profits – Tech.pinions

Who’s The Gorilla And 8 More Questions About the iPhone 5C

Question #1: Is The iPhone 5C coming?

Sure looks that way. The rumors have grown so loud that they’ve become deafening. Let me put it this way: If the iPhone 5C is NOT announced on September 10th at the upcoming Apple event, it will be the non-announcment heard ’round the tech world.

There’s nothing in this world more instinctively abhorrent to me than finding myself in agreement with my fellow-humans. ~ Malcolm Muggeridge

Question #2: Why The Change In Apple’s Strategy And Why Now?

It’s hard to say who gets criticized the most, the successful person, or the failure but it’s mighty close. ~ Joe Moore

Apple definitely considered doing a mid-range phone years and years ago. They opted, instead, to continue manufacturing their one-year and two-year old phones and sell them at lower price points. That strategy has been successful, but it also may have run its course. For a good read on this topic, I commend you to Rene Ritchie’s article entitled: “Why iPhone 4C didn’t make sense but iPhone 5C just might.”

The hardest thing to learn in life is which bridge to cross and which to burn. ~ David Russell

Question #3: How Will Apple’s Corporate Philosophy Shape Their Decisions On The iPhone 5C?

Do what you feel in your heart to be right – for you’ll be criticized anyway. ~ Eleanor Roosevelt

When thinking about the iPhone 5C, we need to keep in mind that Apple is unique. First, Apple has always been about making the best, not the most. ((Tim Cook: “For us, winning has never been about making the most. Arguably we make the best PC, we don’t make the most. We make the best music player, we wound up making the most. We make the best tablet, we make the most. We make the best phone, we don’t make the most phones.”)) Second, Apple is not afraid of cannibalizing their own products. Third, Apple believes in simplicity — less, but better. Fourth, Apple’s strength is in its ecosystem. Any tactical decision that diminishes the cohesion of Apple’s ecosystem would be strategically counter-productive.

The man who follows a crowd will never be followed by a crowd. ~ R. S. Donnell

Question #4: Is Apple Introducing the iPhone 5C In Order To Standardize Their Technology?

Absolutely.

Logic merely enables one to be wrong with authority. ~ Doctor Who

This is definitely one of the most compelling reasons for the move to the iPhone 5C. It will allow Apple to simultaneously retire the iPhone 4 and 4S and move its new customer base to the newer iPhone screen size and to the newer iPhone Lightning power cords. This is not the only reason for the move to the iPhone 5C, and it may not be the primary reason for the move, but it is entirely consistent with Apple’s doctrine of simplifying their product lines and consolidating their ecosystem.

Question #5: Is Apple Doomed If It Doesn’t Add More Market Share?

Get a grip.

Apple’s market share is bigger than BMW’s or Mercedes’ or Porsche’s in the automotive market. What’s wrong with being BMW or Mercedes? [2004] ~ Steve Jobs

— The iPhone is America’s most profitable product.
— Apple Computers, iPads and iPhones were just named the top three brands of 2013.
— Apple easily out-profits both Microsoft and Google.

Rule Number 1: Never lose money. Rule Number 2: Never forget rule Number 1. ~ Warren Buffett

If Apple is doomed, then what does that say about the respective state of their rivals?

Profit is one of the nine reasons to be in business. The other eight are unimportant. ~ John Kirk

Apple is doing just fine. Turns out that selling a differentiated premium product is a sustainable business model. Who knew? ((Ben Thompson: It turns out there are two sustainable positions in an industry (and to be clear, this isn’t exactly rocket science. Again, business school…). The low cost leader – Samsung – and the highly differentiated one. See, Apple already did “transform the industry with a revolutionary design.” And while Android has made significant gains on the hardware, software, and even ecosystem fronts, the overall package offered by Apple is still highly differentiated. The evidence bears this out: Apple charges the highest prices for phones, happily subsidized by carriers (especially in the US), because customers will change carriers to get the iPhone. This results in by far the highest margins in the industry with only a small portion of the overall volume.)) (Most every knowledgeable business observer, that’s who.)

We learn from history that we do not learn from history. ~ Georg Wilhelm Friedrich Hegel

Those who do not know their history insist that history is about to repeat itself – that Android is about to become the next all-encompassing Windows monopoly. But if you know your business history, then you know that Windows was an aberration, not a precedent; the exception to the rule, not the rule.

We’re seeing history repeat itself all right. Just not the history most have mis-remembered.

“History is a very good teacher, but (it) has very few students.” ~ Wael El-Manzalawy

Question #6: But Didn’t Steve Jobs Say That Apple Needed Market Share, Not Profits?

“What ruined Apple was not growth … They got very greedy … Instead of following the original trajectory of the original vision, which was to make the thing an appliance and get this out there to as many people as possible … they went for profits. They made outlandish profits for about four years. What this cost them was their future. What they should have been doing is making rational profits and going for market share.” – Steve Jobs, 1995

Whenever Apple’s market share comes up, so does the above Steve Jobs quote. But when you’re re-reading that quote, keep these things in mind.

First, Steve Jobs was still running Apple when the current iPhone pricing policies were set. It’s unlikely that he forgot his own advice.

Second, the iPhone has been gaining market share in key global markets.

Third, pricing to gain market share simply for the sake of market share is a chump’s game.

Apple already has 65 percent of the mobile phone profits with only 6 percent of the market share. How much more profit share can Apple reasonably hope to acquire?

Fourth, Steve Jobs wasn’t talking about ALL market share, he was talking about acquiring the RIGHT market share. Some customer’s are simply not worth having.

The question is one of price elasticity: How much more profit, if any, will Apple garner by lowering the price of their phone? ((“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.)) And will the market share that they acquire be desirable?

Question #7: Is Pricing The Key To The iPhone 5C?

No.

(The price of the iPhone 5C) is the only thing that deserves analysis ~ Horace Dediu

I respectfully disagree.

The success of the iPhone 5C depends upon valued differentiation. The key is not to make the phone cheaper, it is to make it more valuable EVEN THOUGH IT IS CHEAPER. (Perhaps Apple should call it the iPhone 5 “V” instead of the iPhone 5 “C”.)

Many companies foolishly try to differentiate their products by price. This is always a mistake. If the lower priced item is more valuable than its price, then it cannibalizes its premium sibling. If the lower price is achieved by crippling the value of the product, then poor sales and user dissatisfaction ensue. (See, for example, Windows RT).

The key is to differentiate without disabling the product. You want to create a product that is, yes, lower priced, but the lower price is merely the icing on the cake. The “cake” is that the lower priced product is actually MORE VALUABLE to its intended audience than its premium priced cousin.

Take for example the iPod Nano and the iPad Mini. In both cases, they were lower priced than their premium siblings. But in both cases, the features that the products were missing (size, for example) actually ENHANCED their value to their target audience. Apple needs to do the same with the iPhone 5C.

A satisfied customer is the best business strategy of all. ~ Michael LeBoeuf

Question #8: How Will Apple Differentiate The iPhone 5C From the iPhone 5S?

I don’t know.

I used to be indecisive but now I am not quite sure. ~ Tommy Cooper

— They could do it by making the phone only work in certain geographic locations, like China.

China is a big country, inhabited by many Chinese. ~ Charles de Gaulle, former president of France

I don’t think that’s likely.

— They could do it via specs: lower memory, storage, processor, no LTE antennas, no NFC, no Siri…

…no way. This is crippling the product, not enhancing it. The new iPhone 5C will certainly have lower specs, but those lower specs – as with the iPod Nano and the iPad Mini – should be consistent with the job the product is being asked to do. Artificial differentiation should be avoided at all costs (see what I did there?).

People want economy and they will pay any price to get it. ~ Lee Iacocca

Apple’s goal is to CONSOLIDATE their ecosystem, not fragment it. ((Tim Cook: “And I would just add to that, because we are not fragmented like our competition, we can update an iOS with a major release and a substantial percentage of our customers will update to the – to our latest offer. We’ve made that very elegant and very easy. Also because the usage for iOS is so much higher, when we integrate things well, people use them a lot more and so just those concepts by itself are huge advantages from a customer experience point of view and from a more of the metrics that you’re thinking about point of view.”)) Nothing should be “missing” from the iPhone 5C that will be “missed” by any of its intended audience.

Power is not revealed by striking hard or often, but by striking true. ~ Honoré de Balzac

Question #9: Who’s The Gorilla?

Competing in the market is like wrestling a gorilla. You don’t quit when you’re tired, you quit when the gorilla is tired. The question is, who’s the gorilla in the smart phone space – Apple or Apple’s competitors?

Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window. ~ Peter Drucker

We may find out who the Gorilla is on September 10th.

4 Mobile Business Models, 4 Ways To Keep Score

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?

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.

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. ((Then again, we all know that Jeff Bezos is crazy like a fox.))

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

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.

Google’s Android Activations Are A Lot Less Cash Cow And A Lot More Bull. And That’s OK.

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.

Android’s Market Share Is Literally A Joke

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%.

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.

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.

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, 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.

Apple Is Playing Chicken With The Mobile Carriers

“The game of chicken, also known as the hawk-dove game or snow-drift game, is an influential model of conflict for two players in game theory. The principle of the game is that while each player prefers not to yield to the other, the worst possible outcome occurs when both players do not yield.” ~ Wikipedia

800 Android Carriers vs. 240 iPhone Carriers

“The narrative has been focused on the consumer demand, and the narrative needs to shift to the operator…” ~ Horace Dediu, former in-house analyst for Nokia

Android sells devices through almost all of the world’s 800 carriers while Apple sells the iPhone through only about 240. (Only about 500 of the world’s global operators have the network capabilities needed to handle the iPhone, but that number is quickly increasing.)

The reason for the discrepancy between the number of carriers supplying Android and the iPhone is that Apple prices their phones above $600 and places sales quotas and other requirements on the carriers before they are permitted to sell the iPhone. Potential partners must determine whether taking on these obligations is worth the benefit of offering the device.

Examples of holdouts are China Mobile Ltd., the world’s biggest phone company, and NTT DoCoMo Inc., Japan’s largest mobile carrier. On the other hand, other companies are succumbing to Apple’s demands. T-Mobile added the iPhone to its lineup in April and they announced that they have sold 500,000 iPhones in just under a month. And U.S. Cellular (USM), had long contended that the iPhone cost too much, yet last week they announced that they had agreed to sell $1.2 billion worth of handsets over three years, after conceding that their failure to carry the iPhone was costing them customers.

Are The Carriers In Control…

Adam Satariano of Bloomburg reviewed the current carrier impasse and concluded:

“Apple Inc. (AAPL) is missing out on a chance to court as many as 2.8 billion new smartphone customers, many of them in Asia, as wireless-service providers balk at conditions imposed by the iPhone maker and drag their heels in signing on as partners.”

“Carriers are starting to question Apple’s pricing strategy and are supporting multiple other platforms,” said Shah at Strategy Analytics. “They no longer need Apple.”

…Or Is Apple In Control?

The unasked question here is: If Apple is losing the opportunity to sell more iPhones because of their onerous conditions, then why does Apple continue to impose those conditions? The unstated answer should be – but apparently isn’t – obvious.

Clearly Apple – unlike the vast majority of tech pundits and Wall Street Analysts – does not see a pressing need to acquire additional operators at any cost. Of course Apple wants more customers, and that’s only going to happen if Apple expands its carrier base. However, unlike most of the rest of the world, Apple feels that they can patiently wait until the carriers come to them and meet their terms. Does that make Apple arrogant and out-of-touch with reality or does that make them master negotiators?

Four Realities That Favor Apple: Capacity, Real Growth, Retention and Profits

First, Apple was at their iPhone manufacturing capacity for much of the holiday quarter. It doesn’t make much sense for Apple to increase the number of addressable customers until and unless they have the capacity to provide those new customers with product.

Second, as you can see from the trajectory of the chart of the iPhone’s cumulative sales, above, Apple is still enjoying significant real growth in the sales of their phones. This truth is often obscured and overshadowed by market share numbers.

Third, as markets approach saturation in the U.S. and Europe, retention and churn become far bigger issues and when it comes to customer satisfaction and retention, Apple has it all over their competitors.

Notice how Apple started with only AT&T in the U.S., and then slowly and methodically ground down the opposition of the other carriers until Verizon, then Sprint, then T-Mobile, then U.S. Cellular and many other small carriers caved in as the churn caused by the iPhone crushed their sales and then caved in their profits.

Fourth, Apple takes in 57% of the profits in the mobile industry with only 8% of the sector’s market share. That is some serious leverage.

Apple is Enigmatic But Still Susceptible To Analysis

I contacted Apple to see what their actual negotiation strategy was but, oddly, they were not very forthcoming. Go figure. Tim Cook has failed to return my several calls (or even had the courtesy to lift the current restraining order against me) and my $605,000 attempt to have coffee with him failed when it was discovered that I had used a stolen credit card. C’est la vie.

So we’re going to have to use analysis (i.e., guesswork) instead. My best guess is that Apple’s strategy is to go after the whales and ignore the minnows. (The minnows will fall all over themselves to jump on board once the whales are lined up, anyway.) Apple only has so much capacity to manufacture phones as it is and they’d prefer to expand first in those markets that count and count the most.

Further, Apple is a damn patient negotiator. While the rest of the world is screaming at the top of their lungs that Apple has to “DO SOMETHING”, Apple is patiently waiting for the carriers to realize that they can’t compete without the iPhone in their mobile portfolio. And based upon the capitulation of Sprint, T-Mobile and U.S. Cellular, Apple may just be right.

So who will win this game of Chicken? Right now, Wall Street and a whole lot of investors are betting against Apple. But if you look at the history of Apple’s negotiations with the music labels, with AT&T and with all of Apple’s recent carrier acquisitions, you can see that Apple has played – and won – this game before.

Only time will tell us which side will blink first. But me – I’m not betting against Apple.

Google and Amazon: Doing It All Wrong

By the conventional standards of business, it would be hard to find two companies with a greater tendency to do things wrong than Google and Amazon. Yet both are regarded as outstanding success story. What is going on here, and what does it tell us about how corporations ought to be run.

Each company violates a fundamental rule of business. In the case of Google, it’s a failure to diversify its sources of revenue and profits while at the same time displaying a woeful lack of discipline in how it enters new businesses. For Amazon it’s a persistent, almost stubborn refusal to maximize profits.

A glimpse at Google’s income statement reveals just how narrow the company’s success is. Google took in $50.2 billion in the year ended Dec. 31. Of that revenue, $31 billion came from advertising on Google Web sites and another $12.5 billion from ads on Google Network affiliate sites. This means that Google’s original revenue-producing activities, AdWords and AdSense, accounted for 87% of its gross. Motorola brought in another $4.1 billion Everything else–the Google Play Android store, sales of Google Nexus branded Android devices, paid Google Apps, whatever else the company does to produce revenue–generated a mere $2.4 billion. Considering that Motorola suffered a heft net loss from continuing operations, it’s safe to say that search-based advertising was responsible for well over 100% of Google’s revenues.

The unprofitability of everything Google has tried does not seem to discourage the company. Under CEO Larry Page, Google has purged a number of its least successful products. But it continues to add efforts that have little hope of generating profit in the near-term, or perhaps ever. It is spending a good bit of money developing self-driving cars, though the technology seems years away from commercialization. It’s from from clear that many people away from such hotbeds of geekdom as the Googleplex or the MIT campus will ever be willing to wear, let along pay for, Google Glasses (above.) Who but a Google engineer is going to put down $1,299 for a Chromebook Pixel, a laptop that cannot run any programs other than a Chrome browser? And why is it messing around with same-day-delivery retail, a business that seems far outside its core competency–and a logistical and business challenge that no one has cracked?[pullquote]Classical economic theory says corporations try to maximize profits. Amazon and Google prove there are exceptions.[/pullquote]

Of course, the ad business is so profitable that Google doesn’t have to worry in the near term. It’s net margin was 21%, down from recent years but still very healthy. And investors seem happy. It’s stock is trading just a bit below its 52-week high of 844 and the price is 26 times 12-month trailing earnings, a sign that investors believe growth will be healthy into the future.

So while Google’s attention deficit approach to new projects may defy business school wisdom, it isn’t hurting the company. And it is certainly benefiting consumers. We get goodies like Google Maps and Gmail for free, while Google funds the sort of research–self-driving cars–that once was the province of the government and that could have a big payoff for society, if not for Google.

If Google’s problem is a flurry of innovation that has produced little revenue and no profit, Amazon is a tale of profitless growth. Classical economic theory says the purpose of a corporation is to maximize profits, and while the research of scholars like A.A. Berle and and Herbert Simon long ago dismissed taking that notion too literally, profit motivation is still supposed to have something to do with business decisions.

Not, it would seem, at Amazon. The company’s revenues in the fourth quarter of 2012 grew 21%, and that was the worst performance in three and a half years. But profits are another story. In its best year, 2010, it netted just over 4% of sales while it actually recorded a loss last year. Amazon has relentlessly pursued growth with little regard to profitability. It has disrupted one market after another by undercutting the prices and business models of competitors.

And its investors love it. Like Google, it is trading near a 52-week high. Its trailing EPS can’t be calculated because of the loss, but Amazon is trading at a staggering 76 times expected 2013 earnings.

And customers love it too. Unless you are in a retail business that Amazon has demolished, you are most likely the beneficiary of Amazon’s predatory nature. Amazon has not only saved me money, it has saved me countless hours I would have wasted shopping. (Once you get Amazon Prime, the tendency to order stuff online rather than pick it up at the store become overwhelming. It’s a rare day we don’t get at least one Amazon package.) And while Amazon’s impact on retailing has been the most obvious, Amazon Web Services has drastically lowered the cost of starting any sort of online business.

So let’s hear it for Amazon and Google and their impossible business models. Eventually, Google will to find a moneymaking business to supplement search ads, whose growth is slowing. And Amazon investors’ patience with tiny or nonexistent profits won’t last forever. But for the rest of us, let’s enjoy it while we can.

Upside Down Analysis

These thoughts via Business Insider:

According to estimates from Canaccord Genuity, Samsung has shot further ahead of the pack as the world’s largest smartphone manufacturer, shipping 56.3 million units in the third quarter.

Apple’s consolation is that it still takes a larger share of industry profits, despite shipping approximately half as many units as Samsung.

Today’s analysis of the mobile industry makes my head hurt because it is analysis turned on its head. In business, profits are not the consolation prize. Profits are the ONLY prize.

Sheesh.

A Message To Eric Schmidt And Android: Put Up Proof Of Profits Or Shut Up

There will be one billion Android devices—smartphones and tablets—in use within a year, Google chairman Eric Schmidt said.

Schmidt made the prediction during an interview with AllThingsD’s Kara Swisher and Walt Mossberg at the 92nd Street Y in New York Wednesday night.

Google is activating 1.3 million Android devices a day.

“Do the math,” Schmidt said. ~ via Business Insider

Doing The Math

All right, Mr. Schmidt. I’ll do the math. Activations are only part of the equation. The numbers that you keep conveniently not telling us are margins, revenues and profits. Activations without those numbers are meaningless. Market share without those numbers are meaningless. You want us to do the math, Mr. Schmidt? Your numbers – without context – are mathematically meaningless.

Now I have no doubt that Android has margins, has revenues, has profits. I have no doubt that Android is making money. What I SERIOUSLY doubt is just how much money Android is making. You want us to take you seriously, Mr. Schmidt? Tell us those numbers.

Market Share Myopia

We are OBSESSED with market share numbers when we should be obsessed with profit.

— Market share is a COMPONENT of profits. It means nothing in and of itself.
— Market share is the factor. Profit is the solution.
— Market share is just one of many top lines. Profit is the one and only bottom line.
— Market share is the means. Profit is the ends.
— Market share is not the goal. Profits are the goal.

Where Are The Numbers?

A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large. ~ Henry Ford

So where are Google’s numbers for Android? They have them. They’re just not sharing them. Why do you suppose that is?

When a company has favorable numbers, they shout them from the mountain tops. When a company has numbers that are unfavorable, they remain stoically silent. This is the industry norm.

— Apple seldom talks about Apple TV
— Samsung stopped reporting their tablet sales numbers
— Amazon never reveals sales or profit numbers for the Kindle Fire
— Microsoft actually does reveal the exorbitant amounts they lose on Bing. Go figure.

When a company says nothing about a product’s profits, they are telling us something. And that something is not good. Their silence speaks volumes.

No Profit, No Glory

“Business is all about solving people’s problems – at a profit.” ~ Paul Marsden

It is somewhat ironic that I keep reading stock market “bears” claiming that Apple is a “bubble” when Apple is one of the few companies that actually reveals their numbers and is built upon a solid foundation of revenues and profits. If a company wants recognition, if a company wants to be taken seriously, if a company wants us to respect what they do, then they need to reveal their profits.

There should be a new rule when reporting on companies. Unless a company is making a profit, words like “successful”, “winning”, “dominating”, and such should be banished. If a company wants the glory, they should have the guts to reveal their profits.

Market Share and Margins and Profits, Oh My!

Everyone obsesses over market share but anyone can achieve market share if they don’t care about profits. All they have to do is lower their prices or sell their goods or services at a loss.

— Market share is easy.

— Profit is hard.

— Market share plus profit share is genius.

Stop Talking About…

The worst crime against working people is a company which fails to operate at a profit. ~ Samuel Gompers

Now here come the excuses, the rationalizations, the justifications. “But, but, but…profit isn’t everything! There are more important things like…”

Please stop. There’s nothing more important to a business than profits. Stop talking about:

— market share without context.
— how much profit you’re going to make in some distant, undefined future.
— how much you’re making from some undisclosed and undiscoverable content, advertising, data gathering or other nebulous activity.
— how your business model is different and it shouldn’t be compared to other companies. You’re wrong. Every company’s profits can and should be compared. Profits are the great equalizer.

The proof is in the profits. If you don’t the have profits, you don’t have the proof. And if you don’t have the proof, then please, just stop talking.

Apple’s Quiet, Brutal War on Wireless Carriers

Steve Jobs made no secret of his disdain for wireless carriers. In 2005, when Apple was still denying any interest in getting into the phone business, Jobs sneered at the four major U.S. carriers as the “four orifices” through which the wireless business passed. With the launch of the original iPhone, Apple made a concerted, but failed, effort to change how the wireless carriers did business by getting AT&T to sell the phone without a subsidy.

Jobs had to make a peace of sorts with the carriers because that was the only way to get the iPhone into the hands of customers. But now he seems to be wreaking posthumous revenge on his old foes. The problem is simple. The carriers are selling tons of iPhones. and Apple is collecting all the profit. Sprint reported yesterday that it sold 1.8 million iPhones in the fourth quarter, 40% of them from customers new to Sprint. But the massive subsidy cost, at least $300 a unit, contributed to a $1.3 billion loss in the quarter (and to Apple’s staggering profit in the same period.) As PCWeek.com’s phone maven Sascha Segan tweeted, “Sprint’s quarterly results show once again how the iPhone is a way to transfer $ from carriers to Apple.” In a CNNMoney post headlined “The iPhone is a nightmare for carriers,” David Goldman quoted Nomura Securities analyst Mick McCormack as saying: “A logical conclusion is that the iPhone is not good for wireless carriers. When we look at the direct and indirect economics that Apple has managed to extract from the carriers, the carrier-level value destruction is quite evident.”

There’s not a lot carriers can do about it. The original deal Apple offered in 2007 was almost certainly better for them. Apple relented after AT&T pushed to renegotiate the deal and, more important, additional carriers outside the U.S. refused to go along with Apple’s terms. The carriers got what they wanted, and now they are paying the price, having yielded control to Apple over pricing, branding, apps. and just about everything else in the customer experience.

Cable operators might want to take a close look at what Apple has done to the mobile phone industry. It has been widely reported in the last few days that Apple has been talking to cable operators, including Rogers communications and BCE in Canada, about partnering in a long-rumored Apple television venture. Apple has no more love for cable operators than it does for wireless carriers, but it needed the carriers because they control the spectrum and it needs the operators because they control the content. Somehow, though, these partnerships have a way of becoming terribly one-sided. I hope Apple can revolutionize the television experience, but I’d advise the cable guys to watch their wallets.