Most Read Columns of 2013: Android’s Market Share is Literally a Joke

John Kirk / December 23rd, 2013

During this holiday week, we wanted to re-showcase some of the most read columns of 2013. Whether you read them before or are seeing them for the first time, enjoy some of the most read columns of our site from the past year.

This is the first of three articles looking at how we measure – and mis-measure – who is “winning” in the mobile sector. Article one focuses on market share and was inspired by an article written by Bill Shamblin, entitled: “Chasing Smartphone Market Share Is A Chump’s Game.” Article two will focus on the proper way to measure or “score” mobile hardware manufacturing, mobile advertising and the “razors-and-blades” content models. Article three will focus on the role that market share plays in the network effect and will examine the proper way to measure or “score” how well a platform is doing.

The Joke

Have you heard this one?

Two farmers bought a truckload of watermelons, paying five dollars apiece for them. Then they drove to the market and sold all their watermelons for four dollars each. After counting their money at the end of the day, they realized that they’d ended up with less money than they’d started with.

“See!” said the one farmer to the other. “I told you we shoulda got a bigger truck.”

Or how about this one?

Android is winning because they got a bigger truck.

The Joke Is On Us

Both “jokes” are based upon the old saw that one can lose money on every sale but make it up in volume. Unfortunately, the joke is on us because this is exactly the kind of nonsensical analysis that is being doled out by tech pundits and lapped up by the press and investors. You think I’m exaggerating? Take a gander at some of these recent tech headlines:

Android is crushing Apple and Microsoft in the mobile device market
Android looks like it’s winning
CHART OF THE DAY: The iPhone’s Market Share Is Dead In The Water
Despite its upmarket history, Apple needs to compete on price
Gartner: Apple falls below 20% in smartphone market share
Harvard Liquidates Apple Stake After IPhone Sales Lose Steam
How Apple Is Losing Mobile
IDC: Apple’s share of worldwide tablet market drops under 40%
iPhone growth stalls as Android continues to nip away at Apple’s market share
iPhone Market Share Stuck At 18%
Nearly 75% Of All Smartphones Sold In Q1 Were Android
Sharp to seek Samsung edge for survival as Apple sales lose steam
Why Android Is Winning The Tablet Wars

I could link to a dozen more headlines just like them. These headlines – or their underlying articles – all have two things in common:

1) They contend that Android is winning and Apple’s iPhone is in deep, deep trouble; and
2) They point to market share as the sole or primary basis for their conclusion.

TechCrunch sums up the thoughts of many this way:

“The latest numbers are in: Android is on top, followed by iOS in a distant second. There is no denying Android’s dominance anymore. There is no way even the most rabid Apple fanboy can deny that iOS is in second place now. Android is winning.”

ReadWrite takes it one, final step further, stating:

“The Mobile Battle Is Over – And Google Won.”

In other words, pundits think that Android has won because they “have a bigger truck” (i.e. more market share) – regardless of how much – or how little – profit Android manufacturers make. Android, the pundits opine without a hint of irony, is not making much, if any, money but that’s okay because they’re making it up in volume.

But is that really how market share works? Can you tell how well a company or an operating system is doing solely by measuring its market share?

No, of course not.

Quiz #1: Market Share Alone

Question: Company A has 25% market share. Company Z has 75% market share. Which company is doing better?

Answer: With market share alone, there’s simply no way to know or tell. Company A might be bringing in all the profits and company Z might be going bankrupt.

The Wrong Way To Calculate Who’s Winning

(T)he primary problem with using market share as a measure of business health is it provides no insight into the profitability of the product being sold. ~ Bill Shamblin

Scoring by market share alone and ignoring profit is like saying that a baseball team won because it had more hits when the other team scored more runs. Scoring by market share alone and ignoring profit is like saying that a football team won because it gained more yards when the other team scored more points. Scoring by market share alone and ignoring profit is like saying that a hockey team won because it had more shots on goal when the other team had more goals.

Market share without context is not only useless, it is worse than useless because it is likely to be misinterpreted.

First, market share without context assumes that each percentage of market share is equal to another – that every Android activation is equal to an iOS sale. Nothing could be further from the truth. You can’t simply total up market share and determine a winner any more than you could count up coins or poker chips without knowing the underlying value of those coins or chips. A penny does not have the same value as a quarter and only a small child would rather have more coins than fewer coins but more money.

Second, market share without context implies that market share is a zero sum game – that market share gains for one always result in a loss to another. But in a rapidly growing market, a company can actually LOSE market share yet have both positive unit sales and profit growth. Not growing as fast as another company is not nearly the same as “losing”, especially if the growth is coming in a more desirable portion of the market.

For example, despite a decline in Q1 market share, iPhone sales actually increased based on year over year comparisons. (iPhone sales were not declining,they were growing slower than the overall market.)

The same was true of tablet sales. Last quarter, Apple LOST tablet market share, but because the entire market was rapidly growing, they GREW unit sales by 65%.

tablets-q1-2013

Source: Apple 2.0, “Pie charts of the day: Tablet sales grew 140% year over year”

The “Fair-Share” Way To Calculate Who’s “Winning”

What matters is not only market share and not only profit share but the ratio between them. This is called Fair share profit analysis. Fair Share Profit Analysis contends that 1 point of market share should deliver 1 or more points of profit share.

Less than a 1-to-1 ratio of profit share to market share demonstrates that a company is buying market share; that the company has not been able to differentiate its product in the market and is likely competing primarily on price.

More than a 1-to-1 ratio of profit share to market share demonstrates a company’s ability to differentiate its products, provide more value than its competitors, command higher prices, charge a premium and enjoy pricing power.

Quiz #2: Market Share or Profit Share

Question: Company A has 25% market share and 75% profit share. Company Z has 75% market share and 25% profit share. Which company is doing better?

Answer: If you said anything other than company A, then you are dumber than a doorknob. Any intelligent person would take company A’s profit share over that of company Z’s market share.

No one would be confused if Apple had 50 percent market share and 50 percent of the profits. But apparently it’s very confusing to some that Apple has only 5 percent of the market share and well over 50 percent of the profits. ~ John Gruber, The church of market share

Imagine, for example, that Apple were a hamburger chain who made more money than McDonalds, Burger King, and Wendys combined, but only sold 5% of the total hamburgers. Would anyone seriously contend that Apple was “losing” the hamburger wars?

Apparently so. For example, take this analysis from Matt Asay of ReadWrite (please!):

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.

It turns out it’s a really big deal to maintain market share, and not simply profits. Profit share follows market share.

Profit share follows market share? Are you kidding me? Show me a business sector where profits have a 1-to-1 correlation with market share and I’ll show you the exception that proves the rule. The reason market share doesn’t necessarily correlate to profit share is because profits are made up of both market share and margins. And market share alone tells us nothing about margins, therefore market share and profit share are almost always going to be unbalanced.

screen-shot-2013-04-16-at-4-16-4.16.46-pm

Source: Asymco, Escaping PCs

Take, for example, the Apple Mac. As the pie chart above demonstrates, the Mac has 45% profit share with only 8% of the market share. That means that Apple pulls in an awesome 5.63% of the sector’s profits for each and every 1% of its market share.

Profit share always follows market share? Not hardly.

The truth is, anyone can get market share if they want it badly enough. All they need to do is sell their product at cost, give it away for free or, better yet, subsidize (pay their customers) to take the product off their hands. This is called “buying” market share, but it always comes at the cost of profits.

Pricing to gain market share simply for the sake of market share is a chump’s game. ~ Bill Shamblin

The problem is, you can “cheat” and buy market share, but you can’t do the reverse and “cheat” to buy profits. You have to EARN profits. Buying market share is a downhill race to the bottom but gaining profits is an tortuous uphill climb and it can only be made if the manufacturer is able to produce highly valued and differentiated products. The company that buys market share must inevitably go out of business or reverse its course and fight its way back up to profitability. The company with the value and the profits, on the other hand, has the advantage of holding the high ground and can choose to take market share at will.

Quiz #3: Less Market Share Can Be Better Than More

Question: Company A has 25% market share and 50% profit share. Company Z has 75% market share and 50% profit share. Which company is doing better?

Answer: Anyone with any business sense would say company A.

Company A is commanding 3 times the price of Company Z. The formula is 50% profit share divided by 25% market share (50/25 = 2). This means that for every one percent of market share, company A has two percent of the profit share. Company Z’s position is reversed. For every one percent of market share, they command only 0.5% profit share (50/75 = 0.66). Company Z would have to work three times as hard and sell 3 times as much product just to match the profits of a single sale by company A.

Grading The Contestants

Android accounts for approximately 70% of global smartphone shipments and 29% of global profits. This means that the average Android manufacturer creates just .41% of profit for each point of market share (0.29/0.70 = .414). In other words, the average Android manufacturer needs to capture 2.4 points of market share just to increase their market profit by 1%.

Such a low fair share profit index may indicate that Android manufacturers are:

— Having difficulty differentiating their product;
— Sacrificing profits in order to buy market share (the “race to the bottom”);
— Unable to reach economies of scale in the manufacturing process.

(Profit data, source: Canaccord, Market share, source: IDC)

Samsung is doing far, far better than the average Android manufacturer. Samsung’s 2013 Q1 market share was 33% and its profit share was 43%. This means that Samsung reels in 1.3% of the profits for every 1% of the market share it owns (0.43/0.33 = 1.30). Samsung, unlike all other Android manufacturers, is earning, rather than “buying”, market share.

(Profit data, source: Canaccord, Market share, source: IDC)

Apple’s iPhone 2013 Q1 market share was 18% with 57% profit share. This means that Apple’s iPhone took in a lavish 3.12% ((0.57/0.18) of all profits for each 1% percent of market share it controls.

If Android manufacturers needed to sell 2.4 phones just to gain 1% profit share, they would need to sell a staggering 7.5 units just to match the profits that Apple garnered from the sale of a single iPhone.

As Daniel Eran Dilger puts it:

“… Apple could simply have blown through much of its $13.1 billion quarterly profit to “beat” Samsung in market share, rather than allowing Samsung to do that while earning $4.8 billion less than Apple.”

Further, in 2012 Q1, Apple held 23% market share and 74% profit share. This means that each 1% of market share was equal to 3.22% (0.74/0.23) of the sector’s profit share. Apple’s market share to profit share ratio remains almost identical, which means that Apple has maintained its pricing power. Not only that, by focusing on just a few smartphone models, Apple has become the low-cost manufacturer in smartphones as well.

slide-11-638-1

Source: Ben Evans, Mobile is eating the world

Take a good hard look at the chart, above, then go back and re-read the headlines I listed at the start of this article. What each and every one of those headlines is contending is that Android is winning and Apple is losing because Apple doesn’t control the green portion of the chart, above.

I mean, honest to goodness, take a look at the total units sold compared to the paltry profits obtained from those green sales. Who in their right mind would even WANT that market share?

Price Elasticity

What we’re really talking about here is the economic concept of price elasticity. “Price elasticity” seems to be way beyond the pay grade of most pundits and analysts who follow the mobile sector, but what it essentially means is that when the price of something goes down, sales almost always go up, but the rate of that sales increase depends upon the price elasticity of the product. In other words, dropping prices may increase sales but the increased sales may result in disproportionately larger or smaller profits.

Unless we truly understand the price elasticity of the iPhone, we really shouldn’t be calling for Apple to drop its iPhone prices.

Summation

It isn’t what we don’t know that gives us trouble, it’s what we know that ain’t so. – Will Rogers

Not only do the high priests of market share have it wrong, they have it exactly backwards. The company with the lower market share and the higher profits has all of the leverage. The goal is to INCREASE, not decrease, the ratio of profits to market share. Increasing market share at the cost of profits is a recipe for disaster, not a formula for success.

Apple may or may not do well in the future but right now, and contrary to popular belief, they are winning the smartphone wars and winning them handily.

RATIO OF PROFITS TO MARKET SHARE
3.12% Apple
1.30% Samsung
0.41% All Android

Not only is market share not the best way to evaluate the relative positions of competitors but, without context, it is one of the worst. Assuming that market share will always bring you success is like assuming that a bigger truck will always bring you bigger profits. It’s literally a joke.

Next

Next, I’ll talk about how market share affects hardware manufacturing, advertising and the “razors-and-blades” content models. The series will conclude with a discussion of platforms and the network effect.

Read Part Two of John’s column entitled: 4 Mobile Business Models, 4 Ways to Keep Score.

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.

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?
  • It is 1960. One company has 50% marketshare and the other has 1%. Which company is doing better? Answer: Toyota. (not GM).
    You may insert other brands of your choosing.

    • qka

      I think you meant 1970.

      In the early 60s, Toyota tried to enter the US market, with the same products they were selling in Japan.. They failed miserably, and actually LEFT THE MARKET, to return several years later, with products designed for the US market.

  • Wow… Thats all I can say. Incredible. You killed it with this article. This will be my go-to piece when quibbling with fandroids from now on. Nice work!

  • jfutral

    Definitely a classic article.

    Joe

  • Gary Brockie

    There is one thing you forgot! Apple does indeed need a bigger truck. They need an armored one to carry away all of the immense profits they are making.

    Apple is doomed, to succeed it seems..

    Great article and right on the money.

  • SPM

    This whole article is an exercise in nonsense. Samsung makes almost as much profit as Apple and this profit is growing rather than shrinking as in the case of Apple, and even if you accept the premise of the article that you can ignore Google’s advertising revenue/profits accrued from Android and the fact that OEMs make even less profit making Apples phones for them, the logical conclusions from this are@:

    1) If you are a customer, don’t buy Apple phones – the exorbitant profit margin means that they are overcharging for the Apple badge and are ripping you off as designer labels routinely do. Buying an Android phone which is subject to healthy market competition means you do not get ripped off.
    2) If you are a potential shareholder, don’t buy Apple shares – if Apple’s market share is shrinking, that means Apple’s share values will fall in future, unless profit is hugely inflated to compensate (which is not happening). The recommendation has to be sell, sell, sell.
    3) If you are a developer, ignoring 81% of the market can’t be smart.

    • truth

      This whole comment is an exercise in nonsense. If you are a reader, ignore it.

    • GetFactsStraight

      First, let’s explore your starting premise: The assertion about Google’s profits and ad revenue from Android. Funny, though, how Google makes 90% of their mobile ad revenue from iOS, and not Android. Android’s ad revenue isn’t big enough to be more than a statistical blip on the overall ad revenue radar for Google. In fact, Google may be de-emphasising Android. They’ve removed all Android-based technology from ChromeOS and the ChromeCast device. They’ve “demoted” the entire group as some afterthought under the operating systems division, reporting to the VP who is responsible for Chrome. They used to report directly to the President and CEO, but that changed when the founder of Android left. That doesn’t sound like a division that is strategically important in my mind.

      With that, let’s explore your so-called “conclusions”:

      1) Like-for-like, a high-end Samsung or HTC is the same or similar price as a similarly-equipped iPhone, but without the same profit margin (go figure). They end up “cheap” or “free” because you pay for them with your contract. It’s short-term financing so you can buy an expensive phone for cheap (in the car business, they call it “leasing”. Somewhat different model, same premise). Apple doesn’t have a cheap entry-level phone, and for the moment doesn’t appear to need one (whether that is good or bad in the long run remains an open question).

      2) The “marketshare” numbers need to be questioned. How is it that a device with “shrinking share” accounts for increasing share of app sales revenue, mobile ad revenue and mobile network traffic in general? The share of all of those numbers for iOS has increased year-over-year since the platform arrived. As for “shrinking profit”: certainly, Apple saw some recent setbacks. But that isn’t an indication of a trend either way. It’s too soon to say whether it is a trend or not. Android may have 80% of the devices out there, but iOS represents 85% of ad revenue and mobile data, and about 80% of app sale revenue.

      3) Again, why are developers making an order of magnitude more selling apps via iTunes for iOS than they are on Android? Even the top names, like Rovio, make far more from iOS than Android, even though they have similar-sized user bases. As for Apple’s near-bankruptcy: you had best check your facts. Even without iPhone and iPad, Apple would still be a large company with healthy profit. They were certainly profitable (with decent profit growth) for several years before the iPod appeared, after Jobs got the ship righted and turned around. The iPod and iPhone gave them explosive growth. But the Mac is still a significant profit centre all by itself, and was for several years before the iDevices appeared on the scene. Granted, Mac sales have declined, but slower than PC sales, and it is presumably because the iPad is eating into Mac sales in the same way it is impacting the PC.

      The iPod and iPhone didn’t rescue Apple. To say otherwise is factually not true. The disconnect between “marketshare” and the position iOS holds in useful metrics (app sales, ad revenue, mobile data traffic) has yet to be challenged in the media in any meaningful way. Google has made essentially zero profit off of Android, since almost all of their mobile ad revenue comes from iOS. The assertions in this article are anything but nonsense, and raise valid points and questions based on fact, not innuendo or guesses.

      • Tom McLernon

        To say there there is no profit from Android is just plain crap. There is just as much profit from Android as from IOs. The issue is about in whose hands does the profit end up?

        Is it in the upstream or the downstream? In the case of Apple it is all squeezed into the downstream, the Gucci bag of phones, the rip off of the final purchaser with bling. When oil is $100.00 per barrel there is a lot of margin in the upstream, and none in the downstream. When oil is $50.00 per barrel there is a lot of margin in the downstream and not so much in the upstream. If a company is in the happy position of being in both the upstream and downstream they don’t care much about the price fluctuations. But if they control the upstream (like Saudi) they can create scarcities and control prices.

        The same upstream/downstream analogy can be used for manufacturing, the who makes the components, and who assembles the phones? Where does the profit go if a company does both, and who can create scarcities, and price fluctuations at will?

  • Tom McLernon

    Need to take some math 101? If one company gets 100% of the market share, how much has the other one got? Is that 0%? And how much profit does it have? Just a bunch of flawed logic, you can slice and dice it any way you want, but competition is about taking away market share from others. Is that not how MS got so big, they made their OS a de facto standard commodity, not because it was better than iOS or Linux or Unix. Now there are more Android OSs than Windows, over a billion and climbing.

    • steve_wildstrom

      Let’s try Econ 101: The goal of the firm is to maximize (or, as Herbert Simon argued, optimize) profits, not market share. At 100% market share, you may have all the profits, but that is not necessarily the greatest profit obtainable. Check out monopoly pricing theory.

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