14
Jul
cagematch[4]

Cage Fight, Part 2: Why Apple Will Win The Smartphone War

Posted by in Devices By Manufacturer, Editorials, News

This is a response to Cage Fight, Part 1: Why Android Will Win The Smartphone War.

I have to say, I disagree with Kenny’s view that Apple is losing to Android. In fact, when Artem asked me what I thought of his article a few weeks ago, I went off for about 15 minutes listing reasons it was just plain wrong (at which point, I then debated back and forth with him for another 20 minutes).

cagematch

I’m going to say up-front, I’m thinking short-term here – over the next few years. I’m no oracle, so I can’t say anything more specific than over the next 2-5 years (broad, I know). Certainly, Apple won’t be on top forever, if only because history teaches us that nobody stays on top forever. A company may always be “successful” in that they turn a long-term profit, but they will not always stay remain the king of the kill. Still, as I said, I think Apple will remain on top for another few years.

Apple didn’t lose the computer war

This may seem a little off topic, but stay with me here – it supports the rest of the article, and you’ll see why in a bit. Kenny argues that Apple lost the computer war to Microsoft, and that’s why they’ll lose the smartphone war. Did they lose the computer war, though? Let’s look at two nearly identically-specced laptops, one a Dell and one  MacBook:

dell_vs_apple

You’re going to want to full-size that, but what it shows is a Dell costing $950 and a nearly identical MacBook costing $1,800. Yes, the MacBook is aluminum. Yes, the Dell has a larger hard-drive. There are a number of minor differences, but essentially they’re neck-and-neck (also, full disclosure: there were a few Windows laptops for less – starting at $730 - but for fairness I wanted one that had a LED backlit screen).

My point should be pretty obvious, but just in case it isn’t – despite having nearly identical product costs, Apple is charging an $850 premium (that’s nearly 90%) on their laptops. As Kenny compares them to Microsoft, I’ll keep that analogy going – Microsoft sells just the OS, so they get a minor cut of profits. Apple? The whole damn thing is theirs, not just the OS. Lost the computer war? I think not.

Financial statements don’t lie

As Kenny moves on to talk about Nokia, I’ll do the same. Sure, Nokia is the worldwide leader in terms of sales numbers. But take a look at their income statement (I’m abbreviating it here to show relevant parts; this is for financial year 2009):

Total Revenue $58.8bn
Less: Cost Of Revenue $39.77bn
Gross Profit (Total – Cost) $19.03bn
Less: Expenses $18.66bn
Net Income $373m
 
Their revenue was nearly $60 billion, but their net income was only $373 million. Contrast this with Apple’s income statement (again, just relevant parts, and for FY 2009):
 
Total Revenue $42.9bn
Less: Cost Of Revenue $25.68bn
Gross Profit (Total – Cost) $17.22bn
Less: Expenses $8.99bn
Net Income $8.24bn
 
Their net income was a whopping $8.24 billion. That’s just over 22x more income, while their revenue was over 25% less. Not only that, but they have $23.35bn sitting in their coffers (Retained Earnings) as of September 2009, an increase of roughly 70% in one year (Nokia’s dropped about 12%, in comparison).

Who cares about raw sales numbers?

What I’m getting at here is that Apple is effectively the Bentley of the phone world… but from a corporate and marketing standpoint, they’re in an even better position than Bentley. They’ve maintained the niche, boutique, exclusive feel of their product while producing the most common smartphone in the world. As a result, they still charge ultra-premium prices but enjoy awesome sales (1.7m iPhone 4’s sold in the first 3 days? Holy jesus.) That position is a marketers dream, but it’s damn near impossible to accomplish.
 
Apple doesn’t want to put an iPhone in the hands of every person in the world; if they did, it would lose its value. By maintaining a more exclusive image, they get away with huge profits and revenue sharing (revenue sharing means that Apple gets a cut of the monthly service revenue from AT&T – no other handset maker gets that, as far as I know).
 
The takeaway is this: Apple makes more profit per handset sold than any other phone maker. As of January 2010, it was estimated that Apple’s revenue was $648 per sale. Some rough math of RIM’s numbers shows that their revenue per unit sold is less than $400 (note: my numbers are more of a ballpark than the numbers from BNet’s, but they’re adequate for a rough comparison.) (Note: I’m not going to run Nokia’s numbers, because their phone lineup spans ultra-cheap phones to ultra-premium, so it really isn’t an apples-to-apples comparison – but suffice it to say, their revenue per unit is significantly lower.)
 

Still, if you want to talk sales numbers…

As Kenny pointed out in his article, 77% of the iPhone’s US sales were users upgrading from previous iPhones. 77% is a lot as a percentage, sure – but that still means that 23% were new users. 23% of 1,700,000 is still 391,000. Sprint sold 66.5k EVO’s in the first 3 days (from Sprint stores, granted), and they were damn excited about that. AT&T and Apple sold 391k to new users alone in the same period. And let’s not forget, even if 100% of the new phones were sold to existing iPhone owners, a sale is a sale (and as I’ve said above, that sale means huge profits).

The takeaway

Here’s the essence of what I’m getting at here: Raw sales numbers aren’t everything – at the end of the day, profit is what matters. As a result of all this, even if Apple sold half as many iPhones, they’d still be using $20 bills to stir their coffee. Apple could candy-coat a cat turd and call it the iCrap and still sell 500,000 of them at $100 a pop. My point is that Apple will always hold a cult following willing to pay a high premium to have Apple products.
 

Some other comments

All that said, I think that the tides are slowing their flow towards Apple. Despite the amazing sales of the i4, I think they’ve seen more and more bad publicity lately (iPad user data stolen, iPhone 4 reception issues, etc). Consequently, I think their perfect image is cracking – the more users they gain, more problems are reported. Apple had a reputation for making products that “just worked,” but they’re losing that image due to issues with newer products. They’re experiencing growing pains, and I think that’s likely to continue.

Regardless, as I said above, they’ll always have their core customers who are willing to pay a premium to be a member of the Apple cult.

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Aaron Gingrich
Aaron is a geek who has always had a passion for technology. When not working or writing, he can be found spending time with his family, playing a game, or watching a movie.

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  • Slie

    Kenny: "But profitability doesn’t always predict success."

    Therefore I don't see how this is in response to Part 1 if that was not part ones edge.

    Did you talk about Android, and it's weeknesses?

    • Aaron Gingrich

      Two things:

      1) I'm responding to his opinion with my own opinion. They differ. That's the point of having two articles.

      2) He wrote his part about profitability after reading my draft. Technically speaking, that specific part of the article was a response to me, not vice-versa.

  • Seth Daniel

    "AT&T and Apple sold 391k to new users alone in the same period."

    if I'm not mistaken that 1.7 million iphones is a worldwide number, not a US number, which means only a fraction of those 391k were sold to new users in the us (on AT&T).

    Also, comparing the sales of one htc phone in one nation on a carrier half the size of the carrier that sold the iphone in that same nation to the sales of the iphone in the whole world on many much larger networks is not really a valid comparison...although I see it made a lot.

    I see your point in this article-apple makes ridiculous profits-and I guess that's truly what a corporate business end goal technically is...but I must agree with Kenny on this one. To me winning is about much more than just the bottom line profits, it's about how prevalent your name is, how many developers recognize and want to work for you, how many knowledgeable consumers you have going to bat for you, etc.

    All things considered, I think android is winning. But, again, I see your point, in terms of profit alone, you can't take it from Apple.

  • http://tech.shantanugoel.com/ Shantanu

    lol, so ultimately the cage fight boils down to the same thing with which it started, i.e., "marketplace is large enough to accommodate everyone and that cage fights make no sense because the iPhone and Android phones cater to different audiences"

    • http://www.kembry.com Kenny Embry

      What a great observation. Let me clarify a little, though. The iPhone will be with us for awhile, much like the Macintosh will always be with us. There are clearly different markets for the different phones, and that's a very good thing. Android needs the iPhone, and vice versa. But one will be the dominant player, and I'm saying that it will be Android.

  • Tijl

    @Seth, the iPhone 4 was launched in the US before it was released internationally a few weeks later. So yes, that *is* just the US number.

  • droidneWbie

    The "battle" is not between Evo and IPhone, as others have pointed out. Nor is the present the point of the discussion. If you look at long-term proliferation, Android is poised for continued growth, most likely at Apple's expense. As the IPhone becomes increasingly restrictive (removing that gps app many users bought is an example) more users will adopt a more open platform. If phone companies get too restrictive with proprietary implementations of Android, then Apple has a chance.

    • Aaron Gingrich

      That's why the articles are Android v iPhone. Like I said in the article, I agree that Android will have the greatest market cap.

  • jaamgans

    I hate really poor articles - I was hoping for a really good debate but this is an evasion not a debate/arguement.

    Some might consider that some fair points have been made but these are done using data that is "suspect" and while they may be fair points they don't support the title of the article, rather they try and evade the point - "Win the War":

    Nokia only does phones, while Apple does phones, computers, ipods etc --> I don't see you stating the revenue, cost and profit stream is phone only. Thus very unfair to compare Nokia and Apples profits. However you point could be made by just showing Apples profitability. A counter to their profitability is how long can stay competitive especially as they may be falling into the same trap they have already fallen into once before - ignoring user feedback and future requirements (good to see the IOS4 upgrade is a good start to avoiding a repeat fate). Thus stating apple's profitability doesn't actually show they are winning the war. Especially as Google isn't making a cent on the OS software - hence according to your analysis they can't be in the war at all -- this isn't about profitability its about number of users/items sold etc.

    Similar is showing the price of a laptop compared to Apple laptop and then stating that they are winning cause they can sell at a higher price point. M&S can sell food at a higher price point than Tesco - doesn't mean they are winning the grocery war - they aren't Tesco is - M&S and Apple are just showing that they are differentiators and can carve a market accordingly - definitely doesn't mean they are winning it. MS are winning the war as they have more copies of their OS being used than Mac OS and Linux. PS - what is Apple's profit on their software only stream???? You might find that ipods etc are propping it up - happens all the time in large companies.

    Saying that profit is the only thing that counts is not true - sales are just as important and in some ways even more important especially considering the mix and diversity of your turnover. Companies with higher sales with lots of diversity are less risky than companies with limited sales and limited diversity.

    While Apple will probably always have a sustainable user base (though history has proven this is not necessarily true); having a small user base that will always be prepared to pay a premium does not mean you win the war - it just means you survive (it might be a very comfortable/profitable survival) but it is only surviving, it doesn't mean winning the war.

    If you want to say that profitability is how wars are won, back it up, prove to us how being more profitable means being more successful than higher sales. I will show you an example of how profitability doesn't naturally mean you are winning i.e. If you have 75% profitability but its only £10k, how does that even compete with 3% profitability but £90k - it doesn't it just shows two different models - diversification compared to cost leader. Got nothing to do with winning and diversification is a risky strategy especially if you are behind on innovation (IOS4 is just keeping up with Android's innovation and no face time is not an innovation no matter how they try to spin it).

    • Slie

      Thank you for:

      Putting Google in the picture where it belongs.(because we are talking about google. NOT just Android)

      Bringing in the fact that "Android" is a free portable OS competing with companys that sell Hardware!

      Bringing in the fact that this did not address Part one.