTAL BALL: Three years ago Ballmer proclaimed, “There’s no chance that the iPhone is going to get any significant market share. No chance.” (The iPhone is now the No. 2 smartphone, with a 28 percent market share.)

Meanwhile, Outside the Manhattan Vortex…

Not defending Ballmer, but the editors at Vanity Fair would have done well to ask “market share of what, exactly” before taking the Head Microsoftie to task. Assuming Mr. Ballmer was talking about global handset market share, Vanity Fair‘s editors are wrong to spank the Monkeyboy. For if said editors would teleport themselves ever-so-briefly off of the island of Manhattan, they would find that the world is not made up of iPhone-toting fashionistas.

Take a single, very large example. In China, the largest mobile phone market on the planet, a mere 400% larger than the U.S., smartphones make up well under 10% of the market, and as of the Summer Apple’s (NASDAQ:AAPL) share in China was less than one half of 1% of the total installed base, even after three years of grey-market and nine months of “legitimate” iPhone sales. In China, at least, Ballmer is right.

But does Apple really care about market share? What Vanity Fair and Steve Ballmer both missed is that even if Apple owned only 5% of the global mobile handset market, at a retail price of $300 per phone that’s something like $15 billion per year.

They are not alone. What many people miss in the growing battle between Android and Apple is that Apple, as it did when it introduced the Macintosh in 1984, has made an implicit decision to capture and hold the high end of the mobile devices market, and ignore everything else. (Before we go any further, for the sake of full transparency, Motorola (MOT) is one of my clients.)

Leadership is Overrated

In light of the evidence, one can hardly blame them. Ericsson (NASDAQ:ERIC) watched its onetime market leadership wither as it failed to pace consumer tastes, leaving the company a shriveled rump of a joint venture with Sony (NYSE:SNE). Motorola, once the leader of the market it created, watched its mid-decade quest to build market share on the foundation of a halo product founder as the halo (the RAZR) slowly tarnished.

And today, Nokia (NYSE:NOK) is finding that the demands of sustaining global share leadership are incompatible with the challenges posed by a changed industry. Nokia may sell more phones than any other company, but it has found the rewards of that title increasingly ephemeral.

And so Apple has decided not to try to be the largest mobile device company in the world, but the most profitable. We should not expect from Apple a line of iPhones so much as we should expect successive generations of innovative devices.

These Are the Droids You’re Looking For…

As a part of that decision, Apple has chosen to be a company that plays to developed, wealthy markets and wealthy niches within developing markets. The iPhone is not The People’s Phone. Never would the company consider the bottom or middle of the world’s income pyramids to be a market for anything it produces. Apple makes powerful, pretty devices for the prosperous. Full stop. (And there is nothing wrong with that: just ask an AAPL shareholder.)

For that reason, Apple’s “leftovers” constitute a growing market: legions of users who want access to highly portable, customizeable, low power devices that provide easy-to-use wireless access to the Internet, services, and entertainment, and yet cannot afford the cost of entry into the Apple ecosystem.

And I would argue that this market needs the power of an iPhone-type device more than the global Beautiful People who can afford one.

Enter the Androids.

Over the past year, Motorola, Samsung, LG, and HTC have already introduced Android devices that retail below RMB3,000, and once local manufacturers have access to capable yet inexpensive components, that price will fall quickly. Kaifu Lee, CEO of tech investment house InnovationWorks, predicts that Android devices will be available for RMB1,500 in 2010, and for RMB750 in 2011.

These are tipping-point prices that will begin to push mobile Internet-enabled devices into the hands of a far wider part of China’s population. They are not price points that Apple looks prepared to play in. In all likelihood that means that there will be many more Android devices in the market than Apple devices. That is going to be fantastic for the Android device makers, a life changer for China’s consumers, and it is going to be very, very good for Apple.

Amateurs talk about Share, but Professionals talk about Margin

So the argument over market share is banal and irrelevant, and predictions of Apple owning a share of the China mobile market comparable to its position in the U.S. is so much sky pie: through pricing and positioning Apple has strategically ceded a massive chunk of the market that it helped create, and is indeed seeding demand for Android products across a wider market.

For these reasons, the determinant of success for Apple or any of its competitors in the China smart phone market is not share, but rising profits, growing sales, and happy consumers. Those things are a lot harder to call and cannot be reduced to a single hard figure, but they are much more relevant, especially when the rate of market growth for smartphones continues to grow itself.

Remember that, Mr. Ballmer. And you, too, Vanity Fair.

Disclosure: Motorola (MOT) is one of my clients

Source: Why Apple Is Leaving Room for Android in China