That is an astounding graph. I didn't consciously realize this till the example of Apple made it clear a few years ago, but market share is actually an unambitious thing to aim for. When people treat market share as a proxy for profit share, they're implicitly assuming all the competitors are roughly equivalent. But Apple shows that if your products are sufficiently more desirable than competitors', you can make market share and profit share diverge.
It’s very dangerous to use a single metric as a proxy for something else that is obviously related to it but not directly so. We see this here with market share and profit share. We’ve seen similar things like lines of code and productivity.
There’s an apocryphal story told about an IBM salesman. He was the sales leader year in and year out, selling almost as much as all the other fellows in his office combined. One day, his manager retires and Armonk sends out a hot shot MBA to run the sales team. The MBA summons the top salesman.
“I’ve been running some numbers. Your sales are very good, but you’re only averaging 1.2 calls a day. The other guys are doing 3.7 calls. Imagine how much you could sell if you could get your average up to 3.7!”
The sales guy realized he was going to have to train another manager. “Oh? I was wondering how much the other guys could sell if they did a better job of qualifying leads and got their averages down to 1.2..."
Market share is very important in one business strategy: de-facto standard platform and monopoly rents (see: Microsoft).
If you (or one of your competitors) is planning on playing "monopoly" then marketshare becomes an important metric... either you are aiming for dominant marketshare, or proving that your competitors don't have it. This is why, despite profits being more important, market share is viewed as so important.
They can only diverge so far though. For example, Apple needs a reasonably sized slice of the pie to maintain the App Store. If they had 0.1% of the market, there would be drastically fewer people willing to write apps.
I don't think people do treat market share as a proxy for profit share. You don't really need a proxy for profit share because it's easy to measure. And if market share is publicly avilable information, so is probably profit share. It does make some sense to treat market share as a proxy for market power, though -- business people do this all the time.
An alternative interpretation of the article is simply that Apple is targeting a more profitable segment of the market -- smartphones.
It happens to be the case that this segment has grown really fast and have both the highest margins and the highest total profits. This is perhaps not the case in most industries, which may be interesting.
While this is extremely positive for Apple, it isn't necessarily bad news for Google and Microsoft--their profits and losses simply aren't captured by this chart. It compares profit from a firm that makes both software and hardware with firms that only make the hardware.
As was noticed a long time ago on roughlydrafted.com (before it became a pure fanboi site without anything interesting to say), it's exactly the same in the PC market. Apple grabs something like 80% of the market in PC over 1000$, hence they grab almost all of the hardware margin; then Microsoft grabs most of what remains, and all PC makers are fighting over breadcrumbs.
Yes, but they're much happier making budget hardware, handing over the majority of their profit to Microsoft and fighting tooth and nail over bread crumbs than they would be otherwise. Gotta pursue your dream dont'cha know. It's a freedom thing. Also, even if they make a loss, they will make it back in volume. (since that appears to be their actual business strategy, whether to place sarcasm tags around the preceeding sentence is left as an exercise for the reader)
Small nitpick: roughlydrafted was _always_ a pure fanboi site with little or nothing of interest to say.
Apple went from 4% market share with 50% profits sometime in 2010, to 8.7% market share with 75% profits. Which seems to imply they are also making their devices, on average, cheaper.
Is this the start of them slowly adjusting their prices to grab some more market share? Especially now that they actually have phone models to serve multiple segments of the mobile phone market?
That was the iPod gameplan. By the time the Shuffle came out at $50 to compete with the $50 SanDisk stuff, they had already dominated every single price segment above that.
Remember, they still sell the 3GS. Those phones are old enough that they probably cost next to nothing to make, but Apple still sells them for a few hundred (from the subsidy).
Having the older 3GS and 4 also means they can pull in customer who wouldn't have paid the $200+ for the latest model. How much of Samsung's profit came from people buying their $0-$100 (on contract) phones? How much did that go down when the 3GS became free on contract?
They may not just be making more, but cutting into their competition in areas that were previously safe profit centers.
This reminds me of something mentioned in a (very interesting) lecture that hinted there is some deeper fundamental reason for apple's advantage. The clip is: http://www.youtube.com/watch?v=9RYXqCtsZsc (watch from 21:00 for the exact part).
It claims that Apple has some major advantage in terms of capital cost for the devices themselves. It mentions their chips but I don't see how they can have such a major advantage.
I'd love to hear if anyone has any insights into how they might be able to have radically lower costs.
He's talking about the supply chain optimization. One example is the dram chips used to build the iphone came from Samsung. They were sourced at quantities so large they are actually cheaper for Apple's iPhone than they are for Samsung's own phones. Streamlined products where the only segmentation is storage space make this possible. They can actually request such a large order their competitors can't match and get squeezed to the end of the manufacturing line while also paying more. To match they have to spend more. This hurts even more if your'e not controlling the distribution.
To the average non-techie all they have to decide is what color and storage size they want. This makes the device friendlier to consumers and takes away stress of understanding the hardware choices. The customer is actually happier if they don't have too many choices. People pay as much for this as they do the curated apps.
It’s worth pointing out that this isn’t profit share of the entire global market, but profit share of the space occupied by 8 competing phone companies. There is of course a lot to be gleaned from this chart, but I’d like to see the same with an ‘Other’ bracket too.
I wonder if the innovator's dilemma will apply here, with cheap Android phones (and Windows too) catching up with the iPhone and they can no longer charge a premium.
1) The premium is invisible at the point of purchase... the iPhone 3GS is free, and the iPhone 4 costs $99.
Where Apple seems to be getting its profits are in the prices paid by the networks. I'm sure Verizon would love to pay Apple the same rate for the iPhone that it pays for, say, the HTC Rezound. But if Verizon drops the Rezound from their lineup, no one will care. If they drop the iPhone, they're going to lose share, because a substantial chunk of those customers will slowly bleed off to AT&T.
And AT&T is not going to play hardball with Apple. AT&T has witnessed first hand what having Apple in your corner does to your marketshare, and they will not fuck with that.
2) Android doesn't actually have a price advantage. IPhones aren't more expensive to build than Android phones, nor are the licensing costs cheaper. Apple has strong supply chain and patent advantages here, matched perhaps only by Samsung.
3) Achieving parity with Apple is proving pretty difficult. Android has strategic innovations in licensing and openness, but Apple has strategic innovations in supply chain, battery life, credit card database, and design that are entrenched. Entrenched in that even if Google/Samsung put their organizational oomph behind matching them, it's not certain they would succeed.
Apple entered the phone market because the performance of the existing, fragmented system was so low that it essentially required a fully integrated solution (OS, phone hardware, cloud, application/media store) to repair it. The performance of "iPhone" was and continues to be significantly higher than the competition, leading to all of the industry's profits pooling to them.
The best angle of disruption now would be for higher performance individual solutions (i.e non-integrated components) to emerge that work together seamlessly (through defined standards).
From my perspective, it does not appear that non-Apple players have defined enough standards around each component such that consumers can easily move between various solutions (OS, hardware, cloud, app/media store) that could, on their own, be considered better than any of Apple's pieces.
Until that happens, I don't think we will see disruption. Trying to out-integrate Apple is probably not a wise competitive choice at this point. Apple continues to buy more of the value chain (e.g. Anobit), suggesting they believe more performance can be wrung out of an integrated system and help them maintain a significant competitive advantage across price, functionality, convenience and reliability.
probably not, because apple's primary innovation isn't technical, it's fashion. as long as apple can maintain the iPhone's position as a desirable fashion item they'll be fine.
I take any comparison between Apple and Samsung financials with a grain of salt. The two companies have vastly different reporting requirements and ownership/control structures.
To a lesser degree, this also applies to the other not-US companies listed.
It's also interesting how well Samsung has protected its profits.
Q4 2008 was the only time they really struggled, but their Android devices seem to have done well in gaining the share back quickly and protecting it well.
In Austria people take Android smartphones for free with their contracts but outside of a hardcore geek circles I have never heard of anyone paying up front for one. They are simply cheap enough to be a substitute for featurephones.
I know people earning less than 1500$ per month who pony up 300eur and 40 per month for an iphone.
At least here Apple has won the smartphone wars.
"As the iPhone's share of the market in terms of units shipped has grown from 3% in second quarter of 2010 to 8.7% last quarter, Apple's share of the profits has swelled from 39% to 75%"
Eyeballing the graph, it doesn't look to me like Apple's share of the profits was 39% in Q2 2010, more like 60%. Anyone else see this?
I cannot agree with this, at least not entirely. While it is a risky path to tread, historically market leaders have leveraged price to very great effect against newcomers, and newcomers have done the same to crack open closed markets.
See Hyundai, for example. For the past few years they have been leveraging price to gain entry to the North American auto business. It's working.
1., There is no such thing as a loss leader. If it doesn't make money, cut it. Apple TV is considered a hobby - but it is profitable. Yes, there is a grey area, but at Apple it is very small.
2., Your company runs on money, not market share. This has to be the focus. How can you guarantee the constant influx of enough money? Satisfied customers pay more, pay more often. The quick buck loses you money long-term.
3., Focus. You can't manage hundreds of products. you confuse your customer. Do a few things and do them extremely well. Makes it also easier to market, analyze, etc.
1., There is no such thing as a loss leader. If it doesn't make money, cut it. Apple TV is considered a hobby - but it is profitable. Yes, there is a grey area, but at Apple it is very small.
Pretty sure Apple itself contradicts this. Afaik, the iTunes music store was in fact run as a loss leader for some time, before Apple was in a position to argue for better terms. For all I know, it might still be a loss leader (though I doubt that).
As of Q1 2010, Apple uses reporting that accounts for the revenues and profits of phones in the quarter that they're received. (http://investor.apple.com/financials.cfm - the Form 10-K/A explains the changes on accounting principles on the Form 10-K from how they used to be (amortized over 8 quarters) and how they are now (all reported in the quarter where they're received.))
I don't doubt that Apple has vastly greater profits than any of its competitors, but stats like this are cooked to make the ratio seem even more impressive than it already is. The notion that a feature phone and an iPhone are substantially in the same market is silly. It's akin to categorizing ThinkPads and land line handsets as part of the same market. Of course, journalists optimize for the most dramatic headline, not the most informative or truthful article, so we're not going to see many apples-to-apples comparisons on this subject in the tech press.
Also I have a non-rhetorical question. Apple, and several of the competitors graphed here, have many lines of non-smartphone products. Is this graph tracking the profit/loss of their smartphone divisions only, or profits of the company as a whole? If the latter, then the comparison is silly, isn't it? And if it's the former, how does this analyst account for costs shared among multiple divisions, such as iOS development (which is a cost that's shared with their iPad and to some extent even their Mac divisions)?
> I don't doubt that Apple has vastly greater profits than any of its competitors, but stats like this are cooked to make the ratio seem even more impressive than it already is.
The chart isn't misleading--it shows what it purports to show: the share of total profits in the cell phone market. The chart suggests that Apple has managed to capture a big %-age of the total profits in the market by targeting a high-margin niche, which is in itself a useful observation.
The chart would be misleading if it were, say, comparing profit per phone (which would for no reason make companies that sold a lot of cheap phones look worse than companies that sold fewer expensive phones) but that's not what this chart is doing.
If the graph includes feature phones then that will necessarily dilute Apple's profits since they do not make a feature phone. Therefore that makes Apple's numbers appear less impressive.
I don't have an answer to your questions, but I'm sure Mr. Dediu would be happy to answer them transparently. He's not a journalist cooking sensational stats, he's a serious amateur analyst who tries to make revealing graphs with an intellectual honesty that is refreshing and a community-driven feedback process that is producing better punditry than most of the professionals. I know a lot of people have a chip on their shoulder about Apple, but it is possible to be both interested and impressed by Apple and also still be a rational observer.
[+] [-] pg|14 years ago|reply
[+] [-] raganwald|14 years ago|reply
There’s an apocryphal story told about an IBM salesman. He was the sales leader year in and year out, selling almost as much as all the other fellows in his office combined. One day, his manager retires and Armonk sends out a hot shot MBA to run the sales team. The MBA summons the top salesman.
“I’ve been running some numbers. Your sales are very good, but you’re only averaging 1.2 calls a day. The other guys are doing 3.7 calls. Imagine how much you could sell if you could get your average up to 3.7!”
The sales guy realized he was going to have to train another manager. “Oh? I was wondering how much the other guys could sell if they did a better job of qualifying leads and got their averages down to 1.2..."
[+] [-] r00fus|14 years ago|reply
If you (or one of your competitors) is planning on playing "monopoly" then marketshare becomes an important metric... either you are aiming for dominant marketshare, or proving that your competitors don't have it. This is why, despite profits being more important, market share is viewed as so important.
[+] [-] sliverstorm|14 years ago|reply
[+] [-] shahan|14 years ago|reply
An alternative interpretation of the article is simply that Apple is targeting a more profitable segment of the market -- smartphones.
It happens to be the case that this segment has grown really fast and have both the highest margins and the highest total profits. This is perhaps not the case in most industries, which may be interesting.
[+] [-] GavinB|14 years ago|reply
[+] [-] wazoox|14 years ago|reply
[+] [-] Stormbringer|14 years ago|reply
Small nitpick: roughlydrafted was _always_ a pure fanboi site with little or nothing of interest to say.
[+] [-] 2muchcoffeeman|14 years ago|reply
Is this the start of them slowly adjusting their prices to grab some more market share? Especially now that they actually have phone models to serve multiple segments of the mobile phone market?
[+] [-] schiffern|14 years ago|reply
Most of the price of the device is negotiated with the carrier, not the consumer. So a "free" device is really $600, and a "$199" device is $800.
[+] [-] philwelch|14 years ago|reply
[+] [-] MBCook|14 years ago|reply
Having the older 3GS and 4 also means they can pull in customer who wouldn't have paid the $200+ for the latest model. How much of Samsung's profit came from people buying their $0-$100 (on contract) phones? How much did that go down when the 3GS became free on contract?
They may not just be making more, but cutting into their competition in areas that were previously safe profit centers.
[+] [-] alexdarlington|14 years ago|reply
It claims that Apple has some major advantage in terms of capital cost for the devices themselves. It mentions their chips but I don't see how they can have such a major advantage.
I'd love to hear if anyone has any insights into how they might be able to have radically lower costs.
The guy seems pretty credible.
[+] [-] angstrom|14 years ago|reply
To the average non-techie all they have to decide is what color and storage size they want. This makes the device friendlier to consumers and takes away stress of understanding the hardware choices. The customer is actually happier if they don't have too many choices. People pay as much for this as they do the curated apps.
[+] [-] robin_reala|14 years ago|reply
[+] [-] rythie|14 years ago|reply
[+] [-] erikpukinskis|14 years ago|reply
1) The premium is invisible at the point of purchase... the iPhone 3GS is free, and the iPhone 4 costs $99.
Where Apple seems to be getting its profits are in the prices paid by the networks. I'm sure Verizon would love to pay Apple the same rate for the iPhone that it pays for, say, the HTC Rezound. But if Verizon drops the Rezound from their lineup, no one will care. If they drop the iPhone, they're going to lose share, because a substantial chunk of those customers will slowly bleed off to AT&T.
And AT&T is not going to play hardball with Apple. AT&T has witnessed first hand what having Apple in your corner does to your marketshare, and they will not fuck with that.
2) Android doesn't actually have a price advantage. IPhones aren't more expensive to build than Android phones, nor are the licensing costs cheaper. Apple has strong supply chain and patent advantages here, matched perhaps only by Samsung.
3) Achieving parity with Apple is proving pretty difficult. Android has strategic innovations in licensing and openness, but Apple has strategic innovations in supply chain, battery life, credit card database, and design that are entrenched. Entrenched in that even if Google/Samsung put their organizational oomph behind matching them, it's not certain they would succeed.
[+] [-] malay|14 years ago|reply
The best angle of disruption now would be for higher performance individual solutions (i.e non-integrated components) to emerge that work together seamlessly (through defined standards).
From my perspective, it does not appear that non-Apple players have defined enough standards around each component such that consumers can easily move between various solutions (OS, hardware, cloud, app/media store) that could, on their own, be considered better than any of Apple's pieces.
Until that happens, I don't think we will see disruption. Trying to out-integrate Apple is probably not a wise competitive choice at this point. Apple continues to buy more of the value chain (e.g. Anobit), suggesting they believe more performance can be wrung out of an integrated system and help them maintain a significant competitive advantage across price, functionality, convenience and reliability.
[+] [-] notatoad|14 years ago|reply
[+] [-] beatle|14 years ago|reply
[+] [-] brudgers|14 years ago|reply
To a lesser degree, this also applies to the other not-US companies listed.
[+] [-] nl|14 years ago|reply
Q4 2008 was the only time they really struggled, but their Android devices seem to have done well in gaining the share back quickly and protecting it well.
[+] [-] m_for_monkey|14 years ago|reply
[+] [-] nutanc|14 years ago|reply
[+] [-] dreamdu5t|14 years ago|reply
[+] [-] Cadsby|14 years ago|reply
1. Free 2. $99 3. $199
[+] [-] nasmorn|14 years ago|reply
[+] [-] neutronicus|14 years ago|reply
[+] [-] swombat|14 years ago|reply
"As the iPhone's share of the market in terms of units shipped has grown from 3% in second quarter of 2010 to 8.7% last quarter, Apple's share of the profits has swelled from 39% to 75%"
Eyeballing the graph, it doesn't look to me like Apple's share of the profits was 39% in Q2 2010, more like 60%. Anyone else see this?
[+] [-] bobbles|14 years ago|reply
[+] [-] bryanh|14 years ago|reply
[+] [-] sliverstorm|14 years ago|reply
See Hyundai, for example. For the past few years they have been leveraging price to gain entry to the North American auto business. It's working.
[+] [-] pinaceae|14 years ago|reply
1., There is no such thing as a loss leader. If it doesn't make money, cut it. Apple TV is considered a hobby - but it is profitable. Yes, there is a grey area, but at Apple it is very small.
2., Your company runs on money, not market share. This has to be the focus. How can you guarantee the constant influx of enough money? Satisfied customers pay more, pay more often. The quick buck loses you money long-term.
3., Focus. You can't manage hundreds of products. you confuse your customer. Do a few things and do them extremely well. Makes it also easier to market, analyze, etc.
[+] [-] swombat|14 years ago|reply
Pretty sure Apple itself contradicts this. Afaik, the iTunes music store was in fact run as a loss leader for some time, before Apple was in a position to argue for better terms. For all I know, it might still be a loss leader (though I doubt that).
[+] [-] equilibrium|14 years ago|reply
[+] [-] unabridged|14 years ago|reply
[+] [-] VengefulCynic|14 years ago|reply
[+] [-] bwarp|14 years ago|reply
[+] [-] abstractfactory|14 years ago|reply
Also I have a non-rhetorical question. Apple, and several of the competitors graphed here, have many lines of non-smartphone products. Is this graph tracking the profit/loss of their smartphone divisions only, or profits of the company as a whole? If the latter, then the comparison is silly, isn't it? And if it's the former, how does this analyst account for costs shared among multiple divisions, such as iOS development (which is a cost that's shared with their iPad and to some extent even their Mac divisions)?
[+] [-] rayiner|14 years ago|reply
The chart isn't misleading--it shows what it purports to show: the share of total profits in the cell phone market. The chart suggests that Apple has managed to capture a big %-age of the total profits in the market by targeting a high-margin niche, which is in itself a useful observation.
The chart would be misleading if it were, say, comparing profit per phone (which would for no reason make companies that sold a lot of cheap phones look worse than companies that sold fewer expensive phones) but that's not what this chart is doing.
[+] [-] dasil003|14 years ago|reply
If the graph includes feature phones then that will necessarily dilute Apple's profits since they do not make a feature phone. Therefore that makes Apple's numbers appear less impressive.
I don't have an answer to your questions, but I'm sure Mr. Dediu would be happy to answer them transparently. He's not a journalist cooking sensational stats, he's a serious amateur analyst who tries to make revealing graphs with an intellectual honesty that is refreshing and a community-driven feedback process that is producing better punditry than most of the professionals. I know a lot of people have a chip on their shoulder about Apple, but it is possible to be both interested and impressed by Apple and also still be a rational observer.