This is the fourth segment in an 8-part series on Unlocking the Value in AAPL.
- The Irrational Market Theory
- The Law of Large Numbers
- Market Share
- Apple's History
- Business Model
- A Dollar A Day
*Disclosure: The author owns AAPL.
Lately there has been a popular view that Apple's refusal to go for market share by selling a cheap iPhone will result in dominance by Android and marginalization of iOS (and this time Steve Jobs will not be able to return to save the company). Recent figures that have Android holding 80% of the global smartphone market are cited to support this view. This narrative coupled with the history of personal computer industry make a superficially compelling bear case that has convinced many observers.
There are a number of problems with this. Apple's market share story isn't as bad as it is sometimes made out to be and the market dynamics are significantly different than they were in the PC market.
Carriers in some countries offer low cost Android phones in place of feature phones, often without a data plan. In many respects this part of the market has more in common with the feature phone market than it does with the smartphone market most of us are familiar with (where data plans including a gigabyte or more of data are required). Failing to consider this (i.e. using only device operating system) when segmenting the mobile phone market is rather misleading.
I believe a more useful way to segment the market would be to look at tiers of data service. Unfortunately I am not aware of public data which looks at device or OS market share in this way,1 but nevertheless it is useful as a thought exercise. The segmentation might look something like this:
- small (around 256 MB): enables access to mostly text-based content and services
- medium (around 1-2 GB): enables access to image-heavy and audio content, with limited video
- large (effectively unlimited): enables access to video without worrying about overage charges
This facilitates a more nuanced perspective. As a user pays for more data, total cost of ownership rises. When this happens the cost of the device relative to total cost drops significantly. Most customers with medium and large data plans will pay as much or more for data than they will for their device over a 2-year period making an up sell on the device much easier even without a carrier subsidy.
I would be very surprised if Apple does not have access to detailed data on how data plans impact elasticity of demand for devices. It is easy to imagine this data demonstrating that they would have far more to lose than to gain by more aggressively lowering prices on the iPhone. In any case, we can be sure that they are thinking this through very carefully. Apple does not worship at the feet of the market share gods.
It is immediately obvious that Apple will never compete in the first two tiers.2 Apple will wait for these customers to come to them as developing economies and technology costs come together enabling more people to afford enough data service to actually make use of a smartphone. Tim Cook in his latest interview:
There’s a segment of the market that really wants a product that does a lot for them, and I want to compete like crazy for those customers. I’m not going to lose sleep over that other market, because it’s just not who we are. Fortunately, both of these markets are so big, and there’s so many people that care and want a great experience from their phone or their tablet, that Apple can have a really good business.
It should also be relatively uncontroversial to speculate that Apple's market share in the large data plan tier is much higher than it is in the medium data plan tier. If we had the data, we may find that Apple leads globally among users with large data plans and is competitive among users with medium data plans.
Rather than trying to divide the market, it may be more helpful to look at the total mobile phone market. When we do this we see that Apple's share has been growing steadily3 since the iPhone was first released.
iOS is also gaining ground in the U.S. market where Android share appears to have peaked. This is important because the U.S. market has disproportionate influence in the technology industry, especially among the crucial mobile developer and startup segment.
Clearly all customers in the “smartphone market” are not created equal and Apple is doing extremely well among those customers who are most profitable and whose demand is most influential in shaping the industry.
Start the Photocopiers
If Apple's position was really as weak as the bears would have us believe, why would Google and Microsoft rush to make costly acquisitions in an attempt to copy Apple's vertically integrated ecosystem strategy? By all appearances executives at both Google and Microsoft believe this strategy is working extremely well. So well as to be worth copying.4 Tim cook commented on this in his latest interview:
We’re not looking for external validation of our strategy, but I think it does suggest that there’s a lot of copying, kind of, on the strategy and that people have recognized that importance.
Any time market share is discussed in the context of technology platforms, Microsoft's dominance of the personal computer market immediately springs to mind. In the next segment I will explore how the history of the PC industry may or may not be relevant to the mobile market (or investor perceptions of it).
Although I don't know of data that directly segments the market this way, Ben Thompson has some data that begins to very roughly support this kind of thinking.
Apple probably sells a few devices into the low data service tier. They are happy to receive these sales but are not actively seeking them or designing products addressed to this market. Apple's solution for users who want an iPhone-like device without paying for an expensive data plan is the iPod Touch.
The overall trend in Apple's share of the total mobile phone market remains strongly upwards despite mid to end of product cycle declines in.
If history serves as a guide they will try, but neither will truly copy the most important part of Apple's strategy. They will copy the form but not the substance. Without the quality, attention to detail and true empathy for the customer that is central to everything Apple does the whole point is lost. Things may be different this time around but my magic 8-ball says “outlook is doubtful”.