Does The Rise Of Android’s Market Share Mean The End of Apple’s Profits?

by John Kirk   |   February 21st, 2013

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It’s an article of faith in the Church of Market Share that Android is nearing a tipping point where its market share lead will inevitably turn into a developer share lead, too. ~ John Gruber

Matt Asay, writing for Readwrite Mobile, puts this argument into words in his article entitled: “As iPad’s Market Share Falls, Must Profits Follow?

For those who say market share doesn’t matter, that Apple still commands most of the industry’s tablet profits, they clearly haven’t been paying attention to the smartphone market. Profit share follows market share…

Only, here’s the thing. I HAVE been paying attention to the smartphone market. Perhaps more importantly, Horace Dediu has been too. And as his chart, above, demonstrates, the facts belie the argument that profit share follows market share. Even as Android’s market share has grown by leaps and bounds, Apple’s iPhone profit share has grown too. How can this be?

What’s Really Happening

Here’s what the facts are telling us. First, Android’s growth has not hurt Apple’s profit share. Instead, Android gobbled up all of the profits from the other smart phone manufacturers. Second, Samsung subsequently gobbled up all of the profits from the other Android manufacturers. Samsung now makes as much profit share as the entire mobile industry did five years ago. Third, the iPhone has not only survived the growth of Android’s market share, it has thrived, growing its profit share from 21% in 2008, to 50% in 2010, to 57% at the start of 2011, 73% at the start of 2012, and 72% at the end of 2012. And since the pool of profits has grown dramatically over the past five years, Apple’s profits have too.

What will it take to get Apple’s critics to acknowledge that Apple’s iPhone strategy is actually a raging success rather than the raging failure they constantly portray it to be? Does Apple need to take in 100% of the profits in perpetuity for them to be convinced?

Faulty Analysis

The problem with our obsession with market share is that it rests on two faulty foundations. First, it assumes that every product sold within a category is always just as valuable as another. Second, it assumes that every customer who buys a product is of equal value. These two premises are laughably wrong.

It’s A Mistake To “Pool” all sales together

Are all smartphones or all tablets of equal quality or used in the same way? Hardly. No knowledgable person would argue that they were. Yet when we use market share as our metric, we assume exactly that.

Kiddie pools and above-ground pools and in-ground pools are all considered to be “pools”. But does the sale of one necessarily impact on the sale of another? Sandals and dress shoes and winter boots are all considered to be “shoes”. But does the sale of one necessarily impact the sale of another? Similarly, when we lump all types and makes of phones or tablets together, we create a false basis of comparison. Is the iPhone or the iPad really competing with the gray market phones and tablets being sold in China anymore than in-ground pools are competing with kiddie pools or dress shoes are competing with sandals? Just because two products fall within the same category, does not necessarily mean that they are in competition with one another.

Not All Customers Are Equal

“(T)he fundamental flaw in the Church of Market Share doctrine is the assumption that users are users. That one platform with, say, 40 percent market share, must be in a stronger position than another platform with, say, 20 percent market share, simply because a larger number of users is better, period. What Apple has shown with the Mac, and now with the iPhone and iPad, is that all users are not equivalent. Counting only the Mac, Apple is not the biggest PC maker by unit share. But it is by far the most profitable, quarter after quarter, year after year. What’s more important than a company’s share of the overall market is the company’s share of the profitable side of the overall market.” ~ John Gruber

The fact that customers are not of equal value is so fundamental that I shouldn’t even have to say it. There are whole industries and entire fields of learning devoted to the art of finding the right customer for the right company or product. Not only do companies target preferred customers, but they actively shun customers who are counter-productive too. Yet when we use market share as our metric, we assume that a customer is a customer is a customer. Nothing could be further from the truth.

For example, I might be an ideal customer for Krispy Kreme Donuts. But I might be a lousy customer for Victoria’s Secret. (This is because I stopped wearing frilly lady’s underwear years and years ago. You can confirm this with my parole officer who will totally back me up on this.)

Being a bad customer is not the same thing as being a bad person. Good people can be bad customers. But being a customer is not the same thing as being a good customer either.

Does Market Share Matter To Apple?

Absolutely. Take a gander at this critique of Apple from Steve Jobs:

“At the critical juncture […], when (Apple) should have gone for market share, they went for profits.” ~ Steve Jobs

Steve Jobs wanted, and Apple wants, market share. But they want the RIGHT market share. Apple wants customers who are willing to pay for their products. And Apple wants customers who are good for their platform. In other words, Apple wants market share in their target demographic. Based on the fact that Apple is taking in 72% of the mobile phone profits with only 8% or 9% of the market share, it sure sounds like they’ve aquired the right market share to me.

Does the rise of Android’s market share mean the end of Apple’s profits? Hardly. You can argue as loudly as you like that developers and profit share must necessarily follow market share. But the facts will shout you down.

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?
  • Rich

    It’s kind of like a popularity contest in high school. John dates more girls but Joe dates the prettier ones. Who wins?

    • jfutral

      Leonard. He got Penny. And he didn’t date anyone in high school.

      Joe

  • Glaurung-Quena

    A point that needs emphasizing is that Apple has *chosen* to have the market share that they have. They aren’t gnashing their teeth and wishing they had more customers than they currently do – far from it. A brief look at the prices of used Apple products on Ebay vs used products from any other company shows clearly that there are tons of people who want to own an Apple product but are unwilling to pay full price for one. Ergo, Apple could significantly increase their market share by lowering their prices. And since all of their products have quite high profit margins, they could easily lower their prices any time they felt it was appropriate to do so. But they don’t, because, I am sure, their accountants and market analysts have studied the situation and decided that they wouldn’t make as much money from the increase in customers as they would lose from the decrease in sale prices.

    • Jocca

      I think Apple can barely make enough of their best selling products to satisfy the demand. The only time they cut their prices is when they are about to update their product lines so they really do not need to go after market share, the way Dell and other companies have done in the past. Look at where it landed Dell in the end. What Apple is doing now is to produce the most satisfying product they can think of and let the users vote with their wallet.

  • jfutral

    “Apple wants market share in their target demographic.”

    This is a hard thing for most companies to come to grips with. I face it all the time in the arts. Artists, arts orgs, and businesses want to believe everyone is a potential customer. This is sort of true, until they aren’t. As talented as John Cage and Merce Cunningham were, to expect them to have broad appeal beyond the fans of avant garde is nigh on delusional if not simply naive.

    This is why Jobs and Cook always talk in terms of “their customers” as the people they focus on, not “everyone”. It goes back to the minimalist view of stripping down to what is most important, and when it comes to the market what is most important is _your_ customers.

    But it is just as tough to figure out _who_ your customers are. Sometimes they aren’t who you think they are. Volkswagen never courted the college crowd with the Beatle. Back when Buick was trying to introduce an upscale two seater (I forget what it was called), they discovered that a large portion of their customers were female bowlers. That was a tough thing for them since that was not part of the image they wanted for that brand. And we see where that roadster is now.

    Joe

  • Lou Covey

    What is often not considered is that people buy products, not operating systems. iOS and Android are not sold, they are included in the product. People are buying phones and there is a large market in people that just don’t like Apple, or prefer TMobile (in the US) or cannot afford an Apple product. For those people an iOS phone or tablet is not an option. As Glaurung-Quena points out, it’s everyone else that Apple has targeted and it is serving them quite well. Even Google is in the process of killing the Android product line as they have quit participation in the Mobile World Congress this year. The competition will be between Samsung, HTC and Apple, but more specifically between Samsung and HTC.

    • http://profile.yahoo.com/IAQYDRXWYEDBHIU2SWV3FIXFNA james

      ….cannot afford an Apple product? Seriously?

      Some carriers will give you an older version of the iPhone (3S – I think – don’t really care) for FREE! Just sign up for the service and get older version for NOTHING! it is FREE!

      I am sure Apple still makes money (from the carrier) but when you can get the much loved – adored – idolized – “IPHONE” that is two version behind for NOTHING, it does not actually improve the value of the brand – in two years the iPhone 5 will be two versions behind, at least!

      That is the only thing that makes some of us question the ‘business model’ of Apple. If you make really great stuff, why do you give part of it away for nothing – the profit on each older version cannot be enough to justify devaluing the brand

      It is still a really great phone for the price (FREE), but it is not so cool!

      • Asiliat

        I think (as of writing) iPHone 4 is the $0 option, at least in Canada: http://www.rogers.com/web/link/wirelessBuyFlow?forwardTo=PhoneThenPlan&productType=normal&productId_Detailed=IPHN48BLK

        8GB version. Not great, but gets you into door. Anyone that buys any zero dollar phones don’t really care about them though…. So for this discussion, they don’t really count. :P

      • steve_wildstrom

        Apple makes money on every iPhone it sells–5, 4S, or 4. It probably gets something like $600 for the 5, $500 for the 4S, and $400 for the 4. The carrier pays for the phones and makes up the cost from the stream of monthly payments under contract, at least in the U.S. and other countries where the subsidy model is used.

  • http://twitter.com/dmkraig Donald Michael Kraig

    Assume Apple wanted to double their market share. Who would make their products? They can barely make enough to fill demand as is.

  • http://twitter.com/mikemunyi Michael Munyi

    This is brilliant piece of writing. Many thanks.

  • dj

    Actually companies are laying off people due to the lack of demand for the latest iPhone. “Their Customers” are not expanding and with hardware lasting more than a year these days returning customers are not buying as many products…

    • benbajarin

      That’s actually completely false. Foxconn’s hiring freeze has to do with Chinese new year as they confirmed. Also our supply chains checks continue to show unprecedented demand for the iPhone.

  • http://fandroidspin.com/ Larinx

    I’ve asked this before and never got an answer. can someone name another industry where companies that compete with each other are lumped together to show that another company they’re also competing with is weak? market share analyses are fine. combining hundreds of companies together is idiotic.

  • http://profile.yahoo.com/IAQYDRXWYEDBHIU2SWV3FIXFNA james

    If you do not own an iPhone, iPad, or iSomething by now, you are either 13 years old or you have will NEVER buy one. Apple won the early market with innovation and marketing. Apple products are definitely cool to a point. They have the most loyal customer base in the world. How many times will those customers upgrade? Yes, everyone that bought the iPad mini will upgrade to NEXT iPad mini (which will have – now, don’t be to shocked by this prediction – the Retina Display!) but how often are you going to upgrade to for next minor innovation? Every 6 months? Every year? If they ever come out with a version of SIRI that actually works? For the rest of us…..

    A phone with NON-replaceable battery? Seriously? Watch too many movies and the battery dies and you can no longer take phone calls. Seriously? With a Samsung Galaxy S-?, you just carry a spare battery. If the battery gets low, just pop in the spare and go about your business. As a bonus, you get to laugh at all of the iPeople that will get in your face citing multiple tests that show the iPhone’s battery will last a FULL 0.34321 hours longer than the battery in your phone.

    iPeople used to brag about the zillion PLUS one apps available in the iStore. Good for them. The Android store now has about a zillion MINUS one apps in the play store. How many apps do have on your phone? 20, 50, 200, 400? How many do you actually use: 10 -20 (a high estimate)?

    Finally there is the Apple users beloved ‘Eco-system’ ( EGO-system to the rest of us). Apple totally controls the content on your phone. That is easy but if your new phone (for whatever reason) cannot connect to the iCloud, you have a ‘jewel-like’ brick. My Samsung’s data and apps live on the phone, in the cloud, and on my backup hard drive. My Nexus pad (like all Apple products) does not natively support ‘Flash’. Except it took me about 10 minutes to make it support flash – I just had to go through the back door, instead of through the Google Play store (Using superior knowledge and technical training -OR- I Goggled it!). Apple users cannot do that (I don’t think they can — if they could, we would have head about it – again – again – and iAgain) I actually don’t expect to use it much, Flash is about done, but I wanted to see if it could be done. It can and it only cost me 10 minutes and about 1.5% of the phones memory.

    If you like Apple products, enjoy them. They really are kind of cool. I like them for what they are. Just do not think that cool means you should buy the stock. I have shorted it several times since about $650 and made some money each time. I am still short the stock.

    If it bounces off $365 – THE NEXT REAL SUPPORT FOR AAPL, the stock-, I might actually go long again (yes, I owned the stock for at least part of the ride to $700), if the rest of market looks good.

    • AdamChew

      Do I need an extra battery, sorry I don’t perhaps because I am not into keeping in touch with my broker/brokers 24/7.
      Do I upgrade my iPad or iPhone, yes and when i want and need to. But there are many who have not uses or bought them yet and these are the people Apple is aiming at.
      Do I need to brag how great my iPhone or iPad is no because they perform the way i expect them to. Do I need to affirm to the world that I made the right decision in spend my money on Apple products – no because I enjoy using them without having to tell myself that I made the right decision.
      Do i care where Apple shares are heading? No because I am not as clever as some people who brag at how good they are in making money out of them.
      Do I need to make people feel small that they are not using Apple products, no since they like them they can do whatever they like.
      As far as I am concerned I am confident that I made the right decision in buying and spending my hard earned money on products I loved and enjoyed using.
      Life is short and I loved to have the best and yes it is my money I am spending so please do not tell me what I should do with it.

    • Asiliat

      There is no need to open up the phone for spare battery. I have this: http://dx.com/p/usb-rechargeable-800mah-mobile-external-battery-power-charger-for-iphone-ipod-white-105141

      Cheap and gives me a 50% capacity. There are larger capacity for a bit more price. That solves one of your issues you mentioned up top.

      Secondly, android are just as guilty with quick HW refreshes as anyone else. Nexus 7 with more storage 8GB to 16 in less than 6 months for same price. Moto razr to MAXX which addressed poor battery life in less than a year, etc etc etc. it’s just the way it is – industry is moving faster, everyone is trying to entice the public to buy more.

      I’m not sure what your point is with iCloud. Frankly I don’t like living in the cloud yet. I understand it, just don’t trust it. I don’t even have photostream enabled… So my data lives locally as well. But then I don’t do much word processing, so right now, the only data I have are videos, music, photos, and web bookmarks. We just have different use cases.

      • Asiliat

        Flash has workarounds. There are browsers and services which will re-encode the stream. Skyfire is one, can’t recall offhandedly the other. That said, we know that flash is dying, which I think is a bit of shame. I.e. my 2005 dell 9300 17″ laptop with 1900×1200 screen runs flash fine (windows 8 too!) at 480P with lower bit rates…. But absolutely unwatchable with HTML 5 streams. I digress.

        I like android, although my experience is limited to an HP touchpad running JB. However, until google glass becomes available for under $600, I won’t be switching. BTW even google products are going highend prices: google glass (beta) will be under $1500, and the pixel chrome OS laptop is $1299!

    • sgns

      Reading your comment I’m reminded about Yvon Chouinard’s book about how he designed his company Patagonia: he wrote that they do not go after the lifestyle customers, but instead those who know enough to appreciate quality.

      Why? Because if you go after the lifestyle customers, your profit and growth will be very dependent upon the economic cycles. Rather, constructing a company that goes after the quality conscious people, gets sustainable profit, and some growth. This is clearly where Apple succeeded, and then went through the roof at some time of the iPod revolution.

      So, even if the smart phone market now is clearly in a frenzy, and many update their phones often, I think it’s totally okay with Apple if people don’t update the whole time – you’ll probably come around again if they do their job right. There’s probably also too much worry about Wall Street – considering Apple’s logic AND cash chest – and that the situation for the regular customer is much different, as you, and John Kirk, point out.

      You’re also right about owning AAPL short term, it’s quite risky, because most analysts don’t seem to understand the company. Partly because Apple has been so successful lately, some now seem to think Apple is just a regular competitor, following conventional Wall Street “wisdom”.

  • Angus Dike

    I have to say I avoided reading this article because I thought it was ANOTHER depressing article by Techpinions about how Apple has the right business model and everyone else fails hard. Well, it was, but still a great article because it mentions one thing that I have been trying to argue for a while but it gets lost in the hyperbole of “Android customers are cheap” and “Apple customers a rich with more money than sense” arguments.

    Can someone please show me a market comparison with solely high-end/premium phones! I’ll leave someone else to define the cut-off for “high-end/premium”. But this will give a better analysis of a number of things:

    - market share of premium phones
    - profit share to Google, OEM, network, developers, etc, from premium phones
    - web use (though as I understand, there is also browser/accounting specific reasons that PARTLY explain the high iOS use such as aggressive cache management and page reloading)
    - it will even address the annoying misused “fragmentation problem” by (I theorise) showing high end phones keep relatively up to date and the mid-low end Android handsets are the Gingerbread addicts.

    Then and only then, my theory is that we will be comparing like for like. I’m a Nexus device user, and all the arguments that Android is winning get on my nerves because ignorance masks real issues. Apple doesn’t need to get 100% to “win”. I want Android to be around long in the future. Hell I want every good platform to be around in the future (the death of WebOS put me into depression!). But it has to a) be good for consumers and b) make people money.

    We need to see a more detailed breakdown of what market segments are really doing what.

    • steve_wildstrom

      The problem is the difficulty in getting the data. Only Apple really reports sales in a useful way. for everyone else, it’s mostly guesswork to figure out what they are selling.

      • reality oh snap

        And lying about that (see Samsung units shipped vs units sold vs not really ok we made that part up times).

    • benbajarin

      2 points. I get that you think we discuss Apple’s model too much. However, its hard to argue that its a wrong model. On top of that since we are largely writing for the business and professional community, this is a topic that comes out frequently. I hope you understand that we are focusing on industry issues, and to be quite honest the amount of feedback I get from the major OEMs, ODMs, etc, greatly appreciate that we dissect Apple’s model so they can learn things from it. But at the same time if you disagree it is the wrong model then please engage in the debate more when those types of articles come up.

      Second the high-end market is sort of hard to quantify. I see devices being sold at the same $199 subsidized price point that I would not consider high end devices. But the two biggest categories are sub-100 and $199 (where subsidized). Carriers and ecosystem partners get more value from the $199 segment. Smart phones in the low end are largely used as feature phones. So from a data standpoint the carriers tell me there isn’t much value there.

      At the same time if every customer bought and fully engaged on the higher end more premium features phones, we would have a network problem on our hands as the current infrastructure could not support that many heavy data users. So it seems part of the device strategy is to manage devices on the network as well. Keep in mind carriers don’t carry all devices made from an OEM. The pick and choose to keep devices positioned accordingly as well as to manage network.

      I’m told over and over again that iPhone users consume the most network resources by a large margin. I had one carrier exec actually say to me that in terms of end user behavior the engagement they see with iPhone and iOS devices dwarfs other platforms.

      I attribute this to the quality of the software and the audience who buys these devices and have some more disposable income than the low end.

      Right now though the devices owning what I would consider the premium segment is the iPHone, SII and SIII. If you read my article on the Note 2 you would see that I believe the 5″ plus segment could be quite large and carrier data I’m seeing is suggesting it is climbing the charts as well.

      I’d love to hear more of your thoughts on this subject.

      • Angus Dike

        First, just to clarify. I may find the articles depressing in their familiarity, but that doesn’t mean I disagree with them. I find the articles on these pages very insightful and fact driven. Something hard to come by in many areas. I also fully appreciate the Apple are one of the biggests forces in the tech industry, and rightly so. Put simply, I would not have my Nexus 4 if it was not for the success of the iPhone thankfully removing us from the path of Symbian dominance. And they continue to be a massive success story.

        I believe that should premium handsets be compared, it would be obvious that Apple is a runaway success in profits AND marketshare. As someone who has spent some time in the mibile phone industry, I don’t fully subscribe to the idea that iPhone users have more disposable income than other premium device users in their country, but I do believe that there is a much stronger brand that they beoieve they are buying into. And that brand is much more successful in culturing the idea that everything associated with it is premium, not cheap, discounted, or free. This brand goes a long way in explaining the buying power of an average iOS user to any other platform. Samsung is getting there with its Galaxy brand and massive advertising campaign on it’s premium handsets.

        We (when I worked in the industry) used to say there is no other device that can turn people stupid faster than an iPhone. I’ve repeatedly seen people throw basic financial sense out of the window just to get an iPhone in so many ways I don’t really have space here. No other device has that power. Again, I am not saying anything bad about Apple or the iPhone.

        I am also very curious about web usage stats. I don’t doubt for a second that iOS use is proportionally very high. But again, I believe it’s because it’s such a powerful smooth device, it’s like coming from living in the caves of Blackberry pre Z10, to the sunshine. I tell people all the time not to underestimate how more empowered you feel when the experience accessing data is smoother. However, again, I don’t think this is surprising. If someone is sold something as a cheap iPhone simply because it’s touchscreen, the UX will be subpar and their usage with be feature phone-like, they will not buy into any ecosystem, and they will be a bad customer.

        My point still remains, arguments based on Android as a whole wildly distort the reality of what the market is doing and what the end user is doing.

        I have already read your piece on 5″ devices. It was definitely conversation provoking!

  • jfutral

    What’s kind of ironic is, while they might still be making a profit, it might not have been so overwhelming if ATT hadn’t convinced them to go with the subsidized model. I feel pretty sure the margins would have been smaller had Apple gone the route of unsubsidized like the first go round.

    Joe

  • Nathan

    clutching at straws.
    Is apple consistently grabbing market share as fast as the market is expanding? YES or NO? The answer is NO
    Apple says ecosystem – ecosystem. Now Android is also an ecosystem (open ecosystem). Are there more Androids than Apples? YES or NO? YES

    Today customers ask me is it an Android phone and then what make it is – HTC, Sony etc. Customers think Samsung = Android

    So is Android the bright star & Apple a fading stale platform? YES or NO? YES

    simples