The iPhone and the Minority Majority

Ben Bajarin / February 2nd, 2015

There is an observation I keep thinking about. When I step back and look at the big picture of the Entire mobile industry, it is becoming increasingly clear Apple is acquiring what is essentially a monopoly on the most profitable customers. Apple’s iPhone market share is hovering around 20% of the total installed base of smart phones and was about 15% of smart phone sales last quarter. No other vendor offering a premium priced phone sells anywhere near the volume of the iPhone. Apple’s global share of premium sales had always been in the 60% range but my estimates have that number now much closer to 70% than last quarter. In markets like the US it was much higher.

It seems somewhat inevitable when you sell a premium phone and grow your base of premium customers you amass a very profitable customer base. However, prior to the last six months, there was an assumption that the playing field for premium customers was more level than it actually was. Even though Apple had consistently been selling more premium price smart phones than Samsung, many believed the two were more equal in premium share than they actually were. We are seeing the shape of the market for premium customers now play out, and it unquestionably falls in Apple’s favor.

In a recent podcast, Benedict Evans made the key point that Google’s version of Android has the biggest part of the mobile market share, but Apple has the best part. He is making the same point I’m making and that I made earlier in the week for our subscribers. Apple has the most valuable customers, not just to Apple, but to everyone else.

Countless times we hear from global carriers that they prefer Apple’s customers. Apple brings them a lower risk customer with higher credit. Apple brings customers who spend more and thus have higher annual revenues per user. From discussions I have had with retailers looking to support Apple Pay, they make the point that it is iPhone customers they want in their stores. These customers spend more, plain and simple. We see the same reality in the app stores. Apple makes their developers more than 2x the revenue of the Google Play store — with less than half the user base. Amazon’s most profitable customers are on iPhones. Google’s most profitable customers are on iPhones. Carriers most profitable customers are on iPhones. Even Microsoft is learning their most profitable customers are on iPhones. I could rattle off statistic after statistic that highlights this reality. Apple’s customers are higher value customers and their growing installed base means they are amassing one of the largest, if not the largest, installed base of premium customers on the planet. This observation has some striking implications on the market.

#1: Innovation around iOS First

Even when the belief was the premium playing field was equal, any casual observer of this industry could note that much of the software innovation happened on iOS first, Android eventually, and sometimes never. The economics of these app store differences is hard for developers to ignore. Developers can and do make money on Android, but overwhelmingly app store economics favor iOS.

Hardware innovation is another area that favors iOS. I’ve done a number of projects and provided market insights for the major accessories makers and there is no question their focus is iOS and specifically the iPhone.

Lastly, we are seeing services innovation as well around the iPhone. Apple Pay is a great example of this. As I mentioned before, retailers are jumping on board for many reasons but one of the largest is attracting Apple’s customers to their stores. Similarly, when we talk to companies looking to support HealthKit and HomeKit, we hear from the services companies like health, security, etc., that they want Apple’s customers.

This theme resonates continually throughout my analysis of this industry and discussions I have with many in it.

#2: On the Competition

The hardest pill to swallow is the impact this has on the competition. With smart phone manufacturers having a harder time sustaining their premium market share and their innovations to try and appeal and compete in premium, it seems likely Apple will face less competition. I’d love for this to not be true. However, it feels like all forces are going in that direction.

From the headwinds I sense from many smart phone manufacturers it seems their sights are moving from the premium market where Apple is dominating to the one below it. As all the future smart phone industry growth will come from devices costing less than $200, it seems many vendors are going to go after volume and thus chase lower price points. In doing so, having any credible offering in premium becomes difficult.

Similarly, there could be competitive implications on components. If you are a component manufacturer for a premium part like an SoC, memory spec, display, etc., you really have only one customer to go after. If you don’t land that customer, how can you justify future R&D spending to advance your components when your customer base is chasing lower prices.

Historically, and when the tech industry was much smaller, people would target business customers if they wanted to go after the higher value base. But now, as the tech industry is much larger and fully mature beyond business and into pure consumer markets, it seems the way to target a high value customer is if they own an iPhone.

I’ve teased out a few implications I see, but I am still wrapping my head around this observation and what it means going forward. As innovations from the Apple ecosystem trickle down, some of them will certainly make it into products in other ecosystems. However, it is clear it will happen largely in Apple’s ecosystem first. Consider this an ongoing analysis but a key industry narrative that is shaking out.

UPDATED: I’m finishing my smartphone market report for our subscribers for tomorrow, and wanted to share this relevant stat. Apple’s share of premium smartphone sales in 2014 was ~65%. Samsung’s was ~24%, and the others like LG, HTC, accounted for ~10%.

Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio
  • I totally agree and I share your concern. If this situation continues, it is going to be extremely difficult to maintain profitability as an OEM or even as a component supplier.

    One thing about “Apple ecosystem trickle down”. The question is how long it is going to take to trickle down. Looking at the benchmarks for the iPhone 6/5s and other Android smartphones, it is clear that Android OEMs are still incapable of matching iPhone 5s performance, especially in browser-based benchmarks (where we would naturally expect Google to have put a lot of software effort). It seems that the time to trickle down important features is already close to two years.

    http://www.anandtech.com/show/8554/the-iphone-6-review/5

    If this is the case, in two years time, when Apple starts selling the iPhone 6/6s at prices that are $2-300 below current, they will compete squarely with mid-range smartphones with comparable performance. This means that Apple might even consume the mid-range.

    The problem is, as has been said multiple times by many people, it is not in Google’s true interests to do something about this. In fact, I think this is one of the reasons why Andy Rubin was discharged; he personally wanted Android to be the best. Sundar Pichai, I think, doesn’t really care.

    • obarthelemy

      I don’t think the performance advantage can be extrapolated : Apple have transitioned to 64bit, Android still hasn’t. There’ll be a huge bump in Android’s performance this year when the first 64bit+5.0 flagships come out. Projecting the current performance disparity into the future is simply unrealistic. I actually think we’ll be treated to iFan’s more usual “but it isn’t about performance, you dummy” 360 rather soon in 2015.
      And also not really relevant: what’s the performance like on a €400 iPhone 5C compared to a €450 Galaxy S5, to compare similarly-priced devices ?
      And finally, the benchmark you’ve chosen is skewed Apple’s way, because it’s single-tasking and mostly single-threading. Lookie here, 2nd chart; http://www.phonearena.com/news/Samsung-Galaxy-Note-4-and-Nexus-6-Snapdragon-805-performance-review_id63789 for multtitasking performance, and that’s Apple’s 64bits vs Android’s 32 bits.

      As for Apple’s ASP going down on older models… Apple have never really pursued that road, they’d rather sell more top-price new phones and let used ones trickle down. Today’s €400 5C and … €600 5S are decidedly bad deals.

      • There’ll be a huge bump in Android’s performance this year when the first 64bit+5.0 flagships come out.

        I’ve actually been anxiously waiting for that too. We’ve had Lollipop come out and a couple of 64-bit tablets. There are some preliminary benchmarks out there, but they aren’t encouraging. Combined with the recent news that the new Qualcomm 64-bit Snapdragon may have some major issues and that Samsung is not going to use them in their S6 flagship, the 64-bit situation on the Android side simply doesn’t look encouraging. We should soon see benchmarks for Snapdragon 810 based smartphones, and I’m eagerly waiting for those results.

        As for performance, I referred to the performance of the iPhone 5s in the benchmarks and not the 5c, exactly because the 5s uses the 64-bit A7 whereas the 5c uses the 32-bit A6. The 64-bit A7 is the inflection point where Apple’s chips have really left other chipsets in the dust in single-threaded performance. Before the A7, the performance of iPhones and Galaxies were generally the same. That has changed since the A7 and that is why it is only meaningful to discuss the iPhone 5s and later in this context.

        My understanding is also that in general, writing multithreaded applications is hard, the vast majority of Javascript code out there is single-threaded, and UI-code for both Android and iOS has to run in the main thread. Hence for most apps and especially browsers, high-performance in a single thread is much more important than multi-threaded performance in the real-world.

        Regarding whether a 450 USD 5c and a 550 USD 5s are bad deals, well at least benchmark-wise, the 5s consistently out-performs a Galaxy S5 on browser-based tests.

        Keep in mind that I’m not talking about “now”. I’m talking about two-years from now, when the immensely popular iPhone 6 and 6 plus are going to be discounted. At that point, even lovers of large screens will be able to purchase a mid-range large-screen iPhone (which just happens to be the two-years ago model).

        • obarthelemy

          Snapdragon 810 won’t be the only 64bit CPU to come out this year: Samsung have their own, Mediatek have announced several…
          Indeed the A7 leads, for now, because it is the earliest 64bit. Extrapolating from that is simply invalid.
          The benchmark is about multi-**tasking**. That’s not 1 program running several threads, but several programs running simultaneously, say a few instant messengers in the background and a browser in the foreground.
          We can talk about 2yrs from now, but by now I’m getting forecast whiplash. 2 yrs ago Android was doomed because Samsung was going to be the only player left and break away…

          • KirkBurgess

            And this year Apple will be on A9, their 3rd iteration of their 64-bit design.

            At that point the majority of Aplles user base will be on 64-bit phones – while the share of android phones in 64-bit will be less than 1/10th (perhaps less than 1/20th). Think about what that means from a development perspective – Apps in the Apple App Store are now required to be 64-optimised, and the majority of iPhone users are able to take advantage of that. Now compare that to android Apps and the level of hardware represented in the install base.

          • obarthelemy

            Android apps starting with 5.0 are compiled to the phone’s CPU at install time, so a lot of 64bit’s gains will be achieved w/o even changing the code. ARMv8 does have other changes than just 64bitness, and *that* will still require re-coding, but not the basic stuff.

          • I know. I’ve searched for sources of information. However, reportedly, Samsung’s reason for forgoing the Snapdragon 810 in their next flagship is not that their Exynos is faster; it because of overheating issues. As for the MediaTek octacore 64-bit, I think it’s being used in HTC’s mid-range phones, not high-end which strongly suggest that the chip does not have high-end performance. Yes, there are multiple 64-bit options. However, the performance/heating issues do not seem to be good enough to put it into high-end phones.

            If you have sources to the contrary, I would love to know.

            As for multi-tasking stuff, I think you have to remember that unlike servers, smartphones do not typically run resource intensive independent background tasks simultaneously. Therefore, multi-threaded/multi-tasking performance on smartphones is not as much of an advantage as is the case with servers or desktop PCs. Background messengers should be severely throttled down in a way so that they consume less power anyway.

      • Kizedek

        “I actually think we’ll be treated to iFan’s more usual ‘but it isn’t about performance, you dummy’.”

        You post this sort of “complaint” (slur?) quite a lot. Perhaps I can help you out in your confusion. 😉

        Being, at various times, both excited about benchmarks and downplaying them, is not as manic as you like to think. It’s neither vacillating hypocrisy, nor a conspiracy by “iFans”. It’s taking a look at what the numbers actually mean.

        • benchmark tests don’t always translate to real world software/work/experience. This could be a plus for both Android and iOS; possibly more for Android, because iOS users are actually concerned about getting real work done and not just touting numbers.

        • if a chip that has half the cores, half the MHz and half the RAM scores comparably to or better than another, then that is a “win” for the chip with less specs. This is why “iFans” are currently positive about benchmark tests. The lesser specced Apple chips shouldn’t be winning benchmark tests over faster, quad-core chips with 2GB RAM.

        • if a chip doesn’t score so well, you can look at the actual work it gets done: the smoothness of the UI, the types of apps it runs, the media it plays, etc. If it actually performs better in real world applications than a chip that scores higher, then it is a “win” over the higher scoring chip. That was the case for a while with the Mac, the iPod and maybe the first couple of iPhones and iPads; and that was why “iFans” would (and would do again) downplay benchmarks.

        There are probably other factors, but I trust that helps you to put it to bed. In summary: if it does more work, then poorer benchmark scores are not a big deal; if it is specced at half the power, then higher benchmark scores are something to talk about with Android fans, because numbers mean something to them.

        Of course, a lot of the win-win nature of this for Apple has to do with Apple designing both its own OS and a lot of its silicon. Apple can also get the OS to make better use of the GPUs. I can see how all of this would be confusing, if you believe, as you seem to in comment after comment, that Apple isn’t really doing anything unique with their silicon other than stamping it with the letter ‘A’ and a number.

        If the gap closes, as you state, and Android “gets 64-bit”, etc., then I would imagine that Apple could add a core or two to the CPU or GPU, add some RAM, whatever — even if they were completely incapable of anything you might admit was in any way innovative.

        However, bear in mind that what Apple makes, benefits all 70M iPhone and 20M iPad customers per quarter. Whereas, the hypothetical Android devices, when and if they become available, are going out to what, 0.1% of Android users?

      • DarwinPhish

        “Apple have transitioned to 64bit, Android still hasn’t.”
        Apple introduced 64bit mobile chips over 16 months ago and it’s not like they are standing still. This isn’t just iOS vs Android. This is Apple vs. Qualcomm.

        “Today’s €400 5C and … €600 5S are decidedly bad deals.”. Then why is Apple still able to sell lots of them and still sell lots of 4S’s?

        • My line of though is;

          If you think the iPhone 4s is selling well today, wait until the iPhone 6 becomes 2 years old and is discounted.

          Of course this assumes that the situation remains the same for a couple of years, but it’s nevertheless unsettling enough to be concerned of.

      • danieleran

        Qualcomm’s 64-bit Snapdragon 810 & Samsung’s 64-bit Exynos are both using ARM’s generic A53/57 core designs. That will leave them behind Apple’s 2013 A7, which jumped past ARM’s work to develop custom Cyclone cores. So even after Android gets its first ARMv8a 64-bit CPUs, it will still remain behind in hardware.

        In software, even 2013’s KitKat hasn’t made past ~33% of the Google Play active base, so even if Android 5.0 Lollipop is rolled out much faster, only a small proportion of Android users in 2016 will have even basic, 1st gen support for 64-bit hardware in the OS.

        Android apps don’t take special advantage of multiple cores, and gaming is particularly weak on Android. The primary allure for Android among premium (+$450) phones was large screen sizes, and Apple just dramatically took that advantage away, just like it took away the compelling exclusive advantage of LTE with iPhone 5 (immediately becoming the top LTE phone vendor) or multiple cores in iPhone 4 (becoming the top multiple core phone vendor) or video capture in iPhone 3GS (quickly becoming the top camera phone vendor).

        It’s looking a lot like the iPod days, where 2001-2004 there was lots of discussion about how MSFT’s PlaysForSure was going to take over like Windows, then an admission (2005-2006) that iPods were indeed selling well, then an acknowledgement (2006-2008) that nobody could beat iPod (not Microsoft’s Zune, not Samsung’s Android Galaxy Player), and then a realization that Apple had not only taken the top end but was rapidly mopping up what was left on the bottom with its shuffle and nano.

        With a high end brand established, Apple can continue selling iPhone 5c as its lower end phone at increasingly lower prices, benefitting from massive economies of scale because it’s already sold tons of iPhone 5’s. There’s also an enormous second hand market that is displacing the demand for upper-middle Android devices.

        Previous generations of iPhone were basically obsolete in 3 years (nobody wanted a 2010 iPhone 4 once iPhone 5s came out in 2013), but iPhone 5c (which is basically an iPhone 5 from 2012) will continue to be a very functional phone next year’s as iPhone “6S” goes on sale.

        That will give Apple a broader range of phones than ever: ~$350 5c, $450 5s, $550 6, $650 6S/$750 6+S.

        • obarthelemy

          I haven’t seen anything about Apple’s ARMv8 core being custom (the SoC is custom, the cores… no info), and if they are custom, I have no clue if they have been optimized for cost, thermics, power requirements… Please do provide a source for your assertions ?

          As for becoming top anything, it’s not really meaningful when you’re comparing a single vendor with a single model to several vendors with several models. Share is relevant, ranking…

          Android apps that are coded to it do take advantage of multiple cores, the OS itself does, and screen size is not particularly a premium feature (I paid about $300 for my 6″ Ascend Mate almost 2 yrs ago), so I beg to disagree on all of that.

          Will see how things evolve. It’s clear Android OEMs are failing in the luxury segment, we’ll see if that segment keeps growing and if nobody else manages to crack it. And if operator subsidies persist.

          • danieleran

            Google “apple a7 cyclone core.” There is a lot of basic public information on Apple’s custom core designs, starting with the “swift” core of A6. Qualcomm has its own custom arm core named krait. It doesn’t have a 64-but version of krait though, so it’s using ARM generic designs like Samsung always has.

            It’s not that screen size was helping android raise ASP. It’s that it was helping android differentiate, at (at least) allowing Samsung to charge $100 retail premium. It’s not helping in either regard anymore. Back to plummeting ASPs and nothing to powerfully set itself apart from iPhones.

            You can talk about luxury or volume or whatever clever statistical fallacy that IDC and strategy analytics can invent. But when it comes down to it, Apple is holding and expanding its grip on profits, and has since 2007. That’s going on 8 years now. After 6 years of doing that with iPods.

            Lastly, there are plenty of countries where U.S. style carrier subsidies are not available (from Japan to India) and Apple is still eating up the profitable, valuable end of the market. So time to let that old canard go.

        • I basically agree, but I suggest that the gap between the 5c and the 5s is big enough that you treat them entirely differently. The 5s is when Apple’s hardware vertical integration started to produce iPhone features that Android OEMs are having difficulty matching. 64-bit is one example. Touch ID is another. The hardware performance gap between the 5c and the 5s is quite substantial.

          The real issue is not the 5c getting cheap; Android flagships are more powerful than the 5c and that is how it should be.

          The problem is when the 5s or the iPhone 6 gets cheap. What I predict is that due to the huge lead Apple has in 64-bit, the performance of a two or three year old iPhone 5s/6 may be better than a flagship Android at that point in time.

          I don’t think that this is a healthy situation for the industry and I don’t want it to be that way. I am concerned however that it is starting to look like a possible scenario.

      • EricE

        “for multtitasking performance, and that’s Apple’s 64bits vs Android’s 32 bits.”

        lol – why is Intel spanking AMD right now? AMD bet that multithreading and parallel processing would be more important than single core performance. Sadly for AMD true parallel processing is freakishly hard and single thread performance still rules the roost. Throw in the overhead of davlik, the efficiencies that Apple is able to build into the core silicon through their extreme customization and I think Apple will continue to rule the ultimate benchmark that really matters – performance per watt. Who buys a phone to run a benchmark on it? I want to do stuff quickly with great battery life. No one else touches Apple and I don’t see them closing the gap any time soon.

        • obarthelemy

          Well, the first A57 benchs came in today, and beg to differ: http://www.anandtech.com/show/8718/the-samsung-galaxy-note-4-exynos-review/8 and as I said before, that’s with an unoptimized OS, pushing about 2x more pixels, and for less money.
          As for Dalvik, Android 5.0+ no longer uses that, it uses ART which fully compiles apps at install time.
          As for battery life, the iPhones 6/+ are the first iPhones to last a full day. It is indeed an important feature, glad you noticed at last.

    • klahanas

      Great post!
      I also don’t know how much of the inertia (yes, inertia) on the Android side is OEM’s being greedy themselves. This has always been a huge advantage for Apple, and I commend them for it, they continue to beat stupid competition. Though, last year, they stated digressing themselves a bit as well.
      That it took so long to go 64 bit in Android is BS. 64 bit! In 2015! For a 20 year old tech? What’s the next great innovation, removable storage? /s

      • As many people said when iOS went to 64-bit, 64-bit in and of itself is not what’s important. There has to be a lot of stuff around the new architecture to get the performance jump that the Apple A7 chip got.

        Looking at the benchmarks for the current Android 64-bit chips, I have to say that the results are not encouraging. Either the chips are not good, or the use of the new architecture is not good. In any case, the new 64-bit Android stuff still cannot match Apple’s offerings. This might change as 2015 progresses, but the current situation is not encouraging. If I were to bet, I would guess that Android 64-bit devices will not even beat the year-old iPhone 5s and iPad Air in browser-based benchmarks within the year 2015.

  • KirkBurgess

    Great piece Ben!

  • KirkBurgess

    What does it mean for Intel”s mobile ambitions if premium non-Apple demand disappears?

    • Glaurung-Quena

      “What does it mean for Intel”s mobile ambitions if premium non-Apple demand disappears?”

      1 They’re going to have to give up on charging their accustomed premium for their chips.
      2 They’re going to double down on “internet of things” and try hard to sell chips to that market, since they’ve lost the battle for mobile phones.

    • benbajarin

      Exactly, the right kind of thinking. And Intel’s only play is with the discreet modem, which wouldn’t really solve their problems. But you see what I am saying from a silicon standpoint. I work with a number of component manufactures who Samsung is their largest account. They are all hitting issues because Samsung is trying to bring costs down, and Samsung’s sheer volume declines are hurting this external component ecosystem as well.

      There are a number of very public examples, I can’t mention, where a company had to sell off a side of its business because it lost or could not get Apple has a customer.

    • aardman

      You don’t even need to ask about what if the premium non-Apple demand disappears. Based on the losses being sustained by Intel’s mobile chips, I think the premium, non-Apple demand, as it is, is already insufficient to support Intel’s mobile ambitions.

  • obarthelemy

    I’m not sure things are as one-sided as you make them out to be, and you’re showing strong confirmation bias.
    1- most device innovation is happening on Android, then trickling down to iOS. Full-day batteries, TouchID, 5.5″ and larger screens, gamepad/mouse support, FM radio, probably-soon-to-be-copied pen and 12″ tablets… all showed up first on Android. Some stuff still isn’t even on iOS’s radar, like the mad idea to have an IR blaster and put your remotes right in your phone.
    2- Ditto OS innovation. iOS still doesn’t have widgets, and only recently copied actionable notifications, intents, a sensible photo stream…
    3- Even ecosystem innovation is a wash. NFC payments have been available on Android for years now.

    • I’m not sure that counting which features came out on which platform first, is a meaningful way of looking at things. It easily gets subjective because you also have to factor in which inventions actually became popular. You also have to remember that many of these features were available on the Newton Message Pad for example, and don’t actually qualify as inventions in the strict sense. More than anything though, the truth is that nobody rewards you for being the first to market with an invention.

      Looking at actual sales in each market segment, which titles come out on which App Store first, which App Store makes more money, etc. is more objective and hard to argue against. That’s probably why Ben is mostly only mentioning these data points.

    • benbajarin

      Innovation without mass market adoption is just experimentation. And you are right with some point, but that was up to today, when Android had an ok sized premium base. That is shrinking and will continue, it is that reality I’m speaking of. The future not the past and up to now. Also, strong issues with Google going forward that are concerning. How can they balance on the line and sustain their most premium customers on Android and a first time smartphone owning farmer in Africa. VERY difficult times for them ahead.

      Second, this is about customer bases, and how this plays out going forward. From everything I hear from supply chain, and beyond, the premium part of the smartphone segment is shrinking for Android. It is the undeniable harsh reality. And as I point out, this has huge implications. In my mind, it all depends on what Samsung does. Will they try and hold onto their small part of premium, can they even, or will they chase units since so many other parts of their business depend on it. Nearly every other vendor I talk to is focusing on other parts of the market and not premium.

      • klahanas

        “Innovation without mass market adoption is just experimentation.”

        Respectfully, you may want to put some context into that. By itself, it’s totally shortsighted and devoid of vision. How many Nobel Laureate’s work is not “mass marketable”?

        • benbajarin

          Point is, what’s the good of an innovation if it never sees the light of day. Commercializing an innovation is extremely difficult and rare.

          • klahanas

            That clarifies a bit, but there are levels of innovation. We are still seeing the fruits of Einstein, for instance. No, it’s not “the bomb”, it’s GPS, it’s cosmology, it’s medical instrumentation, it’s semiconductors, one can go on and on…

            So, fundamental innovations such as his yielded too numerous to count other innovations done by others. Many of which were commercialized. So you can see just how shallow the “commercialization only” innovation statement sounds, when unqualified.

          • benbajarin

            And the point I’m making is, what happens to this when Apple has all the premium customers? If every other vendor starts chasing the lower-end then who else is there for premium parts?

            Again, I’m looking at this from were things are going not where things have been. So then, if this plays out like I’m saying then where does it make sense for innovation to be commercialized?

          • klahanas

            Oh. I understand where you’re coming from, and you could well be right. It’s the innovation comment that caught my throat… 🙂

          • Also, what good is the innovation if it can’t be counted on by a developer to be there at least a majority of times at any given moment in time, or over time?

          • Dribbler

            Example: Google Glass – made a quick trip from innovation to experimentation. In the future someone (and it might be Google’s new team) will probably take the basic concept and “innovate” a product that people will actually want to use. Then Google Glass may be judged as an innovation again.

        • Given that “innovation” is a hugely overused term, many people intentionally separate “invention” from “innovation”. This is how I think Ben used the term in the quoted sentence. I myself try to do so as well, although I often fail and find myself lumping them together.

          Therefore, calling Nobel Laureate’s work “not an innovation” is not an insult. It can be either a “discovery” or an “invention”. Not everything has to be an “innovation”.

          • klahanas

            According to patent law, all inventions, dear friend, must be statutory, new, useful, and non-obvious. It’s a more stringent subset for innovation.

            In a broader sense, all it need be is new and clever. A poet can be innovative, a scientist, a clerk, and Lord knows, an accountant, analyst or marketer… 🙂

            First you innovate, then you sell! Two separate and distinct steps.

          • While I agree that the term can be used in the ways that you describe, that is not how many would define it in this context. See Wikipedia for a idea of how I would use it.

            http://en.m.wikipedia.org/wiki/Innovation

            And no, invention is not a subset of invention at least in this definition. It can only be a subset if your definition of innovation is, in my opinion, overly broad.

      • obarthelemy

        All the innovations I listed have been available in mass-market products. Not all successes, but all well outside the labs and in the market.
        Second, there’s the usual chicken-and-eggs problem. Apple are the only luxury brand, thus are getting all the high spenders. Apart from that higher cost of the devices and apps, and the fringe effect of getting locked into contracts used as cheap financing, do you have any evidence that people actually spend more *because* they got an iDevice ? Or is it simply that the high-spenders get iPhones ?
        As for Samsung being the only hope of luxury Android, I think they are one of the worst possible candidate, because indeed they need volume. We’ll see if the redesign works for them, but I’d think HTC and Sony better candidate. Also, it’s luxury, not premium ^^

        • Kizedek

          Oh, no-one I know with an iPhone, myself included, is a high spender. It’s simply a good investment as it is reliable at all the real work we require of it.

          Again (seems like we are always having this kind of debate), it’s a tool, and people of all stripes and incomes can be very particular about certain types of tools. To me, a hammer is a hammer; but I would suppose that a “poor” carpenter may well have a 70-dollar hammer and be very particular about hammers (composition of the metal, weight and balance, etc.).

          You know very well that this is true in all areas of life and work; and yet you always seem to insist that only in the area of products which Apple makes, this isn’t true — that users of Apple products are somehow completely insane.

          • kayeu

            You bring up an important point. For historical reasons, people become extremely price sensitive when it comes to hardware. If you buy an expensive car, or an expensive hammer, or an expensive cook’s knife, or an expensive camera, people don’t look at you as though you’re some moron even if they don’t share the same priorities as you and would never spend that much themselves. And it’s a problem that with hardware only Apple can expect decent profit margins. They are in a virtuous circle while everybody else is in a vicious one. And if everybody else can’t break out, this will keep perpetuating itself. Samsung gave it a good go but, for one thing, they’re beholden to Google and Google’s entirely unpredictable and meddlesome in its dealings with its OEMs.

        • benbajarin

          Your question on do they actually spend more is a fantastic one and one that has been a basis theory for some time. There is absolutely no way to firmly calculate this, but we know Apple’s installed base is growing with customers on the lower-end of the income spectrum. We are finding that while their ARPU per customer is going down it is not going down nearly as fast as Android’s. Which I take as some sign that even as Apple grows their base outside of the top 25% and deeper into the top 50%, they are spending a bit more than their Android counterparts.

          Lump music and entertainment services, and all the services / subscription innovation around iOS and you can make a strong case this ecosystem lends itself to transactions.

          I do actually have consumer research on spending via mobile broken out on all kinds of purchases both digital and physical by age and income demographic for both iOS and Android. That data certainly shows an affinity to spend more on iOS than Android across income demographics, however, my sample size was only just above 5,000 so I don’t consider in conclusive until I get more data points.

          • obarthelemy

            Must be devilishly hard to track. Most people around me mostly do research on mobile, then buy on PC. Less so though if they’re young, on the road, or have fully switched to mobile as their main computing platform.

      • Which customers do you think Google is focusing on given what we know about Lollipop, etc?

        I tend to think that they are focusing on the farmer in Africa. A few reasons;

        1. Material Design is incredibly opaque unlike iOS7 which uses computer intensive blurring in combination with transparency. It seems to me that it was designed to reduce pressure on the GPU, in order to work well on low-power devices.
        2. Material Design encompasses the Web. It is designed to encourage web apps, which might be preferable for bandwidth constrained users in developing countries.

        I have a few more thoughts, but my general impression is that Lollipop clearly has a low-end focus.

        • benbajarin

          I think you are exactly right, and I can’t tell you how many times in our consumer research panels, I heard enthusiast Android fans make mention how much they had Lollipop. As I wrote in my mobile report, Google has a conundrum of how to satisfy their techie elites (valuable customers) on Android and a farmer in Africa. VERY DIFFICULT fence to straddle.

          • Rob bennet

            >> I heard enthusiast Android fans make mention how much they had Lollipop.

            It’s a bit unclear. You mean techies hate lollipop ?

    • DarwinPhish

      Some of the examples you give pre-date Android and were available on Symbian devices. Others are just features included or excluded by choice. Adding new technologies or features to devices is not on its own innovative. Enabling new uses and better solving problems is when it matters.

      Where things really get one-sided for iOS is when you include 3rd party software, hardware and services. Anyone investing significant resources into developing a new game, accessory or online service, it is almost always going to focus on iOS first.

    • Predrag Vasic

      There are two points related to the argument about “innovation” happening on Android first. Some of this was already addressed in other comments, but these two are most important:

      1. most of above ideas have existed before (full-day batteries had existed on every single iPhone model, since the first one, not to mention iPods before; fingerprint sensors existed on may PCs years ago; pen existed on Newton and PalmPilot);

      2. Since the very beginning, practically every new Apple product has been just another entry into an existing market (iPad wasn’t the first tablet; iPhone wasn’t the first smartphone; iPod wasn’t the first PMP, etc). Apple’s history shows that they don’t invent new products; they innovate within the existing category. It is often said that Apple usually looks at a market or a category of products, shakes their collective heads (“no, no, this is bad, there has to be a better way”), then deliver a solution that is infinitely more popular than what was there before. The most recent example is probably the most typical. NFC existed on Android since 2010. In just a few since ApplePay introduction, the volume of payments exceeded cumulative historic volume of all other NFC payment solutions. And that was limited only to the users of the iPhone 6/6+, which was introduced at the same time.

      Apple’s innovation takes existing technology and turns it into a solution that makes sense. This is one of the most significant reasons of their success.

      • Dribbler

        Apple leads where it matters (A7 chip) and selectively innovates on top of previous “innovations” where it can make the biggest impact as well. As Apple locks in more premium users the roe on R&D for the OEMs gets worse and worse. But they have to continue to spend not only to fight Apple but to distinguish themselves from the other OEMs. Android needs to divide focus on all customer segments. Talk about being between a rock and a hard place. I imagine heavy drinking or a lot of Tums being passed around.

    • Shameer Mulji

      Android ecosystem doesn’t have anything remotely as good as TouchID. That’s horse s***t. And NFC? What good is a feature if hardly anyone uses it? Mobile payments using Apple Pay, in the first month alone, eclipsed the amount of mobile payments done using Android for the entire time Android ecosystem has had NFC. What a joke.

  • Space Gorilla

    Well, this should be an interesting comment thread. Great article, but of course you’ve committed heresy by articulating the truth that Apple dominates the Best Customer Segment. I’ll be interested to see what angles the responses take. We’re already seeing the old talking points about Apple not innovating, simply marketing existing tech, and of course Apple not being premium at all, why in fact they’re trailing the industry and aren’t any better at anything at all. I’m sure at some point this will lead into the Apple-customers-as-noobs-simply-fooled-by-shiny-toys-and-marketing meme.

    None of these talking points address your analysis though, they’re simply attempts to excuse Apple’s success. I’m reminded of the article Ben Evans wrote about iOS devices being at parity with Windows, and he had to close his comments due to what was essentially hundreds of commenters stamping their foot and yelling “No fair!”

    • benbajarin

      Thanks. And yes, this is a pill tough to swallow, but it can’t be denied. It is a bit concerning though, as we want to make sure the market is competitive, but Android seems to lack a genuine premium competitor. My concern is Samsung will be forced to essentially forfeit since they can’t justify the RND. We will see, maybe I’m overthinking it, but the iOS share in China and US, where a mass of the most profitable customers are, is growing. Hard to ignore that.

      • Space Gorilla

        I’ve long thought China would be huge for Apple. The absolute number of people that can afford to buy from Apple is massive. I think perhaps a large part of the failure of Apple analysis stems from the belief that customers can’t possibly be choosing Apple’s offerings, that if only these customers knew better, they’d leave Apple in droves. I see that tone in many comments.

        • kayeu

          Well, the assumption is Apple is all style and no substance… If only the poor rubes realised that this is just fairy floss… No, people like their iPhones because they’re simple to use, they get out of the user’s way and it takes a lot less in terms of the users’ proficiency to do a lot more. And they’re fun to use. And unfortunately no-one else can match this level of consumer-oriented tech. Maybe in time a company like Xiaomi can evolve into a lower cost consumer-driven force in this market. Of course, they have a few IP issues as it stands now but they seem to get the fun bit.

        • aardman

          Yeah, this “it’s just marketing” refrain always gets my goat.

          Marketing only gets you, at best, the first sale to a new customer. For that customer to keep coming back and generate more sales for you, you have to offer real quality and value not just balloon poodles and confetti.

      • klahanas

        Choices of OEMS, choices of shopping points, choices of features, less lock-in, is the differentiator. Not luxury. It would be nice if either Apple opened up, or a competitor learned luxury, but such is life.

        Also, I think this point is more relevant to tablets than phones. As a data point of one, I do expect my tablet to be closer to my PC in function than I do my phone.

        • Kizedek

          “Choices of OEMS, choices of shopping points, choices of features, less lock-in, is the differentiator. Not luxury.”

          Great, why not. …except the OEMs can hardly survive.

          • klahanas

            Do you really think that there’s a Razr in my future? 😉

        • Grouch4460

          Enough already about “open.” The great great great majority of smartphone users do not know or much less, care, about “open.” Only the experience matters and iPhone has no comparable experience.

          • klahanas

            The point was about the distinction, what you prefer doesn’t concern me.

        • benbajarin

          Yes this is true. But I guess the question is where will that come from? I’m becoming increasingly concerned about Samsung from things I hear, I’m not sure they can stick out the spend they are doing to try to be a minority player in premium.

          • peter

            When your (mobile) business shrinks as fast as Samsung’s, it is very hard to take the long view. Especially if you get hammered by the need to give price concessions on excess channel inventory, depreciation on excess manufacturing infrastructure, etc.

      • jamesdbailey

        “It is a bit concerning though, as we want to make sure the market is competitive, but Android seems to lack a genuine premium competitor.”

        This is perhaps where Microsoft should have stepped in as an Android smart phone manufacturer. Too bad they are stuck on their own solution. The Cyanogen investment is interesting in this regard. I don’t actually have any idea what Microsoft is planning, if anything.

      • Rob bennet

        Why do you think investment in phone r&d would be affected by premium devices ? most of the r&d is done either at the component level(and component prices don’t benefit that much from premium devices) and at the software level,(but google is dedicated to that).

        • aardman

          post withdrawn

    • kayeu

      The feedback I get from the so-called noobs is they love their iPhones because they’re so simple and easy to use. Techy types just don’t get it. They seem determined to ignore the issue. Ease of use is big business. Greater user engagement because users find it easier to do more with their phones is damn good business. Dumb is the new smart. The more the tech savvy elite rant about idiots and sheep, shiny toys, the dumber they look. To start a discussion on CPUs and benchmarks misses the point. As long as iPhone users feel reassured that the internals are kinda okay good enough, they don’t give a rat’s backside. If the benchmarks are good, well that’s gratifying, if they’re not, well, who cares anyway. Is that dumb? Yes, it is. But maybe some people are sick of these discussions, and just want to get on enjoying using their computer or device.

      • Space Gorilla

        “The more the tech savvy elite rant about idiots and sheep”

        I’m sure these folks view themselves as the tech savvy elite, but they’re really more on the level of hobbyists and fiddlers. The programmers I work with regularly, who all have their Masters in Comp Sci, prefer iOS devices and Apple gear. And I would guess it’s the same reason I prefer Apple gear, I just want to get work done. The simpler and easier the device is to use, the better.

        • TheEternalEmperor

          I chose iOS and I’m a Java dev with 20 years of experience and a BS in Comp Sci. I tend to find that most those “tech elite” guys are dilettantes, not at all professionals.

        • kayeu

          Well, that’s an interesting point. I don’t move in tech circles at all. But what you say rings true. In my experience over the many years using Macs, I have to say, the people who are most vocal and insist you must be stupid are amateurs and hobbyists who don’t do much with their computers at all. These days I realise that it was all a distraction from any discussion about what you actually do with your computer, or your phone, tablet, whatever. My background is more art than computers and I’ve always found Macs easier to use and maintain. Of course, what you’re saying is these people tend to be the most vocal and the quickest to start arguments about which is best. I can certainly see that with arguments like Canon vs. Nikon. Amateurs endlessly argue which is best, photographers simply talk about photography. Thank you for pointing this out. Unfortunately the Internet can give a very skewed view of things.

        • aardman

          I remember visiting Cray’s headquarters here in Minnesota in the late 80s or early 90s when Cray was still a big deal in computing. Like a really big deal. And they took me, a nobody who didn’t represent any company or institution, just a curious non-techie, on a one hour guided tour of their facilities, including working installations of the Cray II, then their latest model. And what I noticed right away was that all the PCs in the building, which included those serving as front ends to their in-house super computers were all Macs. Not an IBM-PC or clone in sight.

          • Steve Jobs often told the story of meeting Seymour Cray and telling him that the original Macs were designed using Crays and Cray telling him the some Crays were designed using Macs. 🙂

  • aardman

    It shouldn’t really be big news that Apple dominates the profitable end of the smart phone market, given that Apple has been doing the same thing for years in PCs. The basic structure for both markets is the same: With iPhone, just as with Mac, Apple has an exclusive OS and the supplier of the main competing OS orchestrates a race to the bottom in a drive to maximize their OS’s user base. Of course Android ends up in the same situation that Windows is in.

    That said, highly tech-oriented bloggers and commenters are still viewing the iPhone through the prism of utility, evaluating it primarily in terms of specs and performance. Just look at all the comments here about CPUs and GPUs and other technical aspects. For most of the people who own one, I believe the iPhone has left that utilitarian realm long ago.

    I understand that the technical aspects of smart phones are interesting and important to Techpinions readers, but that reader profile is not representative of the greater population of iPhone buyers. We can discuss endlessly about the comparative technical merits of Android and iOS phones, but that is not what explains iPhone’s astounding sales and profitability. If you have the best performing, best quality product, you’ll probably capture the market. But if you want to capture the market AND also maintain eye-popping profit margins, then you have to offer exclusivity, prestige, and other unique intangibles that we generally attribute to luxury/aspirational products.

    I am not saying technical excellence is not important, but it’s not nearly enough if you want to be an Apple. Or Mercedes Benz, or BMW, or Miele, or Subzero, and so on and so forth.

    • klahanas

      Absolutely excellent comment! Ease and elegance matter, but they are not all that matters. Apple’s greatest contribution has been is to raise the lowest common denominator by making it easy for non-techies to do things. Great! It does not need to stop there… BMW, Mercedes, etc., are not limiting in any way versus their equivalent competitive models. Performance is a given, all gain, no loss.

    • Both are important. I am under the impression that readers here understand this. Sometimes the discussion follows the technical aspects. Sometimes it follows the marketing. Just like the analysts here. They write good articles on both issues.

      That’s why Techpinions is awesome.

    • kgelner

      It doesn’t require anything intangible at all. It just requires you to have more efficient manufacturing and the ability to buy in larger quantities, then you can easily produce the same level of quality with better margins – even much better margins…

      I’m not denying the intangible stuff exists also, but it’s built atop a very solid base of pure efficiency in component/manufacturing cost reduction.

      • aardman

        Efficiency in manufacturing is a supply side thing, it only explains lower costs. It doesn’t explain the higher ASP that Apple sustains year in and year out.

        • kgelner

          I agree with that (a high ASP comes a from the combination of intangibles plus good hardware) but the profit per phone is made up both of high ASP + low component costs.

    • kayeu

      Okay, I read all the octa-cores 64-bit stuff and my eyes glaze over. Many years ago I would be too intimated by this technical talk to say, bah, irrelevant! I’d struggle to keep up. I eventually realised that it was indeed an attempt to intimidate me by IT departments who wanted to obfuscate the issues at hand and assert their authority. So I’m always suspicious of this talk. Wait a minute, why have we wandered into a discussion about the guts of these things just at this particular point? Surely the uniqueness of the iPhone is in the software. We buy the hardware and apple throws in the software for free. But it’s the software, stupid. Okay I do get it… The hardware and software are tightly integrated so you need fewer core thingies and less ram doovalakies. But essentially it’s the operating system software that defines your device. Beware when the conversation turns to the guts of the hardware. Don’t worry if you get lost in the discussion and feel inadequate. It’s probably some smelly old red herring anyway

      • Apple is a hardware company that uses software and services to differentiate their hardware. Plus Apple is integrating vertically by making their own ARM chips. This has raised their game substantially.

        • Joe90

          Your mistake, like most people is missing what Apple tries to do. This hardware/software misses the point. Apple is about using technology to make peoples lives better. Now that dosn’t mean they do so but it is what they try to do.

          So when we drill down Apple is a UX company .

          • OK, as a UX company, how does Apple make its money? Hardware, pure, plain, and simple. Software, services, UX, and vertical integration all enhance the hardware, and the profits from hardware sales. At the end of the day, Apple sells hardware.

          • Lei Gong

            This debate is better defined and had around the question of “what parameters does one use to assess the quality of hardware/products”. Not all buyers will gravitate towards decontextualized numbers and specs as the selling point, and, I think, as computing devices proliferate, decontextualized numbers and specs will have less and less value as the point of assessment.

          • “We don’t compare the guts of cars for example.”

            The same type of people who care about CPUs and GPUs etc. are the same sort who spend hour talking horsepower, V6 versus V8 etc. None of which matters to most of us when purchasing a car.

            I only care about those numbers when deciding upon different models within the same brand .. Accord LX versus EX V6 etc.

            I would say that specs matters when deciding which MacBook to purchase.

          • aardman

            From an accounting viewpoint, yes Apple makes its money from hardware. You look at their financial reports and it sure looks as if it is hardware that keeps laying the golden egg. Now conduct a thought experiment: What if iPhone ran on Android and Mac on Windows. Will they still be selling a lot of devices and at those high ASPs? So, in essence, is hardware truly the secret of Apple’s success? Here’s another clue: Steve killed the Mac clone program.

          • I’m back to my original statement, “Apple is a hardware company that uses software and services to differentiate their hardware.”

            If Macs ran Windows instead of OS X, or iPhone, Android instead of iOS, Apple would be in a race to the bottom with everybody else.

          • EricE

            “OK, as a UX company, how does Apple make its money?” – Not just by hardware; that’s incredibly myopic. They make their money by curating the entire experience – hardware, software, sales, *and* service.

            It’s the whole enchilada. Yes, hardware is a significant piece – but it’s not the end-all, be-all. It’s relentless focus on the overall experience that has garnered Apple it’s fanatical user base. The technology is inconsequential. Which is what drives most techies nuts – Apple isn’t playing by “the rules”. Thank god at least one company is doing something different or we would still be supplying our own cases and power supplies to computers that we program with toggle switches

  • peter

    It is interesting to compare Apple to Intel, who claim most of the premium segment in x86 CPUs. While AMD is still in business, their ability to innovate in technology and design is severely hindered by the fact that the most profitable customers end up buying from Intel. Building a cutting edge PC that does not contain an Intel CPU is pretty much impossible. The question is whether the mobile market is going to play out in a similar manner (a cutting edge phone pretty much needs an Apple SoC) or will the mobile market be big enough to support alternative suppliers of premium parts such as Qualcomm.

    The same question exists for software. If Apple is taking most of the premium customers, would it continue to make sense for Google to continue to ‘subsidise’ the development of the Android platform (with the enormous free-rider value leakage that they continue to suffer).

    • I agree, but I think we should also note that profitability and hence a large R&D budget does not make you immune from boneheaded mistakes. Itanium comes to mind.

      In fact, I think ARM/Qualcomm, by assuming that 64-bit would be only good for servers and not optimising their designs for smartphones, pulled a major Itanium here. This time, instead of AMD shipping Athlons and forcing Intel to change course, it is Apple that shipped the A7 and forced Qualcomm to come up with 64-bit CPUs for smartphones.

      • peter

        Could not agree more. The AMD/Intel story makes clear that once an incumbent has a lock on the best customers, it takes something truly exceptional (stupid or brilliant) to break that lock. Coming up with clever little features here or there is not going to do it.
        The other thing I have in the back of my mind is how the notion of ‘path dependence’ might magnify the effects of small mistakes on the part of ARM/Qualcomm. For example, if Android manufacturers need to cede the premium market on account of less than premium SOCs then that severely harms the prospects of any supplier who might launch premium SOCs in, say, 2016 (because the premium market will have to be rebuild from scratch).

  • Lei Gong

    A question for me is, “Does this mean the smartphone ecosystem and the features and capabilities that it offers is going to be class segmented?”

    On another note, Samsung is pretty much a lost cause at this point. I don’t think they knew how to execute on the high end to begin with. I do think there’s a second wind to this market though. Because a good chunk of low and mid tier Android users are from developing markets, if that segment experiences rising incomes they may move upmarket, and because they’re moving up from Android they may be likely to pick up another Android device. To keep them attached to Android and not shift to iOS though there would have to be some kind of offering, and the ecosystem/services would have to be sticky. This is more likely to happen in developing countries simply because the overall service market is less mature, which in theory would grant some parity between the iOS and Android ecosystems. This market would take time to mature though, which may be too little too late for current suppliers. It may also end up being forked Android since one way to maintain that stickiness as customers move upmarket will be through services that are closely coupled to the hardware (and maybe its ecosystem).

  • BlueBoomPony

    70+ million phones in a quarter, but, yeah, it’s just a cult according to the dumb tech geeks. Ha ha ha!

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