Research groups like IDC and Strategy Analytics seem to value marketshare as the only metric that matters. Since their clients in the smartphone industry only have marketshare as an advantage, it is more profitable for research groups to produce reports that favor marketshare. Recently, IDC took Apple to task for not growing its worldwide, smartphone marketshare. They said nothing about Apple's domination of industry profits. Is that fair? Does Apple have a marketshare problem? If so, what can they do about it?

A numbers game

Here's the game board, there are no rules. Who's winning?

Now, lets make the game a little more interesting:

Who's winning? That depends on who's asking, and who's answering. In the real numbers game played by research groups and analysts, there are also no rules. The winner is determined by who is paying whom for what results. In the above game of made up numbers, Apple is the top handset manufacturer in the world. Obviously, their winning.

Except...

Samsung ships the most handsets in this mythical quarter, and Android outpaces iOS total shipments by a wide margin. Take out the US numbers and the platform shipment beat down is even worse. Clearly, Android is winning. Focus on what individual manufacturers actually selling to customers, and Apple wins every time. Ignore sales and focus on shipments to the channel where end-user sales are not considered, and Android dominates. 

When money is factored into the game, it gets even more interesting. You will see reports that show Apple and Samsung raking in over 100% of the profits in the mobile industry. That's not a typo. Many players are actually losing money. Negative profits push the positive numbers above 100%. What those reports may not highlight is the fact that over 80% of the Apple/Samsung profit duopoly belongs to Apple. It is not anywhere close to even. Samsung's profit-share is in the teens. 

Part of this is due to the fact that Apple's average selling price per handset is so much higher than the rest of the industry. It really should be a separate category. Additionally, Apple has a much higher profit margin. They benefit from manufacturing efficiencies and economies of scale other companies can only dream of. Samsung spends so much more in advertising that it heavily weighs on their bottom line. Other companies are so behind in other ways, they lose money on every phone they sell. Most of the android phones are so inexpensive, there is little margin for profit.

To put this in oversimplified terms, Android is winning the marketshare game; Apple is winning the profit-share game. In fact, They are winning their particular areas by similar margins. Is it possible to excel in both at once?  I seriously doubt it. Here's why?

Mass market

Let's face it; the mass market includes a lot of people who don't have a lot of money. Every study that has bothered to look into it has found that the average iPhone user commands more disposable income. More than whom? More than the average person. The average represents the fat middle. It is the majority of the people. By definition, that makes Apple's audience the minority. Until the upper-income group becomes the majority, the mass-market product will never be the most expensive product. 

In the US, there are more people who can afford $200 every 2 years for a smartphone. Even so, it is still a big ask in the face of cheap and free. Outside of the US where carriers are less likely to subsidize handsets, the full price of the phone becomes a real barrier. Most of the world has trouble paying $200 for a phone. The iPhone 5s is $649. It is little wonder that it sells less than Android worldwide. That it sells at all is a market miracle.

Regardless of how many are sold into the third-world, it is unlikely that Android will ever make as much money as iOS. Android handsets make pennies on the dollar, and they don't make that many dollars. Android reaches big marketshare numbers by being cheap or free. Companies like Amazon and Google have famously released products into the market at below cost. They purposely lose money on every sale to gain marketshare. But hardware is not their real business. They make money in other ways. That is what Android makers have to compete against. There will never be much money in Android. It is simply not set up to make money.

The solution to this problem is to stop treating Android and iOS as if they were in the same segment of the market. For the most part, they're not. Think back to the days when desktop computers really mattered. A PC for which you spent $1,000 was considered a budget PC. Sub-zero was the term used for any PC that was less than $1,000. We were able to segment the PC market into logical categories. The was the high-end, mid-range, and budget segments. We did not compare budget PCs to high-end PCs.

That logical segmentation simply does not happen in the smartphone market. If it did, we would see very different reports. We would never be talking about smartphones over $500 in the same sentence as smartphones under $200. That doesn't happen in apparel or automotive or computers. For many years, the industry has known that in the over $1,000 segment, the Mac is well over 90% of the market. It is only at 5% when compared to $200 PCs. That is because Apple doesn't make a PC that is as inexpensive as the average Windows PC. I just read that the average selling price of a Mac is $1,300. PCs average around $400. There is no comparison.

Apple does not make a new smartphone for under $550. No honest analyst has any business lumping them in the same segment as $100 handsets. But that is exactly what happens. Last quarter, Apple sold over 50 million iPhones. No company comes even close to matching that with a premium product line. The average selling price of an iPhone is around $635. Do the math. In its segment, Apple is well ahead of the pack both in volume and in profit. Even on a big screen TV, filmed with a wide-angle lens, Android wouldn't even be in the picture. 

Android wins by Photoshopping the picture. It inserts the budget and mid-range segments into the picture, and deletes any mention of profitability, usage, and customer satisfaction. Now, most of the field is Android green. If the smartphone market was set up like a football field, Android players would cover the field from their own 5 yard line to Apple's 1 yard line. Apple, however, would occupy the end zone. That is where the real game is won. While Apple wins 56 to 3, The commentators would be fixated on the total yards dominated by Android. That is the absurd game we are playing in the smartphone industry. 

David Johnson