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).

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:

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.