Apple Is Being Shortsighted In Clinging To The High-End Smartphone Market

Five years ago, when Apple introduced the iPhone, it had the smartphone market to itself.

Apple was so far ahead of its competitors that, for the next three years, the iPhone was by far the best phone on the market. Apple’s manufacturing prowess and volume advantage, meanwhile, enabled it to produce and sell iPhones at the same price as its competitors. This combination — best product, best price, and lowest unit cost — produced astounding profits for Apple, allowing the company to deliver a mind-boggling 30% profit margin and amass a staggering $US150 billion in cash.

But in the last two years, several things have changed:

  • Apple’s competitors have caught up: The iPhone is no longer obviously the best phone on the market
  • Apple’s competitors are now selling their excellent iPhone competitors for much less than Apple is selling the iPhone, allowing them to capture the extraordinary growth in emerging markets
  • Another smartphone platform, Google’s Android, has taken over the world, rendering Apple’s iOS a niche platform in many markets

If smartphones and tablets were not a platform — if the only thing that mattered to the value of the product and a customer’s purchase decision was the gadget itself — then Apple’s loss of market share would not make a difference. Apple zealots would be correct when they smugly assert that what matters is Apple’s “profit share” not “market share.”

But smartphones and tablets are a platform.

Third-party companies are building apps and services to run on smartphone and tablet platforms.

These apps and services, in turn, are making the platforms more valuable.

Consumers are standardising their lives around the apps and services that run on smartphone and tablet platforms.

Because of these “network effects,” in platform markets, dominant market share is huge competitive advantage.

In platform markets, as the often-hated but always insanely powerful Microsoft demonstrated for decades in the PC market, the vast majority of the power and profits eventually accrue to the market-share leader.

Global smartphone market share

Niche platforms, meanwhile, get marginalized — just the way Apple’s Mac platform was marginalized (and nearly killed off) in the PC market.

Apple understands that the mobile market is a platform market — that’s why the company is always emphasising the strength and value of its iOS “ecosystem.”

What Apple does not seem to understand, however, is the fate that almost all niche platform providers eventually succumb to — gradual loss of influence, power, and profitability, followed by irrelevance.

If you don’t understand what happens to platform providers that lose momentum and become niche players, just look at BlackBerry. Five years ago, before Apple arrived on the scene, BlackBerry was wildly profitable and basically the only game in town. Now, BlackBerry is fighting to survive.

What Apple zealots who crow about the company’s current profitability should recognise is that BlackBerry was highly profitable only a few years ago.

Now, it’s losing buckets of money.

And BlackBerry’s stock price, just like Apple’s stock price, foretold the company’s fall long before the company’s profits began to tank.

Purely to protect its already insanely high profit margins, Apple is no longer offering the best products at the best price.

It’s offering similar (at best) products at significantly higher prices. (This is now true in both smartphones and tablets.)

This strategy is fine in the U.S. and other rich countries with carrier subsidies: The difference between a three-year-old phone that is “free” with a two-year contract and a new phone that is $US199 with the contract is tiny compared with the total cost of the contract as a whole. So buying the latest, greatest Apple phone for the same price or just a little more than another phone is an easy decision.

But in emerging markets, which is where most of the growth in the smartphone industry is, paying $US500-$700 for an unsubsidized Apple phone compared to, say, $US150 for an unsubsidized Samsung or Xiaomi phone that does almost all of the same things is also an easy decision.

And it’s a decision that has caused Apple’s sales in China to tank–while the company hands almost the entire market to Android.

Growth of Apple’s market share in the middle and low ends of the market would increase the value of Apple’s ecosystem and platform. More Apple owners would sign up for iTunes. More Apple owners would start buying things through their iPhones and iPads. More Apple owners would start using their fingerprints to unlock their phones and pay for things. And more Apple owners would standardize their lives around Apple’s platform, which would increase Apple’s “lock-in.”

The smartphone market is maturing and smartphones are becoming a commodity.

Apple could respond to those facts of life by taking a long-term view and reinvesting more of its staggering profits in its platform.

But Apple is not doing that.

Instead, Apple is clinging to super-high profit margins and the same risky “premium” strategy that almost bankrupted it in the PC market of the 1990s.

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