Last week I discussed Apple's quarterly results for the July-September quarter and mentioned briefly that Apple has now definitely entered the Top 5 biggest mobile phone makers overtaking RIM. Thus, depending only on how well ZTE has done in Q3, Apple is either the 5th or 4th biggest mobile phone maker in the world. Apple is bigger thus than classic big dumbphone makers like SonyEricsson and Motorola, and counted now very legitimately with the 'big boys' of Nokia, Samsung and LG
For some random visitors to this blog, it might be 'no big thing' as Apple obviously leads in the tablet PC space with the iPad and has for a decade dominated the MP3 player market with the iPod (a widely held misconception, that is only true of the US market, not globally), so why would it be remarkable that the iPhone is in the top 5? They might well even expect Apple to soon be number 1 of phone makers.
Regular visitors to this blog will know how I have written about the mobile phone industry for years, and that this achievement is something I have repeatedly said was not a plausible goal for Apple, that as long as the majority of mobile phones sold in the world were 'dumbphones' (non-smartphones) then a premium priced smartphones-only maker like Apple (or RIM or HTC) could not hope to match the overall unit sales of the big mobile phone makers who manufacture both smartphones and dumbphones, like Nokia, Samsung, LG, SonyEricsson and Motorola. I have often said that I do not expect Apple to be able to achieve that, not just making only smartphones. Or more specifically, not while the world buys more dumbphones than smartphones. Still this year Q3, dumbphones outsold smartphones by 3 to 1 globally, so while Apple is strong in smartphones, that market is so much smaller than dumbphones, that I did not see the chances for Apple to become a major player in the total phones market. And obviously, we are shifting from dumbphones to smartphones, so sometime during this decade, Apple's strategy of making only smartphones would be the 'right' strategy for any phone maker, so Apple (and RIM, HTC etc) is well prepared for that eventual market condition. But that is not today.
APPLE IS MOBILE GIANT
But Apple did enter the Top 5 (possibly the Top 4) for the first time ever, this past quarter, when counting unit sales of handsets. Note, Apple has been one of the biggest handset makers if counting total revenues for a longer time, as the iPhone is the most expensive phone if measured by average sales price. And for those obsessing with profits (this blog is not an investor blog, we don't focus on financial measures, but we do note which companies are profitable - ie viable in the long term, and which are loss-making ie likely to suffer in the near future) obviously Apple makes the lion's share of the total profits in the mobile phone industry. However, while financial analyst-oriented readers may crave such a measure, we do not have regular independent global analysis of the phone making industry where the players are ranked by revenues (or by profits). And part of that challenge is, that many of the big phone makers are multi-industry conglomerates, so they make many separate products, that typically the corporation will not itemize. Take Samsung, it also makes PCs and home electronics and plasma screen TVs and all sorts of electronic components - and mobile phones. We cannot count Samsung corporation's profitability as that of Samsung handsets unit..
But lets get back to Apple. The four big independent industry analysts - IDC, Gartner, Strategy Analytics and Canalys - all report quarterly on the handset industry, and tell us how the biggest handset makers are performing. They measure the size by unit sales, so a cheap 30 dollar Africa phone will count as one unit of handsets sold, just as an iPhone 4, which has an unsubsidised price of 600 dollars. Yes, its perhaps 'unfair', but thats also how the car industry measures car market shares, by number of cars sold where one cheap Tata sold in India or Proton sold in Malaysia counts as one car unit, just as one Ferrari or Rolls Royce. The industry market shares tend to be measured in units, not by their value. Same how the aircraft industry measures market shares of Boeings and Airbusses and any other aircraft manufacturer airplanes sold, etc.
So Apple sold 14.1 million iPhone mobile phones. Out of all phones sold, that is only about 4%, but Apple has been growing very strongly. In 2008 Apple passed the 1% milestone for unit sales of iPhones out of all phones sold. By 2009 it was 2% and for this full year 2010 it will be well in excess of 3%. And now for one quarter, Q3 of 2010, Apple sold 4% of all the phones in the world. One out of 25 of every phones sold worldwide has an Apple logo. That is a major achievement. Apple is literally selling better than classic mobile phone makers like Motorola, SonyEricsson, Panasonic, Sharp etc. And Apple is far outperforming the other newcomers to the industry like RIM, Huawei, HTC etc.
CAN APPLE CATCH LG?
The next rival is far ahead (for now), global number three, LG sells about twice as many phones quarterly as Apple did. That might seem a very big ask, to expect Apple to have to double sales in the next year to catch up to LG. But actually, the race is not quite like that. LG is likely to give Apple a lot of help to leapfrog itself, similar to the recent past with Apple. Just like previous near rivals, former top 5 handset makers Motorola and SonyEricsson, LG is a very sick rival right now, it is badly bleeding in the profits department, making so big losses, they fired the CEO. This rival (LG) is not poised to grow, and in counting unit sales - it is very costly to compete globally in the low-cost end of the handsets. We may see a repeat of what happened.
Both SonyEricsson and Motorola abandoned their global ambitions, while fighting to return to profits. Take SonyEricsson. In 2007 they sold more than 100 million mobile phones per year, globally (if Apple manages to sell 14.1 million each of the next 4 quarters, Apple would be selling 56.4 million units annually, or just over half of where SonyEricsson used to be). Today SonyEricsson sell at the rate of 40-45 million per year, so in three years, SonyEricsson abandoned over half of their market, just to return to profits. And what of Motorola? In 2006 they sold over 200 million handsets. Today they sell about 30-40 million, meaning that in four years, Motorola threw away 5 out of six of their customers, just to claw itself barely into profits, now as the company is being split up and sold. (Note, that another former global Top 5 rival, Siemens, when faced by similar loss-making market situation earlier in the past decade, decided the strategy options were so undesirable, that they simply abandoned the handset market and sold their handset unit)
LG is not a strong vibrant healthy rival for Apple to target. Apple took on strongly profit-making RIM and HTC - both strong, 'pure smartphones' maker and beat them handily in only three years. How easy will it be for Apple to beat a struggling LG which is in about as bad a shape as SonyEricsson and Motorola were a few years ago. Its very plausible, almost likely, that LG will lose unit sales dramatically, and a very likely strategic choice by LG in attempting to return to profits is to also abandon the global aspirations of fighting with Nokia and Samsung. If LG decides to retreat from the global market, its unit sales will decrease very dramatically. So LG may lose a third, maybe even half of its sales, as it attempts to recover profitability. If at the same time Apple keeps growing its annual sales numbers as strongly as in the past three years, we might see a new company in the Top 3 global handset makers by this time next year.
MARKET IS BIZARRE
Now, you might say, that is normal competition. You might say, that is typical in fickle consumer goods, where fads and fashions rule and a hit product can propel a company to dominance. Remember the Razr in mobile phones and how it propelled Motorola to a (short-lived) market growth? Or how the Wii has helped Nintendo recover market position in the home videogaming consoles.
BY FAR MOST EXPENSIVE
So, lets start looking at the bizarre. First there is the price. The average price of a mobile phone worldwide is about 100 dollars. The dumbphones had an average price of about 60 dollars at the end of 2009, and smartphones a little over 300 dollars. Cheapest phones go currently for price ranges in the 20 dollar to 25 dollar range. Morgan Stanley gave us a price pyramid for phones in 2009 and told us that phones costing 600 dollars and over, had about 2% of the market. Premium phones (non-iPhone smartphones) with an average price of about 350 dollars counted for the next 11% of the market. And basic phones with an average price of 100 dollars accounted for the vast base of the price pyramid, 87% of all phones sold.
How can it then be, if the market can only support 2% of phones in the 600 dollar range (remember, these are real prices, ie accounted for without handset subsidies, so the real price of the iPhone 4 is about 600 dollars, as is the Samsung Galaxy or the Nokia N8 or the Blackberry Bold etc) - that today, with Samsung's Galaxy selling in the millions, and HTC doubling sales every six months, selling in the millions, and Motorola selling its premium-price smartphones enough to become profitable again - that in that fiercely competitive market, Apple sells 4% of the world's phones - without any price cut? Either Morgan Stanley had under-estimated the market severely for the 600 dollar phones last year, or else - the market has changed strongly in the past year and the 'top end of the price pyramid' has grown significantly bigger in the past 12 months.
Conventional wisdom says that to grow sales in this market, you have to to offer lower-priced phone models - like Samsung does with its Bada OS based Wave phones, or what Nokia has been doing for several years now, or how Blackberry has been pushing the lower end of its price points, to be more appealing to the youth and consumer markets. But Apple has had none of that. They kept their prices stubbornly at 600 dollars, and yet, they are nearly doubling their unit sales - while the global mobile phone market (I am not talking of the sub-sector of smartphones, I mean all phones) has not grown in size! This goes against all conventional wisdom!
If the overall market for phones is about the same in size, and Apple already had a totally disproportionate share of the highest end of the price point, and in the past 12 months, many rivals have introduced new models to compete for that 600 dollar phone segment, then conventional wisdom would suggest that Apple would 'have had to' surrender some of its market share to the Samsungs and Motorolas and HTCs and Nokias of the world. And for Apple to have any hope of retaining (far less gaining) market share, they would have had to introduce lower-cost models just to hold market share. (Note, this type of thinking is core to how I analyzed year in smartphones for example, I was applying 'standard' competition theory to the market).
What happened? Apple almost doubled its unit sales in a year when the market did not grow, but the number of competitors did grow, and Apple did not drop its price. This should not be possible.
What it does tell us, is that the current level of sales is 'closer to reality' than what was the level of sales in 2009. In 2009 what Apple had, was still 'under-performing' ie there was a lot of pent-up demand, customers worldwide wanting an iPhone, who hadn't been able to buy one yet. Witness China and the Lunar New Year gift to Apple quarterly sales in Q1 of this year, where after Christmas usually all smartphone makers see declines in sales. Not this year, not in China. China only opened its 3G networks last year, so this was the first time of the Chinese New Year's gift-giving season, that 3G smartphones were a viable gift. China has 1.3 billion people, so there are lots of gifts out there. Most Chinese are traditional and give the 'red envelopes' (containing cash) but enough - several millions - of Chinese are more modern, that they now give - like we do in the Western World for Christmas - phones as gifts. Apple (and Nokia) saw a huge bonus smartphone sales in the January-March quarter of 2010, that had never been seen before, out of China. It will happen again in 2011. But these are the kinds of 'pent up demand' issues that have helped the iPhone grow sales. Same for South Korea - one of the world's most advanced mobile telecoms markets, they only launched the iPhone less than a year ago.
I don't mean to be critical of Morgan Stanley, and greatly appreciate their price pyramid analysis from last year. But obviously that analysis was done in a time before all the facts were in. Today the top of the pyramid has to support something like 5% or 6% of all phones, not 2%. And Apple has a lion's share of those.
Please do understand, the basic economics is still true. The world cannot afford to buy an iPhone at 600 dollars unsubsidised price. Not, if 83% of all phones sold cost less than 100 dollars and cheapest phones go for 25 dollars today. The farmer in The Gambia who earns one dollar a day, will not save all his income for two years, starving himself and his family, to buy an iPhone. It will simply not happen. The iPhone is far too expensive to be a world phone. Similarly to how a Mercedes Benz cannot be a world car. A Smart Car might be, its perhaps cheap enough - or the Tata. But not a car that is in the highest price bracket. Same for the iPhone, it cannot take the world, even if its price was cut in half.
But - the very important point - we miscalculated. We, as an industry, have under-estimated the amount of customers willing to fork out 600 dollars for the iPhone (or equivalent superphones, premium priced smartphones). If today 4% of the planet's population is willing to buy an iPhone at its current prices, and remembering the various rivals in roughly the same price range selling several millions more (Samsung Galaxy, Nokia N8 etc) - we may find that the 600 dollar phone market is actually closer to 10% than 2%.
This is a perfect case of 'numbers are my buddies' - I am willing to change my view, based on the facts as they emerge from the market. I have said before that the iPhone is such a high-priced luxury item, that it is near its market potential. Obviously it was not. And I am willing to accept that the potential is bigger than we - the industry - previously thought. Still, it does not mean that 600 dollars is something everyone can afford to pay.
But the price point will come. At some point, there are no more customers willing to pay super-premium prices for superphones, and then, at that point, if Apple wants to grow, the only way to grow market share is with lower price phones. But that point is not now, in November of 2010. There is still growth in the top end of the price pyramid, inspite of what the conventional wisdom (including analysis on this blog) have said.
AND ONLY ONE MODEL
This is the even more bizarre bit. All of the other Top 10 global handset manufacturers offer a wide range of handsets. Even RIM, another pure smartphone maker, offers about ten different Blackberry models. Nokia and Samsung release more than a new phone every single week, somewhere in the world. Conventional marketing has said for 100 years, that to gain market share, you have to diversify your product range, to meet customer needs. Globalization theory has further insisted, that we have regional needs and need to develop 'global-local' product offerings, where we adjust to local environments and desires. Americans tend to like flip-phones while Europeans like candybar swiss-army-knife phones, while Africans want dual SIM cards and FM radios, etc.
We humans are not homogeneous in our desires and wants, for example in phones, some will want a small phone to fit in the pocket of the blue jeans, while another will want a large screen to see internet pages. Someone will want a QWERTY keyboard to do messages well, while another will want a good camera to take pictures. All phones have to be a compromise in some way, if nothing else, if you try to cram everything into the phone, the phone will be huge like the Nokia Communicators, which have traditionally been ridiculed by many as being 'the size of a brick' where they have tried to fit every conceivable technology into one phone.
Henry Ford brought the prodcution line to car-making and he offered his early cars in one color because that color was the cheapest paint he could buy (he apparently never actually said 'you can have it in any color as long as its black'). Ford used his production line technology to become the world's biggest car-maker and at one point more than half of all cars driven on the planet had a Ford logo on the hood. But then rival car maker General Motors decided to offer consumers choice, and soon grew to be bigger than Ford, where GM soon offered separate brands of cars, optimized for given customer segments, the Cadillacs for the wealthy, the Chevrolets as basic cheap transportation, Pontiacs as sporty cars, the Oldsmobiles as reliable family cars, etc. GM used product differentiation as the means to grow past Ford and became the world's biggest car maker for nearly a century.
What Apple has done, is the mobile phone equivalent of 'any color as long as its black'. This, according to all marketing theorists, should be a textbook recipe for market share disaster. Rivals offer better cameras (Nokia), bigger screens (Samsung), better text inputs (Blackberry) etc. And the big rivals tend to offer several specialized models to address such needs, such as Nokia does with the N8 and its camera, the E-Series with its QWERTY keyboards, etc. But Apple refuses to give consumers a QWERTY keyboard, its camera is modest, only now for the iPhone 4, the camera finally offered a flash, etc. Similarly Apple has had many long-running feuds with the industry standards from early iPhones not supporting video recording or MMS picture messaging, to the recent fights with Adobe about Flash support, etc. 'Any color as long as its black'. Sounds almost like 'my way or the highway' or 'the way Steve Jobs wants it, nor nothing.' And the rivals - they have been more than happy to oblige customers, giving every conceivable ability and option and color and feature such as now offering waterproof phone models (for use in the bathtub and shower) or 3D screens or pico projectors, etc.
Motorola said this year that 30% of consumers will not consider a phone that doesn't have a QWERTY keyboard. Think about the iPhone and the world market. Apple is succeeding with only one model, where evidence suggests major segments of the global customer base refuse that specific model because of its form factor. Its like in cars, if you have a dog, you may appreciate a hatchback model of the car. If that is what you want, so you can easily get your pet into the car (and for the dog to have 'its place' in the car) - then you will never ever in a million years consider buying an Aston Martin or Ferrari or any other car, no matter how cool or sexy or desirable - if that does not offer a model with a hatchback (unless, perhaps, you buy two cars obviously). We've heard of several studies of youth preferences from the UK to Indonesia to Canada, that they prefer the Blackberry because they are addicted to messaging. Apple could easily design an iPhone with a slider QWERTY keyboard - and if Apple bothered to do this, it would probably be the world's best keyboard too, so everybody would love it - but they have not 'bothered' to do that. Is Motorola right in saying a third of the planet is not going to consider a phone without a separate 'real keys' keyboard? Whether its a quarter or half, doesn't matter. The fact is there, that there is a big segment of consumers who, no matter how much they may like the iPhone, they will not buy any pure touch-screen phone that doesn't have an actual QWERTY keyboard.
The facts are clear. And Apple is foregoing this market segment. Deliberately not giving them any option.
Why is this relevant. Two reasons. First, Apple is succeeding in growing into the Top 5 handset makers, refusing to make a QWERTY-phone, while a rival - longer-established - smartphone maker, RIM has made a line of smartphones that (almost) all have had QWERTY keyboards. And Apple has grown past RIM. Whose choice was better? I am myself a QWERTY guy, I love my Nokia E90 Communicator for its QWERTY keyboard and I am a recent convert to the Blackberry Bold also because of the QWERTY. I have had at least one of my phones in my pocket with QWERTY for more than a decade now and if we count back to non-phone PDAs, I go back almost two decades of carrying a QWERTY device in my pocket everywhere, from my days of lugging my HP LX series PDA absolutely everywhere everyday.
I would love to believe that everybody was like me, and 'naturally' everybody will so much love their QWERTY's that once you go QWERTY you never go back. But we are humans and we have differing needs. Yes, there is the heavily texting-messaging addicted segment of the population (me included). But for a much larger segment, some texting is enough - and for them, the touch screen text input on an iPhone is 'good enough.' Not perfect, but good enough. And most importantly - the iPhone touch screen keyboard is faster to use, than the classic T9 on most basic phones. So for most iPhone users, they will experience an improvement in their typing speeds using the iPhone. No matter that some will insist on a Blackberry. The iPhone is good enough.
Imagine if Apple did what they do with the Mac line of PCs or the iPods, that they would offer us a range of prodcuts. Imagine if Apple offered us the 'basic' iPhone 4. Then they offered us a 'super iPhone' lets say with a 12 megapixel camera with Xenon flash, some other cool gimmicks and premium components but would sell it for say 800 dollars (299 on AT&T with 2 year contract). This would have some 'obvious' visual clues to why its the super version, ie it could be the only white iPhone when others are black, etc. You can be sure, there would be lines of fanatical Apple loyalists standing in line for days, to get hold of this premium super-iPhone, almost no matter what its price. This would be introduced for Christmas season, so it would go on sale say December 1. It would revive all Apple interest for Christmas (and Chinese New Year) and keep Apple as the must-have device, helping also sell cheaper iPhone models for Christmas.
Then imagine iPhone would offer a 'fatter' version of the standard iPhone 4, for slightly higher price (50 dollars more perhaps), as the QWERTY slider edition. Otherwise the same as the basic iPhone 4. The QWERTY variant would be offered about three months after the 'new iPhone' so the QWERTY iPhone 4 would have been released around late August/early September, 'in time for school'. The youth would love this version.
Then for the after-Christmas (And after Chinese New Year) season, in late February or early March, Apple would give us the Nano version, a slightly stripped-down, but crucially NEW iPhone, which would mostly be a re-dressed and clearly physically slimmer/smaller version of the previous iPhone. So they'd re-design the iPhone 3GS, and do it with a visibly smaller screen, say 3.2 inch size. Price this as the 300 dollar iPhone (on AT&T would sell for 99 dollars with contract). This would be the 'entry level model' that we would give our loved ones, so they stop using our iPhones..
I am not the first analyst to suggest Apple should expand its product line, and that Apple should release more than one new phone model per year. But understand two things - first, that all of Apple's Top 10 global biggest phone makers already do this strategy - they do not have this (expanding their product line beyond one phone model) as an option. Yet Apple jumped into the Top 5 - without using this option!
So strong is Apple's brand and loyalty and appeal. They can break into the Top 5 with only one model, where their other Top 5 rivals carry from 10 to 100 phone models in their line-up. Wow. And obviously - at any time that Apple wants, it can always expand its product line - to suddenly grab a major slice of that adjacent product space. Consider the QWERTY variant. Imagine how many of the world's youth want an iPhone, but are addicted to SMS, send over 100 SMS per day. They need the ability to send SMS blindly, without looking at the phone screen. You can't do that on an iPhone. But now, imagine if Apple gave them a QWERTY iPhone? It would immediately be the ultimate must-have phone for all the youth. The cool kids would get them, and all others would have to have them. Are you cool? Oh, you still tap along with that old Blackberry? About time to switch to the iPhone...
If Apple can take the majority of the 600 dollar 'superphone' smartphone space, with an iPhone model that never had the best camera, didn't have the biggest screen, didn't have the QWERTY keyboard, wasn't compatible with all industry standards, etc - could Apple take half of the QWERTY space? Imagine if this QWERTY-iPhone was launched by Apple? It would devastate Blackberry's market chances in the consumer space and cause nighmares at Nokia's HQ around their consumer QWERTY strategies. If RIM sold 12 million Blackberries the past quarter and lets say two thirds went to consumers. Most of those would go to the youth segment. So Blackberry has about 8 million of those. What of Nokia's line of QWERTY consumer phones? Probably similar scale, lets call that at another 8 million. And all other makers of QWERTY phones from Samsung and HTC to the 'Chinaberry' and various Indian and other new makers who offer Blackberry clones. The youth market in one quarter has to be at least 25 million and probably 30 million QWERTY phones. If Apple took just half of that, Apple would double its quarterly sales.. This without a 'bargain price' Nano iPhone to cannibalize profits.
I think in the long run Apple has to diversify its product offering. But so far, it has managed to grow very strongly with only one new iPhone model released per year. That is amazing. And as a warning to all other Top 10 rivals, Apple - and only Apple - has this strategic option they can implement at any time. If Apple feel their market share growth has stalled, they can instantly boost it by releasing a couple of new product models in the next year. Yes, managing a series of products is more costly than just one model, but Apple already manages that very well with the Mac and the iPod. Some time we will see the product line expanded.
NOT OPEN MARKET
But that is where the iPhone is so totally against all 'conventional wisdom' in mobile phones and especially in smartphones. This market is not 'open'. It is not like other consumer electronics for example, where consumers can go to retail stores and compare items side-by-side and decide on their merits. Because of the archaic practise of handset subsidies (when phones cost 2,000 dollars a piece, and voice minutes cost a dollar, and the first networks were trying to find customers, it made sense to subsidise the phones, to bundle the phone price with the 2 year contract - but today, when a plasma screen TV costs 2,000 dollars and we can afford those - and an average (non-smartphone) mobile phone costs 100 dollars and the voice minutes cost less than 10 cents per minute, in many markets 1 or 2 cents per minute - then we do not need the obsolete concept of bundling the 2 year contract with the price of the phone.
Whenever there are bundled phones as the main form of mobile phone offerings and contracts, like say in the USA and Japan, it means that the carrier/mobile operator, not the consumer - decides what models are going to be subsidised and if your phone does not get a good subsidy from the carrier(s), then your market chances are effectively zero in that country - witness Google Nexus One and Microsoft Kin for recent examples. In very round terms, about a third of the world's mobile phone contracts are contract-customer phones, most of those are with subsidies. And two thirds of the world's phones are sold without contract, on 'pre-paid' accounts, where the consumer pays full street price for the phone, and buys the telecoms services separately. As there is no bundling of expensive handsets, in these markets usually the telecoms services are far cheaper than those in countries of bundled contracts. There is a gradual shift in the world away from contract-bundles as recently happened in South Korea and Israel for example.
In televisions, you can be a major TV manufacturer, set up distribution with one of the electronics distributors in a given country, and then offer your TV sets for sale in that country. And depending on the actual merits of your TV, its real price, and the marketing efforts you do, you the manufacturer can expect a 'fair' market performance with your product and its price. In the mobile phone market, that is not at all the case, again witness the Google Nexus One. Many analysts and comparison sites rated the Nexus One very favorably against the iPhone 3GS at the time. But the US carriers decided not to support the Nexus One and picked similar touch-screen phones by HTC instead. Nexus One died in the US market. Not because it was a bad phone or badly priced, it was because of the limited competition in the carrier-subsidised phone market of the USA. If carriers would not subsidise the Nexus One (with a retail price of about 550 dollars) down to about 199 dollars to be competitive with the iPhone 3GS, Google had no chance. They tried to sell it online but to pitiful performance.
Again, lets bring this back to the iPhone. The conventional wisdom says you cannot succeed in the global market without very strong carrier relationships. Look at all the rumors of Apple with a CDMA version and Verizon. Whenever some tech analyst site publishes a new rumor suggesting the Verizon iPhone is coming, the Apple shares take a bounce upwards. The iPhone is not available on all networks. The world's biggest mobile operator is China Mobile (alone twice as big as the total US domestic mobile phone market) but China Mobile was forced by the Chinese regulators to deploy their 3G network on the Chinese domestic 3G standard, called TD-SCDMA (which is incompatible with the WCDMA version of 3G as used in the iPhone today). Apple does not offer China Mobile a TD-SCDMA version of the iPhone. But Nokia, Samsung, HTC, etc major smartphone makers do offer TD-SCDMA versions of their smartphones. So Apple is fighting in a somewhat 'handicapped' condition, like a boxer who has one hand tied behind his back. Apple has to fight for global market share, yet it does not offer an CDMA-2000 EV-DO version of the iPhone (as used by Verizon and Sprint in the USA, KDDI in Japan, China Telecom in China, etc) and no TD-SDCMA version (used by China Mobile). By these technology choices, Apple is completely shut out of about 20%-30% of the world's market potential for 3G smartphones.
And as mobile phones are often corporate/enterprise 'employee phones' ie business tools, we also often get phones and their contracts as part of our employment. In large and medium corporations (companies that buy more than 100 phones per year) the phones are tightly managed and the IT department will govern what phones are accepted as employee phones - as these provide various risks to the IT department, as vulnerable entry points to the protected IT systems of the corporation. These phones tend to be Blackberries or Nokia E-Series or previously were also Microsoft Windows Mobile or Palm business-oriented phones. About one phone in five is a company phone, sold today. Note, that while in small businesses, the boss can do what he or she wants, I am not talking of small businesses. In large corporations, perhaps the marketing department can get an exception for the VP of marketing to have an iPhone, but the standard sales reps and field engineers etc, the phones they get, are from a set of pre-approved models, very strongly Blackberry-dominated. An Ostermann survey in 2009 found that 75% of US businesses had Blackberries, and obviously of the remaining 25% the majority would not be iPhones, they'd be Microsoft Windows Mobile or Palm based phones..
I do not mean to dismiss the iPhone. Apple has tried very hard to break into the corporate space, and have occasionally some breakthroughs, like one of the world's 50 biggest banks announced earlier this year that it will allow iPhones to be used by its employees (while not abandoning Blackberries), and the EU slapped Nokia rather hard this summer when it decided that for the EU Parliament, they were getting iPhones not Nokia smartphones. But these are rare exceptions. With the exception of the advertising and media industries, the iPhone is not a corporate/enterprise phone (yet). So if we look at the global phone market, where Nokia and RIM compete for 100% of the market (both consumer and enterprise market segments), Apple is fighting effectively only in one of the two. That makes its achievement all the more impressive. Apple achieved its Top 5 without meaningful presense in the enterprise segment. You could say Apple had been locked out of 20% of the world market. Ever more a phenomenal achievement.
HOW GOOD IS 4%
Apple is the boxer fighting with one arm tied behind his back. Apple is a global player, but it does not offer all global standards of 3G. Apple does offer a smartphone suitable for consumer and corporate use, but it has had almost negligent market penetration in corporate phones (so far). Apple refuses to offer a QWERTY variant. And still in several markets, the iPhone is not offered on all networks due to the early launch carrier relationship contracts. How well is Apple really doing.
I have a model for the global mobile telecoms market and out of that, if I remove the 3G standards that are not supported by Apple today; and I remove the enterprise/corporate segment of what is left; and I remove the consumer/youth QWERTY segment of what is left; and for what is left, I still remove those networks on compatible standards but who for contractual reasons cannot sell the iPhone (like T-Mobile, a GSM/WCDMA operator in the USA, or NTT DoCoMo an WCDMA operator in Japan) - I get an 'iPhone feasibible' market of only about half of the total mobile phone market globally.
This is BEFORE we count the price into the equation! So, what does this mean. It means, that in those markets - where the iPhone is a viable option - it is on the right standard, has the carrier relationship, is acceptable to the customers to even consider etc - this market is only half of the world's phone market. And Apple has already 4% of the world, meaning 8% of this 'half market'.
What does it mean? It means, that Apple's 'true' market performance, in those markets that are relatively fair to compare - is 8%. Thats about where LG is today by they way, number 3 of global handset makers. If Apple wants to address those 'gaps' in the coming years, releasing a CDMA version for Verizon and Sprint, offering a QWERTY etc - without touching its price, the current iPhone 4 and some close variants, if offered on a global level - could attain 8% market share.
Beyond these, is the option of the Nano iPhone, which if executed carefully, could double Apple's unit market share, while not seriously hitting its profitability, as I have explained.
Note, Apple is the most profitable handset maker by a wide margin. If at any point Apple feel that the iPhone is 'underperforming' to their own internal targets, Apple always has the option to cut their profit margins - ie drop their prices (or boost their marketing expenses). This is an option that only a few of the major rivals have, and nobody has as much of a margin in its profits, to power possible 'price wars' as Apple has. Is this not the best positioned phone maker today? They have the most desirable phone, the phone with the highest price, the highest profits, and have entered the Top 5 without the costs of managing wide ranges of products. Apple can offer its developer-partners a nearly homogenous product line with the least amount of fragmentation in technical specifications. And now they have all the options.
This is very frightening in a very real sense to the rivals. Understand what I am saying. Apple is beating the competition like a rented mule, while seriously under-performing today, compared to its true potential. Imagine the strategists at the HQs of Nokia, Samsung, RIM, HTC etc, who look at their internal customer satisfaction surveys and comparisons to the iPhone etc, and then they see that another quarter went by, and Apple still has not split its product line. They give a quiet sigh of relief, and hope and pray, that it will be yet another quarter, before Apple finally gets fully onboard with this battle.
And again, before I am crucified by Apple loyalists, I admit - totally utterly admit - that Steve Jobs's judgement and knowledge of his customer base, its loyalty, and the unprecedented appeal of the iPhone has been far better, than my understanding of this, what I profess to be my area of expertise, the mobile industry. Steve Jobs has personally managed the iPhone and made decisions, some truly magnificent, others perhaps not perfect, but the combination of which, has given him the best phone in the world by customer loyalty and satisfaction. The best phone in price and profitability. Climbing from nowhere to Top 5, in one of the most competitive global industries ever, in its most competitive segment. Apple has performed brilliantly. What more could you ask for in a CEO.
Now, I do think that at some point there will be more than one iPhone model, and when that happens, Apple will grow market share again. So I am only critical of Apple for under-performing! For all his excellence - and Steve Jobs and Apple have been excellent - I am convinced that Apple has under-performed in the smartphones/mobile phones space. They can do twice as well without lowering their price or cutting in any significant way into their profits. And then, after that, if they introduce the Nano version as I have argued, they could double their market share AGAIN. Then we're talking 16% of the world's phones (in a 2-3 year time frame from now) and Apple would start to challenge the world number 2 mobile phone manufacturer, Samsung.
THE ERA OF THE iPHONE
I told you well before the original iPhone even launched, that it will forever change our industry. I called it the phone by which we'd measure time, before iPhone and after iPhone. Yet, if you asked me three years ago whether Apple with pure smartphones on a 600 dollar price strategy could ever be a top 5 manufacturer, I would have said, 'never'. In my mind it was categorically, economically not viable. It was even foolish to think that.
How wrong I've been. Apple has proven they can break into the Top 5, while offering only one phone model, and with a price that is about twice as expensive as the average prices of its nearest rival in price (Blackberry) and costing six times what is the global average for phones. This they have done in the most heated age of competition in smartphones, when over 30 global Fortune 500 rival brands have entered the smartphone space. They are now the world's second largest smartphone maker, and if you accept the definition that a smartphone is a computer, Apple is once again the world's largest computer manufacturer by computer units sold. They are also the most profitable tech company. And where all their bigger rivals in mobile phones manufacture both 50 dollar dumbphones and cheaper smartphones than Apple, Apple with only the iPhone, has in three short years, leapfrogged some 50 rivals and stolen a place in the Top 5 of handset makers. Wow. That is amazing. Congratulations.
Now, Cupertino - expand your product range to include a super-iPhone and a QWERTY variant of the iPhone 4. Then add CDMA and TD-SCDMA versions. Terminate your exclusive contracts like with AT&T in the USA and Softbank in Japan. And keep pushing for the enterprise space. You'll double your market share and hit 8% in about a year. And after that, offer the Nano model at half price (as I explained, carefully ensuring you will not cannibalize full-price iPhone sales) and you can target the 15% market bracket for a 2 year to 3 year window. Then you'd be safely in the Top 3, and truly fulfill your mission to be a mobile company. You never need to be the cheapest phone for everyone. You can always be the most aspirational phone with the associated price premioum that will fulfill your investor hunger for greater profits. But yes, congratulations and here is to wishing you on to even greater things. Inspite of all that I write here griping about 'missing this' and 'I want that' you've changed our industry for the better and I applaud that. Keep doing what you do best, disrupting industries and making consumer electronics more user-friendly. Our industry is more exhilirating with Apple a major part of it.