If You Were Apple, You'd Ignore Low-End Smartphones, Too
Apple's critics seem to believe the company is missing the boat by not aggressively pursuing the fast-growing low-end smartphone market. It may be that Apple has no desire to board a leaky boat and have to knock itself out bailing just to inch toward its destination. That destination is profitability, of course, and Apple has been sailing toward it quite smoothly on its high-end tack.
Feb 18, 2014 3:34 PM PT
Smartphone sales have been rising. The 968 million smartphones sold surpassed the sales of feature phones for the first time, Gartner noted earlier this month. However, sales actually topped 1 billion, according to IDC. What's the difference of 32 million between friends? Not much.
Here's a more important point: High-end smartphone sales have been slowing fast, while low-end smartphone sales have been rising fast, both companies observed.
This may lead to the assumption that in order for smartphone manufacturers to do well, they need to sell sub-US$200 -- and even sub-$150 -- "smartphones." If they don't, they'll miss out on something really super important.
The problem is, when you look at smartphone revenues and profits, there appears to be no upside for Apple in chasing the low end.
Apple snagged 87.4 percent of mobile phone earnings before interest and taxes in the fourth quarter of 2013, said Tavis McCourt, an analyst with Raymond James, in an Investors.com report.
Samsung claimed 32.2 percent of industry profits.
If you're doing the math right now, don't worry about hurting your head -- McCourt's math takes into account the industry total earnings that resulted from many manufacturers actually losing money in the fourth quarter. Basically, while Apple and Samsung are raking in profit, their competitors have been burning money just to stay warm.
Chump Change at the Low End
Because the volumes are so high in the low-end smartphone market -- it grew to 42.6 percent of global volume to reach 430 million units in 2013, IDC reported -- there's a false sense of opportunity.
If McCourt's revenue and profit math is anywhere close to being accurate, it shows that 430 million units of low-end smartphone sales have resulted in very little profit for anyone but possibly Samsung, which sells many different models of phones at both the high and low ends.
Even if low-end smartphone sales were to double in 2014, the amount of profit likely would be a trickle compared to what Apple collects now.
Still, Shouldn't Apple Change Course?
I can't wait for a cacophony of analyst, pundits and players to begin in earnest this year.
Apple will have to cope with the flood of lower-priced phones that will hit markets around the globe, Antonio Viana, president of commercial and global development at ARM Holdings, told CNET earlier this month.
They'll be under pressure to do something, he maintained.
I'm not so sure. Heck, if I were running Apple, I'd keep the bus pointed straight ahead and hit the gas. Here's why:
- Despite sliding market share in terms of unit volume, Apple earned 87 percent of mobile phone industry profits -- up from 77 percent last year. That's a massive leap forward despite losing something as "important" as unit market share.
- Apple earned far more profit than everyone else -- including Samsung -- despite the competition releasing a flurry of seriously good smartphones. The competition has never been stronger.
- Apple sells high-end devices at an enviable profit -- and then turns that sale into additional profit via its iTunes and App Store ecosystems. In 2013, iTunes revenue leaped to nearly $24 billion or so. Which other phone manufacturer has anything like this at all? Google? Nope. Google sold the money-bleeding Motorola unit to Lenovo.
- If the low end of the market represents such a Shangri-La, the revenue just doesn't work out. In the fourth quarter of 2013, Samsung delivered 82 million units, while Apple delivered 51 million. Apple's effort claimed 87.4 percent of all revenue while Samsung's took in 32.2 percent, according to IDC. What does this tell us? It tells us that the very best, most dominant Android competitor is making far less than half of Apple's profits while producing 30 million more units to sell. Ouch. That's pretty freaking amazing execution by Apple, never mind that every single competitor other than Samsung claimed just a tiny blip of profit -- or none at all. Those competitors include Microsoft, Nokia, LG and Motorola. Aren't they supposed to be powerhouse companies?
Let's put it another way: In 2013, Samsung had to sell 300 million smartphones -- double Apple's 150 million -- in order to capture far less than half of Apple's revenue, based on Gartner's figures. Even assuming the actual count is closer to the 314-to-153 million in unit sales IDC reported, the ratios are similar.
Meanwhile, it appears that Samsung has to work far harder than Apple to capture that revenue -- particularly in advertising spend. The reports are varied and difficult to pin down accurately, but Samsung consistently appears to slightly outspend Apple in the U.S. and far outspend the company abroad.
Which business would you rather be in? The one that hopes the future not only will remain consistent but also will pay off at some nebulous date? Or the one that makes insane profit right now?
Putting the Low End Into Perspective
To follow this line of thinking applied to lack of profit seen by most manufacturers in 2013, it would be like telling your young daughter to sell cookies at a loss in the hope that she'd develop loyal customers she could potentially keep and upsell in a year or two. I don't know about you, but I think even the small children in AT&T's thinktank could decide which would be better.
This one is pretty good, too: