Apple had an amazing 5 year run with iPhone. It launched the smartphone revolution. iPhone went $0 in 2007 to over $20 billion in quarterly revenues today, and is a huge chunk of Apple’s profits.
5 years in, iPhone is still the most popular smartphone in the world, with ~20% market share worldwide, and about 50% share in U.S. It generates about half of mobile industry profits. It is a big part of why the most valuable company in the world today carries the fruit logo.
Apple did all this as a complete newbie in mobile, competing with incumbents at the most profitable high-end of the market. With the device that has $600+ average selling price – 20 to 30% more than competitors get for their top of the line handsets. And Apple managed to keep that price level, plus the huge profit margins involved, for more than 60 months now. They also did it with a smartphone that has a major update every two years, with a minor update in the middle. In an industry with ever shorter product replacement cycles, where competitors release major flagships twice a year.
There were two main reasons why Apple was able to do so well with iPhone for so long:
#1. iPhone was a Revolution. And Steve Jobs was right – it was 5 years ahead of competition
Apple invented the modern smartphone as we know it. Before that – all the Symbian, Windows Mobile and Blackberry devices were just phones, with some “smart”/computing functionality tacked on top. Nokia and RIM were trying to squeeze a computer into a phone. Apple turned this notion on its head, built a small pocketable computer, then added a phone functionality to it. And it worked really well.
What’s more, Apple had two to three years to really think about and build this new true mobile computer, while competition didn’t have a clue what’s coming. iPhone announcement caught everyone else so much unawares, that it took Nokia, RIM and Microsoft – former smartphone incumbents years to figure out what it’s all about. To understand that their old “smart” platforms were rendered obsolete by iPhone, and that they had to start from scratch if they ever wanted to compete in the paradigm shift to the true mobile computing.
Google was lucky. They had their CEO on Apple’s board – the first hand knowledge of where Apple was headed and what Steve Jobs was thinking. Also, Google’s own Android project was in early enough stage of development to pivot. So a Blackberry look-a-like became an iPhone copy. Even then, with Apple’s 2-3 year head start, and constant improvements of iOS, it took Google 4 versions of Android and 5 years to more or less catch up. Steve Jobs was right about how far ahead of the competition iPhone was at launch.
#2. iPhone’s carrier greenhouse
The second important reason of why iPhone’s good times lasted so long – is the nature of mobile telecoms markets, especially were the devices are involved. In most affluent parts of the world there is no free mobile device market. It is controlled by a handful of operators, who usually decide which device lives or dies via contract subsidies.
The situation is even worse in the U.S., Apple’s home market, where it’s up to AT&T and Verizon to decide which smartphones will succeed. And where price competition in mobile phones is virtually non-existent. It doesn’t matter whether you pay $50, $100, $200 for a heavily subsidized mobile device, or bring your own $500 phone – your monthly data, SMS and talk costs are usually the same. Over the life of a 24 months contract, the price of the device is a small consideration.
Due to the revolutionary nature and high desirability of iPhone, Apple was able to shift the balance of power in mobile industry. They could demand extremely high price and big subsidies for an exclusive availability, which carriers compensated via pricier contracts for heavier data. Country exclusives also helped operators to poach the most affluent customers from competition, thus strengthening Apple’s hand in negotiations to end exclusivity in this country or that. And, by gradually increasing the number of carriers iPhone is available on, Apple could show steady and impressive growth year after year. While its 2 year major device upgrade cycle was perfectly tailored to the 24 months contract/subsidy business model most carriers run on.
As long as iPhone was THE device to have, while everyone else was scrambling to come up with comparable experience handset, Apple was shielded from the competition by carrier subsidies.
Good easy times are almost over for Apple/iPhone
But all good times come to an end, and in technology markets the end usually comes much sooner. iPhone’s carrier greenhouse days are approaching that point.
- Almost every major operator with standard radio bands/network technology, who wants iPhone, already has one. Growth opportunities by expanding the reach via new markets and carriers are almost over. There are three major iPhoneless carriers left: China Mobile, Japan’s NTT DoCoMo and T-Mobile U.S. Probably a few of smaller ones in other countries. How long will it take Apple to get all they are ever going to get with current approach?
- In U.S., where there is effectively no price competition, iPhone is already at about 50% smartphone market share. How much higher can it go?
- In other affluent subsidized markets like Western Europe, where costumers can get “cheap” iPhone, but then have to pay real price via higher monthly contract fees, iPhone’s market share has stabilized at around 20%, and hasn’t been growing for years.
- iPhone was never able to make significant inroads in most unsubsidized markets (e.g India), and never will with current approach. Unless it changes iPhone business model, Apple will always remain in the high-priced single digits niche there.
- Destruction of Nokia, RIM and Microsoft in smartphones, which was responsible for at least part of iOS market gains early on, is almost over. There’s almost nothing left to take from them. Plus all three are desperately trying to re-enter the fight with new true mobile computing platforms. What if some of them succeed?
- Then there’s Android. iPhone was never able to take anything away from Android. In fact, after the initial gains, in all the markets where price matters one way or another, iPhone is barely hanging on to the early gains. In market share. And, now that Samsung is on a roll, even in profit share.
- In Apple’s best market, U.S., Google’s Nexus 4 is now $299 unsubsidized, compared to $199 for iPhone on an expensive 2 year contract. It may not matter much today, but what if some shift towards pre-paid happens in the next couple of years?
At the current –high price/slow update, 1 new model a year – business model, the easy growth avenues for iPhone are almost exhausted and will disappear in the next 24 months. If Apple wants to continue to grow in smartphones faster or even in-line with the market – they will have to change.
Apple will have to get off its butt and start competing in mobile, just as it does in every other market it plays. With a wider range of models, released more often, with lower overall ASP, and lower margins than it currently enjoys on iPhone. We will need a wider iPhone, a cheaper iPhone, heck, maybe even QWERTY iPhone and what not.
I am pretty sure Apple will figure it out. Their supply chain, manufacturing, design and distribution capabilities are second to none. With Macs, iPods and iPads, Apple has shown time and again that they can outperform any free market competitor in a fair fight.
Tim Cook clearly understands what’s at stake and has already signaled they are going after mobile phone market as a whole, not just smartphones. I hope Apple’s management is smart enough to know they can not get above the single digits in overall mobile devices with only one $600+ device release a year.
And I hope those rumors that Apple is working on iPhone 5S release in the first half of next year, are true. Apple already gave an unnecessary leg-up to Samsung and other Android vendors by ignoring bigger screen opportunities, keeping to a lazy update schedule, and leaving for one and two year old iPhone models to take care of lower end opportunities.
Now would be a very good time for Apple to step up the pace in the smartphone game.
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