Apple's quarterly results for the July-September quarter confirmed that the company has now entered the Top 5 biggest mobile phone makers overtaking RIM. Thus, depending only on how well
ZTE has done in 3Q, Apple is either the 5th or 4th biggest mobile phone maker in the world. Apple is bigger thus than classic big dumbphone makers like SonyEricsson and Motorola, and counted now very legitimately with the 'big boys' of Nokia, Samsung and LG.
For some random visitors of Bright Side of News*, it might be 'no big thing' as Apple obviously leads in the tablet PC space with the iPad and has for a decade dominated the MP3 player market with the iPod [that is only true of the US market, not globally], so why would it be remarkable that the iPhone is in the top 5? They might well even expect Apple to soon be number 1 of phone makers.
Regular readers will know how I have written about the mobile phone industry for years, and that this achievement is something I have repeatedly said was not a plausible goal for Apple, that as long as the majority of mobile phones sold in the world were
'dumbphones' - a premium priced smartphones-only maker like Apple [or RIM or HTC] could not hope to match the overall unit sales of the big mobile phone makers who manufacture both; Nokia, Samsung, LG, SonyEricsson and Motorola.
In third quarter of 2010, dumbphones outsold smartphones by 3 to 1 globally and while Apple is strong in smartphones, that market is so much smaller than dumbphones, I did not see the chances for Apple to become a major player in the total phones market. However, we are shifting from dumbphones to smartphones, and sometime during this decade - Apple's strategy of making only smartphones would be the 'right' strategy for any phone maker. Thus Apple, RIM and HTC are well prepared for tomorrow.
APPLE IS A MOBILE GIANT But Apple did enter the Top 5 for the first time ever, this past quarter, when counting unit sales of handsets. Apple has been one of the biggest handset makers if counting total revenues for a longer time, as the iPhone is the most expensive phone if measured by average sales price. And for those obsessing with profits - obviously Apple makes the lion's share of the total profits in the mobile phone industry. However, while financial analyst-oriented readers may crave such a measure, we do not have regular independent global analysis of the phone making industry where the players are ranked by revenues [or by profits]. And part of that challenge is that many of the big phone makers are multi-industry conglomerates, so they make many separate products that typically the corporation will not itemize. Take Samsung, it also makes PCs and home electronics and plasma screen TVs and all sorts of electronic components - as well as actual chips from which those products are built.
Samsung even builds cars, thus we cannot count Samsung Corporation's profitability as that of Samsung handsets unit...
The four big independent industry analysts - IDC, Gartner, Strategy Analytics and Canalys - all report quarterly on the handset industry, and tell us how the biggest handset makers are performing. They measure the size by unit sales, so a cheap 30 dollar Africa phone will count as one unit of handsets sold, just as an iPhone 4, which has an unsubsidized price of 600 dollars. Yes, it's perhaps 'unfair', but that also how the car industry measures car market shares, by number of cars sold where one cheap Tata sold in India or Proton sold in Malaysia counts as one car unit, just as one Ferrari or Rolls Royce. The industry market shares tend to be measured in units, not by their value. Same how the aircraft industry measures market shares of Boeings and Airbuses and any other aircraft manufacturer airplanes sold, instead of value, narrowbody versus widebody etc.
So Apple sold 14.1 million iPhone mobile phones. Out of all phones sold, that is only about 4%, but Apple has been growing very strongly. In 2008 Apple passed the 1% milestone for unit sales of iPhones out of all phones sold. By 2009 it was 2% and for this full year 2010 it will be well in excess of 3%. And now for one quarter, 3Q of 2010, Apple sold 4% of all the phones in the world. One out of 25 of every phones sold worldwide has an Apple logo. That is a major achievement. Apple is literally selling better than classic mobile phone makers like Motorola, SonyEricsson, Panasonic, Sharp etc.
CAN APPLE CATCH LG? 
The next rival is far ahead [for now]; global number three, LG sells about twice as many phones quarterly as Apple did. That might seem a very big ask, to expect Apple to have to double sales in the next year to catch up to LG. But actually, the race is not quite like that. LG is likely to give Apple a lot of help to leapfrog itself, similar to the recent past with Apple. Just like previous near rivals, former Top 5 handset makers Motorola and SonyEricsson, LG is a very sick rival right now, it is badly bleeding in the profits department, making so big losses they fired the CEO. This rival [LG] is not poised to grow, and in counting unit sales - it is very costly to compete globally in the low-cost end of the handsets. We may see a repeat of what happened. Then again, the decision to go with nVidia Tegra as their main platform might prove beneficial.
Both SonyEricsson and Motorola abandoned their global ambitions, while fighting to return to profits. Take SonyEricsson. In 2007 they sold more than 100 million mobile phones per year, globally. Today SonyEricsson sell at the rate of 40-45 million per year, so in three years, SonyEricsson abandoned over half of their market, just to return to profits.
Motorola? In 2006 they sold over 200 million handsets. Today they sell about 30-40 million, meaning that in four years, Motorola threw away 5 out of six of their customers, just to claw itself barely into profits, now as the company is being split up and sold.
LG is not a strong vibrant healthy rival for Apple to target. Apple took on strongly profit-making RIM and HTC - both strong, 'pure smartphones' maker and beat them handily in only three years. How easy will it be for Apple to beat a struggling LG which is in about as bad a shape as SonyEricsson and Motorola were a few years ago? It's very plausible, almost likely, that LG will lose unit sales dramatically, and a very likely strategic choice by LG in attempting to return to profits is to also abandon the global aspirations of fighting with Nokia and Samsung. If LG decides to retreat from the global market, its unit sales will decrease very dramatically. So LG may lose a third, maybe even half of its sales, as it attempts to recover profitability. If at the same time Apple keeps growing its annual sales numbers as strongly as in the past three years, we might see a new company in the Top 3 global handset makers by this time next year.
MARKET IS BIZARRE Now, you might say, that is normal competition. You might say that is typical in fickle consumer goods, where fads and fashions rule and a hit product can propel a company to dominance. Remember the Razr in mobile phones and how it propelled Motorola to a short-lived market growth? Or how the Wii has helped Nintendo recover market position in the home videogaming consoles, only to record a loss in third quarter?
BY FAR MOST EXPENSIVE So, let's start looking at the bizarre. First there is the price. The average price of a mobile phone worldwide is about 100 dollars. The dumbphones had an average price of about 60 dollars at the end of 2009, and smartphones a little over 300 dollars. Cheapest phones go currently for price ranges in the 20 dollar to 25 dollar range. Morgan Stanley gave us a price pyramid for phones in 2009 and told us that phone costing 600 dollars and over, had about 2% of the market. Premium phones [non-iPhone smartphones] with an average price of about 350 dollars counted for the next 11% of the market. And basic phones with an average price of 100 dollars accounted for the vast base of the price pyramid, 87% of all phones sold.
How can it then be, if the market can only support 2% of phones in the 600 dollar range [remember, these are real prices, i.e. accounted for without handset subsidies] - that today, with Samsung's Galaxy selling in the millions, and HTC doubling sales every six months, selling in the millions, and Motorola selling its premium-price smartphones enough to become profitable again - that in that fiercely competitive market, Apple sells 4% of the world's phones - without any price cut? Either Morgan Stanley had under-estimated the market severely for the 600 dollar phones last year, or else - the market has changed strongly in the past year and the 'top end of the price pyramid' has grown significantly bigger in the past 12 months.
Conventional wisdom says that to grow sales in this market, you have to offer lower-priced phone models - like Samsung does with its Bada OS based Wave phones, or what Nokia has been doing for several years now, or how Blackberry has been pushing the lower end of its price points, to be more appealing to the youth and consumer markets. But Apple has had none of that. They kept their prices stubbornly at 600 dollars, and yet, they are nearly doubling their unit sales - while the global mobile phone market [I am not talking of the sub-sector of smartphones, I mean all phones] has not grown in size! This goes against all conventional wisdom! Naturally, what conventional wisdom does not count are services offered by the iPhone such as iTunes. This is something conventional industry forgot about.
If the overall market for phones is about the same in size, and Apple already had a totally disproportionate share of the highest end of the price point, and in the past 12 months, many rivals have introduced new models to compete for that 600 dollar phone segment, then conventional wisdom would suggest that Apple would 'have had to' surrender some of its market share to the Samsungs and Motorola's and HTCs and Nokias of the world. And for Apple to have any hope of retaining market share, they would have had to introduce lower-cost models just to hold market share. [Note, this type of thinking is core to how I analyzed year in smartphones for example, I was applying 'standard' competition theory to the market].
What happened? Apple almost doubled its unit sales in a year when the market did not grow, but the number of competitors did grow, and Apple did not drop its price. This should not be possible.
What it does tell us, is that the current level of sales is 'closer to reality' than what was the level of sales in 2009. In 2009 what Apple had, was still 'under-performing' i.e. there was a lot of pent-up demand, customers worldwide wanting an iPhone, who hadn't been able to buy one yet. Witness China and the Lunar New Year gift to Apple quarterly sales in 1Q of this year, where after Christmas usually all smartphone makers see declines in sales. Not this year, not in China. China only opened its 3G networks last year, so this was the first time of the Chinese New Year's gift-giving season, that 3G smartphones were a viable gift. China has 1.3 billion people, so there are lots of gifts out there. Most Chinese are traditional and give the 'red envelopes' [containing cash] but enough - several millions - of Chinese are more modern, that they now give - like we do in the Western World for Christmas - phones as gifts. Apple and Nokia saw huge bonus smartphone sales in the January-March quarter of 2010, that had never been seen before, out of China. It will happen again in 2011. But these are the kinds of 'pent up demand' issues that have helped the iPhone grow sales. Same for South Korea - one of the world's most advanced mobile telecoms markets; they only launched the iPhone less than a year ago.
I don't mean to be critical of Morgan Stanley, and greatly appreciate their price pyramid analysis from last year. But obviously that analysis was done in a time before all the facts were in. Today the top of the pyramid has to support something like 5% or 6% of all phones, not 2%. And Apple has a lion's share of those.
Please do understand the basic economics is still true. The world cannot afford to buy an iPhone at 600 dollars unsubsidized price. Not, if 83% of all phones sold cost less than 100 dollars and cheapest phones go for 25 dollars today. The farmer in Kenya who earns one dollar a day, will not save all his income for two years, starving himself and his family, to buy an iPhone. It will simply not happen. The iPhone is far too expensive to be a world phone. Similarly to how a Mercedes-Benz cannot be a world car. A Smart Car might be, its perhaps cheap enough - or the Tata. But not a car that is in the highest price bracket. Same for the iPhone, it cannot take the world, even if its price was cut in half.
But - the very important point - analysts miscalculated. We, as an industry, have under-estimated the amount of customers willing to fork out 600 dollars for the iPhone [or equivalent superphones, premium priced smartphones]. If today 4% of the planet's population is willing to buy an iPhone at its current prices, and remembering the various rivals in roughly the same price range selling several millions more [Samsung Galaxy, Nokia N8 etc.] - we may find that the 600 dollar phone market is actually closer to 10% than 2%.
This is a perfect case of 'numbers are my buddies' - I am willing to change my view, based on the facts as they emerge from the market. I have said before that the iPhone is such a high-priced luxury item, that it is near its market potential. Obviously it was not. And I am willing to accept that the potential is bigger than we - the industry - previously thought. Still, it does not mean that 600 dollars is something everyone can afford to pay.
But the price point will come. At some point, there are no more customers willing to pay super-premium prices for superphones, and then, at that point, if Apple wants to grow, the only way to grow market share is with lower price phones. But that point is not now, in November of 2010. There is still growth in the top end of the price pyramid, in spite of what the conventional wisdom have said.
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