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Summary

  • Bears have pointed to the iPhone's declining market share as a reason to short Apple.
  • The Mac provides a good comparison to the iPhone due to it's premium pricing and history of low market share.
  • While the PC market is barely growing, the Mac is growing both its market share and unit volume.
  • This is due to Apple's strong customer loyalty and ecosystem.

Much has been made of the iPhone's declining market share over the past couple of years. Currently, it hovers around 15%, and it looks set to decline further in the coming years. However, the absolute number of phones sold year over year continues to rise, with Apple selling 35.2 million iPhones in Q3 2014 compared to 31.2 million in Q3 2013.

Apple bears point out that this growth is less than the growth of the general smartphone market, (which is set to grow about 20% in 2014 according to Fitch). They imply that this will led to big troubles for Apple once the market is saturated, arguing that if the general smartphone market starts growing far more slowly, iPhone sales will start going flat, or even start to decrease, taking even more of Apple's market share with it.

However, this isn't necessarily true, or even the norm for Apple. Even in a market that isn't growing, a company can grow their own market share within that market. This can be seen in how the Mac actually started growing both their market share and absolute units shipped year over year after the PC market started growing saturated, as seen in the chart below.

This can also be seen from worldwide shipment data via Gartner. Apple grew its shipment market share from 9.9% to 13.7% in from 2012 to 2013. According to IDC, PC sales actually fell by double digits in 2012.

The Mac line has still managed to see tremendous growth even in the face of single digit growth in the PC market. I believe this will remain true for the iPhone as well, due to the same reasons the Mac managed to gain market share;

Customer Loyalty

Apple is the beneficiary of tremendous loyalty from their customers, with most users being tremendously passionate about Apple. The devotion that Apple users possess to the company is fairly famous, with Leander Kahney having written a book about the subject. This book was pre-iPhone. It helps to explain why the Mac did so well once the PC market's growth started slowing down.

By and large people who owned Macs, were staying within the ecosystem and upgrading their Macs. On the other hand, many people who owned other Windows computers from other companies, such as HP (NYSE:HPQ) were not as loyal to their company, and switched to Macs. This lead to an increase in market share and units sold for the Mac. This could very easily happen for the iPhone as well. A recent survey showed that 76% of iPhone users were planning to stick with their phones vs. 58% for Samsung (OTC:SSNLF), which came in second place. The strong customer loyalty that existed for the Mac exists for the iPhone. There is evidence that people are already switching over to the iPhone as well, even with their market share erosion; in the Q2 conference call, Tim Cook stated that "Additionally, over two-thirds of people registering an iPad in the last six months were new to iPad, while over half of the people registering iPhones were new to iPhone." It stands to reason that a great many of the people new to iPhone switched from Android or Windows Phone.

Ecosystem and Halo Effects

Mac sales also benefitted from the strength of the overall Apple ecosystem. People who bought the tremendously popular iPhone and iPad often also bought Macintosh computers.

In this way, Apple's success in some areas of their business leads to success in other areas of their business. Apple has tens of billions of dollars in the bank, has spent over 4 billion dollars on research and development last year, and has a long history of successful product launches. Due to these three reasons I'd say they are most likely going to have products that are fairly successful in the future. These new products will drive sales in other areas, such as the iPhone. Currently, it's all but confirmed that Apple has two new major products in the pipelines; the iWatch and the iTV. Both of these products could drive sales of Apple's iPhone, and the iPhone could drive sales towards them as well.

Of course, the halo effect Apple's products enjoy is just the icing on the cake. Apple's ecosystem is already very strong, and the cult following Apple has will be the primary driver of market share growth in the future.

Conclusion

Market share is important to an extent, and Apple is a master of finding the balance between profits and market share. They stuck to producing high quality devices and selling them for high prices when the PC market was growing, and this strategy continues to pay dividends today when the PC market is stagnating. As of 2013, Apple made around 45%, of the total profit in the PC market (though this doesn't include the profit Microsoft (NASDAQ:MSFT) makes from Windows sales - just hardware manufacturers). The iPhone will likely continue to lose market share, but what's important is that the units sold year over year and the profits continue to grow. Eventually, this will result in market share gains as well, as it did for the Macintosh.

Disclosure: The author is long AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Why The Mac Makes Me Confident In The iPhone's Future