4 Mobile Business Models, 4 Ways To Keep Score

by John Kirk   |   May 30th, 2013

The hundred meter dash, archery, weightlifting and the long jump are four very different Olympic sports with four very different methods of keeping score. The hundred meter dash is scored on speed. Archery is scored on accuracy. Weightlifting is scored on strength. The long jump is scored on distance. You don’t judge the participants in the hundred yard dash by how much weight they can lift. That would be the wrong way to measure them.

“…looking at ‘smartphone share’ or ‘profit share’ or ‘platform share’ all tell you something about the industry, but all three metrics mislead you if you try to treat them as a way to see who’s ‘winning’, because ‘winning’ means different things for Apple, Samsung or Google. After all, Google may well still make more money from searches on iOS than it does from searches on Android.” ~ Ben Evans, On market share

Hardware manufacturing, advertising, “razors-and-blades” content sales, and platforms are four very different business models and they have four very different methods of keeping score too.

You don’t take the metrics used to measure one business model and apply them to another business model. That would be the wrong way to measure them.

Each business model demands its own specific forms of scoring. The goal should be to devise, discover, or discern a form of measurement that properly and accurately reflects how a business is performing in the business model in which it is participating.

Biathlons, Triathlons and Decathlons are all unusual Olympic events in that they group together several disparate sports and then determine an overall winner. Think of Apple, Google, Samsung, and Amazon as Olympic teams that compete with one another in the four interrelated mobile business models – hardware manufacturing, advertising, “razors-and-blades” content sales, and platforms – a sort of Quadrathlon. Each team has its strengths and its weaknesses, each team wants to win the events that they’re best at and maximize their score in the other events in order to win the overall Quadrathlon.

Let the games begin!

Hardware Manufacturing

Last week I tried to explain how using only market share to analyze mobile hardware manufacturing was not only the wrong way to keep score of that business model but that it was actually obscuring the real score.

“The truth is that focusing on market share as the primary metric is the only way to paint the iPhone as anything other than a roaring success.” ~ John Gruber

I suggested an alternative measurement known as the “Fair share profit analysis,” in order to generate some perspective but, truth be told, the only real way to accurately “score” who’s winning in hardware manufacturing is with net hardware profits. When it comes to selling mobile hardware, do Apple, Samsung, HTC, Motorola, etc. really care what their market share is? No they do not. That’s the top line, a means to an end. The only thing that matters when they are selling mobile hardware is profit. That’s the bottom line, the end for which the means were made. Market share is all well and good but only if it brings home the profits. Keep your eyes on the prize – and profits are the prize.

So who’s winning the medals in the olympic sport of mobile hardware manufacturing?
genuity
Source: “Who’s Winning, iOS or Android? All the Numbers, All in One Place

Awards Ceremony: Apple walks away with the Gold (both figuratively and almost literally), Samsung takes the Silver and no one else even medals. The Bronze podium stands empty.

Advertising

The only proper way to score advertising is net advertising profits retained. Market share and platform may be used to garner advertising revenue but they are only the means and they should never be confused with profit, which is the end.

Today, there are three great truths in mobile advertising:

1) Google is killing it in mobile advertising.
2) Google is killing it in mobile advertising…but mobile advertising is still relatively small; and
3) The vast majority of Google’s mobile advertising revenue is generated on the iOS platform, not the Android platform.

1) Google is killing it in mobile advertising.

Google dominates the mobile search market with 93% of US mobile search advertising dollars, according to eMarketer. Facebook is at No. 2.

2) Mobile advertising is still relatively small.

The mobile ad market alone stood at roughly $4.1 billion at the end of last year, up from $1.5 billion at the end of 2011. Google, currently has more than half the mobile ads market with annual revenues of around $2.2 billion.

Just to keep things in perspective, mobile ad revenue only accounted for 9% of all online ad revenue last year, although the percentage of mobile ads vis-a-vis other online ads is rapidly growing. And mobile ad revenues paled in comparison with mobile hardware sales. While it took an entire year for ALL mobile ad revenue to reach $4.1 billion, Apple alone, and in 90 days, and in what many considered a down quarter, brought in revenues of approximately $31.4 billion just from iPhone and iPad sales.

3) Google is making its advertising money on iOS, not Android

“(I)t’s Android’s large market share that is the winner for Google. The more Android devices being used, the more Google services with Google ads are being used.” – Virtual Pants

Actually, not so very much. Most of Google’s advertising dollars are generated by iOS’s relatively smaller market share, not by Android’s massive market share.

MoPub-Ad-Spend-Share-Jan-Feb-March

Source: MoPub

Take a good hard look at the chart, above. The iPhone ad spend doubles the ad spend share of ALL of Android. The iPad almost matches ALL of Android BY ITSELF. And even the lowly iPod has one-quarter of the ad spend that ALL of Android does. Market share is all that matters? I don’t think so. That’s like arguing that acreage is all that matters in real estate. The size of the lot does matter in real estate but location, location, location matters more, more, more. And market share does matter in mobile advertising but it is the location of the market share that matters even more.

Apple’s iOS Mobile Ad Metrics Dominates Android

Why 75 cents of every dollar spent on mobile advertising is spent on iPhone and iPad

iOS leads Android in mobile ad revenue

Apple’s iPad dominates online shopping traffic & revenue generation

iOS Still Top Platform For Monetising Mobile Ads, Opera’s Q1 Study Finds, iPhone Also Beating Android For Generating Ad Traffic

iPad Still Dominates Tablet Ads With iPad Mini Gaining, Velti Finds

“My belief, though, is that what Google is winning with Android is a booby prize — overwhelming majority share of the unprofitable segment of the market.” – John Gruber

When it comes to ad revenues and profits, we shouldn’t be counting Android as a single entity anyway. Ad revenues don’t help Android, the platform. They help specific digital stores. Ads going to Amazon, Google, and the various stores in China and elsewhere need to be broken out separately, not lumped together.

Awards Ceremony: Google wins the Gold and they win it going away. But they receive their Gold medal standing on the Apple iOS platform, not the Android platform.

Silver and Bronze? I’ll let you decide if it’s Facebook, Yahoo, Microsoft’s Bing or someone else. They’re all so far back that it doesn’t much matter now anyway. That may change over time but we’ll have to wait and see how this market develops.

“Razors-And-Blades” Content Sales

“(T)he razor and blades business model, is a business model wherein one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as supplies…” ~ Wikipedia

The “razors-and-blades” business model is tricky to score.

– Hardware revenues and profits mean NOTHING in the “razors-and-blades” model. In fact, it’s not unusual to LOSE money from hardware (razor) sales.

– Market share means both nothing and everything in the “razors-and-blades” model. It means nothing because it doesn’t actually generate any profits but it means everything because it is a prerequisite to generating profits. In fact, the only reason you’re giving away your hardware in the first place is to acquire massive market share which, in turn, will hopefully lead to massive profits.

– Ultimately, the only way to measure the success of the “razors-and-blades” model is on the net profits generated by the sale of the complementary goods (razors). In mobile, the complementary goods are content such as music, video, books, etc. and apps. Amazon also has the added advantage of being able to sell everything from their sprawling retail catalog.

As I tried to explain in my tersely titled article: “Selling The Amazon Kindle Fire and Google Nexus 7 Is As Silly As Selling Razor Blades To Men Who Love Beards“, the “razors-and-blades” model makes no sense in this market space. At least it makes no sense to me. In the “razors-and-blades” model, the complementary sales – whether it be blades for razors, or ink for inkjet printers or games for gaming consoles – must be proprietary and must command a premium price. That’s the whole point. Give away the razor, make it back – and more – by selling the blades at a premium.

If you’re selling content, you want to be platform agnostic so that you can sell as much content as possible. This, in my opinion, should be Amazon’s strategy.

If you’re giving away hardware in order to sell content, then you want that content to be tied to your hardware product so that you can monopolize the sale of the complementary product and command a premium price.

In the mobile space, the complementary sales ARE NOT proprietary, they ARE subject to competition and they DO NOT command a premium price. Amazon and Google don’t sell content that is any different or superior to that being sold by Apple and other content providers and their content isn’t being sold at a premium. In fact, Amazon often sells their merchandise at a DISCOUNT which – in the “razors-and-blades” business model – is completely bat-manure crazy.1

So who’s winning in the “razors-and-blades” business model? Why, surprisingly, it’s Apple and it’s Apple in a runaway.

Google Play now at 90% of iOS app store downloads; iOS still holds a 2.6X revenue lead

Despite growing competition from other tablets, Apple’s iPad still accounts for a whopping 89.28 percent of e-commerce website traffic, and also rakes in more money on a per-user basis than any other platform. ~ Monetate

Distimo reports that iOS App Store revenues were 430% larger than Android during 2012. ~ Apple F2Q13 Earnings Call

“…iTunes inclusive of Apple’s own Software generates as much as 15% operating margin on gross revenues. That’s over $2 billion a year.” ~ Asymco, So long, break-even

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Source: Canalys

Apple sells their content, not in order to make money but, in order to make their hardware more attractive so that they can sell ever more hardware and make ever more profits. With regard to tablets, Apple is playing the OPPOSITE game that the Amazon Fire and the Google Nexus are playing. While Amazon and Google subsidize their tablets (razors) in order to make money on the sale of their content (blades), Apple should be subsidizing the sale of their content (blades) in order to make money on the sale of their hardware (razors). But that’s not how Apple rolls. Instead, Apple sells their hardware at a premium AND they sell their content at a premium. That’s not supposed to happen but that’s just how good the Apple ecosystem is.

It’s like a walk-on winning the Olympic marathon while everyone else is stuck in the starting blocks.

You can say that it’s elitist or arrogant to argue that iOS users are better customers than Android users. But you can also say that it’s the truth. ~ John Gruber, Church of market share

One last thing. If Amazon and Google have an incentive to sell discounted hardware and premium content and Apple has an incentive to sell premium hardware and discounted content, one of those business models is going to fail and it’s going to fail hard. Since Apple is, so far, successfully selling premium hardware AND premium content, I’ll let you be the judge of how this is going to play out.

Awards Ceremony: I’m tempted to award all three medals to Apple just for having the sheer audacity to win a game that they didn’t even enter. But I guess Apple will have to console themselves with just winning the Gold.

And the Amazon Fire and the Google Nexus tablets? Disqualified for not understanding the rules of the game that they were playing.

Remember, Amazon and Google sell their hardware at cost. They don’t make a penny off those sales and they might even be taking a loss.

Market share? Yes, they have taken some minor market share…in a market where they are GIVING AWAY THEIR MERCHANDISE. And market share is not how you score in the “razors-and-blades” game. While the press and the pundits fawn over the market share of the Amazon Fire and the Google Nexus, what they’re entirely missing is that in the “razors-and-blades” business model, market share should be a GIVEN. I mean, honestly, if you can’t obtain overwhelming market share when you’re giving away your product at cost, then you should be ashamed, embarrassed, abashed, chagrined, humiliated and mortified ’cause you’re doing something terribly, terribly wrong.

You win the “razors-and-blades” game by scoring the most content profits. All those Amazon Fire and Google Nexus market share numbers that the analysts are always going gaga over? Meaningless. They should be removed from the count. They’re probably not hurting the sales of the other available tablets and they’re not helping the bottom lines of their makers either. There is zero proof that Amazon and Google’s hardware giveaways have led to increased retail sales which, after all, in the “razors-and-blades” model, IS the point.

And if you’re going to prophesy that market share alone gives Google data that will someday, somehow, be worth something to someone, then you need to go back and re-read how the “razor-and-blades” business model is scored.

What we desperately need in analyzing mobile computing is far more attention paid to profits and far less attention paid to prophets.

Next Time

Next time I will finish with the “mother” of all business models – platforms – and do the medal count.

http://techpinions.com/googles-android-activations-are-a-lot-less-cash-cow-and-a-lot-more-bull-2/18124

Read Part One of John’s column entitled: Android’s Market Share Is Literally A Joke

Read Part Three of John’s column entitled: Google’s Android Activations Are A Lot Less Cash Cow And A Lot More Bull. And That’s OK.

The author would like to gratefully acknowledge the contributions of Ben Bajarin and Steve Wildstrom. All the great ideas, that you agree with, were theirs. All the bad ideas, that you disagree with, were mine.

  1. Then again, we all know that Jeff Bezos is crazy like a fox. []

John Kirk

John R. Kirk is a recovering attorney. He has also worked as a financial advisor and a business coach. His love affair with computing started with his purchase of the original Mac in 1985. His primary interest is the field of personal computing (which includes phones, tablets, notebooks and desktops) and his primary focus is on long-term business strategies: What makes a company unique; How do those unique qualities aid or inhibit the success of the company; and why don’t (or can’t) other companies adopt the successful attributes of their competitors?
  • http://www.facebook.com/rambu.tan.161 Rambu Tan

    *applause* (standing up) As usual.

  • Rich

    Jeff Bezos is beyond crazy like a fox. Amazon is so successful it’s frightening to me – and I’m not even in business.

    • Joe_Winfield_IL

      Define “successful.”

      The US Postal Service has pretty impressive volume and pricing that cannot be beat. They still suck as a business.

      • Glaurung-Quena

        “Define ‘successful.’”

        Well, they’re pretty good at destroying the profits of anyone who dares to try to compete with them, doing huge amounts of business and keeping their customers happy. And they’re pretty good at making a salary for Bezos and everyone who works for him. And after running in the red for quite a while in the early 00′s, now they’ve finally become pretty good at not losing money (breaking even or clearing a small profit). If they were a private company, that would be enough, wouldn’t it?

        The only thing Amazon is bad at is making significant profits. But that’s neither here nor there — the only group who is harmed by Amazon’s lack of profits are all the investors who have been massively suckered into buying Amazon stock despite the fact that they might not live long enough to see the stock make back its purchase price (I figure Bezos must have some really amazing futuristic mind-control ray that he aims at Wall street every quarter).

        • Rich

          I wouldn’t say investors have been suckered into buying Amazon stock. Investors are responsible for researching stocks before they buy them, and Amazon’s small profit margins have been well-known for quite awhile.

        • Joe_Winfield_IL

          “…If they were a private company, that would be enough, wouldn’t it?”

          This is probably the best point I’ve read on Amazon. We always trash large public companies and Wall St. analysts for their myopic focus on the present and immediate future, the need to goose each quarter’s results. Amazon management are rightly praised for their willingness to always maintain a big-picture, long-term perspective. Costco is probably the best analog in the physical retail world, as the company is content to maintain perpetually small margins; they “win” with merchandising and proprietary customer data.

          I guess I’m just a little jaded (as it appears you are) that AMZN owners are willing to assign such a high valuation to the company. I don’t even mind that the company isn’t making any net profit today. More troubling is that there is no rough timeline given (even a vague one) for when the company expects to begin revving its profit engine. Or that FCF is also pretty darn low. My pet theory is that the stock price falls apart if Amazon ever does start to generate real profits. At this point, traditional earnings-based valuation metrics suddenly become relevant, and the company will have a nearly impossible hill to climb. But since I don’t own the stock, it’s more just a curiosity.

      • Mark Jones

        Here’s one person’s view of how successful Amazon is: https://medium(dot)com/what-i-learned-building/d233f02d52a5

        • Joe_Winfield_IL

          I read that article last week. Interesting stuff, and he cites so many specific examples that his points are hard to refute. My main takeaway is that Amazon’s real objective is to constantly raise the table stakes for competitors. Free shipping, broad selection, generous return policies, etc. are all hygiene factors today; customers won’t shop at a site lacking these services, but ascribe very little value relative to the huge cost retailers bear. The company is making it impossible for other general purpose etailers to compete. My question is, so what? Is this how Amazon defines its own success, or is there something more?

          For the purposes of the broader discussion here, what does this fortress of retail do for Amazon vis-à-vis Apple, Facebook, Google, Microsoft, content owners, and OEMs? If retail is merely a means to an end, what is the end? Or is it the other way around, where all other services and products are just a giant catcher’s mitt to bring more users into the retail fold? If the ultimate objective is just to dominate low-margin, third-party retail, then why do the other tech companies need to worry about Amazon (except of course Google, who needs other retailers to buy ads)?

          • Mark Jones

            If you’ve read my comments scattered across Techpinions, PED, ben-evans, and asymco articles, you’ll know that I think many of these companies are headed to retail (Amazon, Google, Facebook). Why else would they want to identify and know everything about each one of us, if it’s not to gladly take the cash we want to spend. Retail is huge, so even low-margin still brings huge profits.

            But where are the boundaries to retail? For example, an e-wallet that takes a small cut of each transaction. Who will take that cut? A device company like Apple? Or a services company like VISA? Or the techno-sophisticated retailer like Amazon or Google? Another example, advertising. Would not advertising dollars eventually go to the techno-sophisticated retailer? Or can a services company like Facebook still matter? After all, Amazon already has a heavily influential social network hidden in its popular ratings system. It’s not necessarily your friends, but it is the people who’ve bought and used the product, and so are likely to be very knowledgeable. Imagine if that is scaled even further.

            If the retailer becomes dominant, let’s say, it’s the only retailer that has the sacle to have profitable same day delivery. When that happens, can a device company still get good prices for its devices? Would people still go to a brick-and-mortar store, even an Apple Store? Or will the relationship and revenue be like Amazon and the ebook publishers? Or like Apple and the music labels? Or like cellular operators and the non-Apple phone manufacturers? Who takes almost all of the revenue and profits?

          • Joe_Winfield_IL

            Transaction processing is a no brainer; each of the tech titans has some user information or trust that they can exploit to earn a slice of each sale. I don’t know what e-wallet services will look like in a couple of years, but I’m confident that explosive growth is coming in the near future. I think of Apple, Google, and Amazon all as service companies (among other things), so it doesn’t seem a huge leap to me.

            That said, I don’t see all the other tech giants getting into direct product merchandising. Google and Facebook would have to walk away from lucrative advertising and referral revenue to enter the fray directly. This would be the equivalent of Microsoft getting into the hardware business, except that Google and Facebook are weaker monopolies than Microsoft. The ad buyers can turn to Microsoft, Yahoo, Twitter and others if they feel threatened by Google and Facebook. Apple doesn’t even want to vertically integrate its own product supply lines due to the risk/reward of manufacturing, so it’s hard for me to imagine the company spending tens of billions to get into a 2% margin business.

            I may be naive, but I just don’t see a future where brick and mortar retail evaporates completely. Zappos has proven that free returns are enough to entice many people to make “risky” soft goods purchases online, but the vast majority of shoppers would still rather peruse a selection of shoes in person, physically handling several different choices and trying on a few for fit. Even if Amazon had same HOUR delivery, the process would still be less convenient than conventional shopping for a large portion of the population. The same is true with several product categories.

            Also, same day delivery is obscenely expensive from an inventory standpoint. Much of what Amazon sells cannot be allowed to sit on shelves at hundreds of micro distribution centers, for fear of obsolescence. Amazon’s price algorithms prevent the problem today, but inventory turn is an order of magnitude more difficult to manage with localized sales. I’m not saying it’ll never happen, but I don’t see it as a panacea the way that many do.

          • Mark Jones

            Google already offers Google Shopping and is “piloting” same-day delivery (Shopping Express) in San Francisco area. Google can still sell ads; Amazon sells ads today.

            I don’t think Apple will get into retail, but how will these changes (if they occur), impact them.

            Brick and mortar will never disappear entirely, just like PCs may never disappear. But so much of it could move online that retail, and the names of the largest retailers, will be fundamentally changed.

            There’s still much to figure out to make same-day delivery successful even in dense populations, and Amazon is busy trying to do so.

      • Rich

        In Amazon’s case, I’m defining successful as an ever-increasing number of retail sales are leaving physical stores and going to Amazon, and the shift is happening quite rapidly. If it’s suggested that Amazon’s profit margins are small, ask the managers of the physical stores whether that’s any comfort to them.

        • steve_wildstrom

          The remarkable thing about Amazon is that its income statement looks like a mass-market retailer–razor-tin net margins–but the stock is treated like a tech company. Of course, AMZN is a little of both. Its business model is definitely retail. But it is also a deep tech company, as demonstrated by its AWS business.

          • Rich

            I just think it’s amazing that some people keep beating the drums about Amazon’s margins. So they’re small – who is it hurting? Not investors; they’re responsible for checking out the stock before they buy it. If they buy it anyway, that’s their choice.

            The CEOs of the big retail chains don’t see Amazon’s profits as a flaw. To them it looks more like a lethal weapon.

            No less of a super-smart person than Marc Andreessen said recently that Amazon is going to destroy physical stores. I hope he’s wrong, but he said it.

          • AdamChew

            Amazon is successful because it a Internet business and the world is it market hence the uge revenue but not the profits.

            You can’t say that about the brick and mortal retail outlets.

            Let see what happen when buyers have to pay sale tax on the goods purchased.

  • tz

    I find it amusing that in the attempt to enter the market that Apple succeeds in quite well, certain companies are actually giving away or slightly losing money on the products that they produce.
    Further, they appear to only have established a tenuous toehold in limited facets of that market.
    All quite fascinating to my mind.

  • seerwright

    As with the market share/profit share article last week, it’s not clear (to me at least) how profit is being calculated, which I believe is important. (The Canaccord paper doesn’t disclose methodology either.) It matters because Samsung has made substantial fixed investment in recent years to revamp and boost manufacturing related to mobile, which may be a drag on profitability depending on how it is calculated. Being the first-mover, in a sense, Apple got a jump on fixed investment, which may mean it’s more of a variable game for them since much of their early fixed investment has depreciated. A rough analogy is that new businesses tend to drain cash, due to investment, while mature ones tend to be cash cows. Perhaps profitability needs to be normalized between Samsung and Apple, perhaps not. The point of my comment is that the details appear to be missing.

    • studuncan

      Apple is spending about $10B a year now in fixed costs. It’s going up, not down.

      Missing details are because the companies want them to be missing.

      • benbajarin

        “Apple is spending about $10B a year now in fixed costs”

        Something I am digging hard to understand as to the what and why. I have some good clues but more investigating is required.

        • studuncan

          Definitely. Horace Diedu is teasing it out, but I don’t think anyone has full insight into where they’re putting all that money.

          • benbajarin

            I agree. Horace and I have talked about this recently and I think we have a pretty good handle on it. Still some things worth getting more clarity on with regards to several components and infrastructure.

          • studuncan

            Well, I guess they, or a subcontractor, is building out a large factory in Texas somewhere. I guess that’s some of it.

      • seerwright

        I think that is too general of a statement considering the context of this article. Apple manufacturers a number of products and they also have retail and land – it’s hard to tease the $10 billion apart without details. I can’t find anything which details how much capex is going to mobile manufacturing. There is some evidence, however, that $2+ billion of that $10 billion is related to rescuing Sharp late in 2012. A second point here is not how much Apple is investing, but how much Apple is investing relative to Samsung, specifically in mobile hardware. Profitability of mobile hardware manufacturing is, after all, one of the points of this article.

        • studuncan

          The bulk of Apple’s costs are now mobile. See their COGS. It only makes sense that most of their CapEx goes there too. Take 50%,75%,100%. It doesn’t significantly change the point.

          You’ll never get investment info out of Samsung, so a comparison is actually just a wild guess.

          • seerwright

            COGS is not investment. It’s an income statement item. This is my whole point: the article relies on data that does not specify how profitability is calculated, nor does the article’s source. When capex is measured in billions, it could, in fact, change the point. Samsung is not traded on a U.S. exchange, so it doesn’t have the same reporting requirements as, say, Apple. However, they still make a lot of information available in English and, better yet, it is audited and reviewed. Like Apple, they are not super transparent, but they do a lot more than they have to.

          • benbajarin

            The challenge with Samsung, which is also becoming and will become challenge with Apple, is that because of areas of verticalization they are transferring component costs across BUs to generate margins. Samsung uses other Samsung parts and uses that to cut costs and transfer for margins. That is very hard to pinpoint. Same with Apple, iOS is a differentiator and and investment by way of RND and talent, etc., but we can’t pinpoint a percentage that Apple software contributes to profits, but I’d argue its there, we just can’t directly but our finger on it. Just a few examples of the complexities of more vertical companies and calculating profit.

        • Mark Jones

          There’s a little more insight from Peter Oppenheimer, Apple CFO on the quarterly call, when he said “We expect to spend about $10 billion in CapEx this fiscal year; that will be up little under $2 billion year-over-year. We expect to spend a little bit under $1 billion in the retail stores. And the other $9 billion is spent in a variety of areas. We are buying equipment that we will own that we will put in partners’ facilities. Our primary motivation there is for supply, but we get other benefits as well. We are also adding to our datacenter capabilities to support all the services that Tim spoke about in answering Ben’s question and in facilities and in infrastructure. So, that’s where the capital is going.”

          At this point, that “equipment” is likely mostly for mobile, not for Mac. Datacenters are costly but we know Apple only has four (CA, NC, OR, NV), and can calculate that it could only be a small slice of the $9B.

          Also, I’m not sure anyone ever confirmed an Apple investment in or prepayment to Sharp. There’s more evidence Samsung invested in Sharp. Also, Samsung spends far more on capex than Apple, but most believe a good chunk of that is for semiconductor fabs.

          • seerwright

            Those are helpful comments from Oppenheimer, but please keep in mind the following: 1) they are forward looking and don’t explain actual profitability, 2) they don’t shed light on how profitability is calculated by Canaccord, which is a source used by the author of this article, and 3) speculation that ” ‘equipment’ is likely for mobile” is just that – speculation. Apple manufactures laptops, desktops, runs cloud services like iCloud, and presumably is scaling up for future products we don’t even know about. As a finance guy myself, I can tell you that fixed costs have to be allocated and there likely isn’t even consensus *within* Apple as to how profitable certain product lines are. It’s a notoriously difficult thing to know for most companies, certainly all of the ones I’ve worked at. It’s not necessarily a percent or two either. The swings can be large depending on allocation of fixed costs, method (cash or income), and other factors.

    • benbajarin

      From our standpoint in tracking the industry in our analysis reports, we run up against the same rubs. In some cases we know exactly how revenue and profit is disclosed and in others we are left to make an educated guess. Even though us analysts are not investigative journalists, we still have to do a lot of digging to be as accurate as we can in these matters.

  • Michael Hofer

    I read the previous article in this series last week but found it to be lacking some important details. This is a significantly more concrete and compelling picture of the mobile ecosystem, good work.

    • FalKirk

      “This is a significantly more concrete and compelling picture of the mobile ecosystem, good work.” – Michael Hofer

      Thanks. Next week, platform.

  • mhikl

    Kirk, so many links to read to prepare for discussion. the rest of the week is been planned. Thanks, I am sure.

  • Mark Jones

    I’m not sure if you will cover this in your platform article, but I think both Amazon and Google are still in the “investment” or startup phase of their strategy. I think both are headed toward ultra-high-volume e-commerce, which when scaled, creates a wide moat. (Think of the scale needed to get to profitable same-day delivery of non-digital goods.) They both someday want to be able to suggest and sell you any good or service at the moment you need it (which they’ll know by tracking you all over the physical and virtual worlds). Google has the luxury of being able to fund their investment from their ample advertising profits.

    For Amazon, I think selling hardware at cost is a defensive strategy (i.e., just in case you get locked out of the other platforms) that also has the benefits of creating “virtual storefronts” in people’s houses (which is a different take on a retail store), and of potentially commoditizing the hardware business model (of Apple). Same for Google, except its ecommerce play is in its infancy.

  • Dave_Hart

    You seem to miss the fact that both Amazon and Google are diversified. They make money from many different markets. For them it isn’t a matter of having to the most profitable kid on the block when it comes to competing in the same space as Apple. For them, it’s purely strategic..

    The Kindle and the Kindle Fire were strategic moves for Amazon. They helped to lock in book customers at a time that the industry experienced a shift from paper based books to ebooks. It had nothing to do with having devices in the tablet space.

    It’s my opinion that Amazon doesn’t see themselves competing against Apple. Their strategy is ensure that customers do not have to leave their online store to find goods, whether they are physical or digital content (i.e. ebooks, MP3, streaming, electronic downloads, etc.).

    Saying that Apple’s business model is better than Amazon’s business model is missing the fact that they have entirely different business models. It’s like comparing a 7/11 to a grocery story. They sell some of the same stuff, but that’s as far as it goes…

    • FalKirk

      “You seem to miss the fact that both Amazon and Google are diversified” – Dave_Hart

      My focus is on mobile computing.

      • Dave_Hart

        “My focus is on mobile computing.”

        But you can’t simply carve out a business unit from a diversified company and compare it to a company that is much more focused on the same sector. They will have completely different goals and business strategies.

        If Apple lost their revenues from the mobile computing sector it would have a huge impact on their earnings and their stock evaluation. However, if Amazon lost their revenues from the mobile computing section, it would be a drop in the bucket.

        The point is that you are evaluating the business strategy of Amazon in the wrong light. Their business strategy is to have a one stop shop for just about anything physical or digital and they are succeeding in this strategy. Evaluating it by any other light simply results in a poor and, perhaps, misleading analysis.

        • FalKirk

          Thanks for the comments.

          I understand your perspective, but I respectfully disagree. It is, as you say, important to understand the overall business strategy of each company. But sector comparisons can still be made so long as the overall strategies are fairly represented.

          • Dave_Hart

            “I understand your perspective, but I respectfully disagree. It is, as you
            say, important to understand the overall business strategy of each
            company. But sector comparisons can still be made so long as the overall
            strategies are fairly represented.”

            I agree with your statement. I also would agree with your analysis if I thought that it fairly represented Amazon’s strategy in the mobile space. The problem is, in my opinion, that it doesn’t. As a result, you concluded that Apple is beating Amazon at their own game, but this is a poor conclusion because Amazon is playing an entirely different game than the one your analysis describes.

            Amazon’s strategy isn’t to sell content (blades), it’s to get people into the store and keep them there. Selling content is Icing on the cake.

            We’ll just have to respectfully disagree on this one. : – )

          • FalKirk

            “Amazon’s strategy isn’t to sell content (blades), it’s to get people into the store and keep them there.” – Dave_Hart

            Actually, you’re in the right. I have no idea what Jeff Bezos and Amazon are doing. Their business model is a miracle to behold and the devil to understand. :)

          • normm

            I think Amazon is still an internet-boom company, and their strategy is to give everything away and make it up in the stock price.

  • fring

    Congratulations…you managed to put all my random thoughts and opinions into one(now two) article(s).
    Looking forward to the next one.
    Thanks.

  • TS

    Hi John, super excellent analysis.. as always.. keep up the superb work !

  • http://www.technovia.co.uk Ian Betteridge

    Great piece, John. One small point though: the figures on mobile ad spend for iOS vs Android come from MoPub, which I believe doesn’t carry Google ad inventory. While it’s likely that their metrics in terms of proportion of platform mirror Google’s, it’s not definite.