The iPhone and the Minority Majority

on February 2, 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%.