Think the iPhone Is Falling Behind? Think Again.

With the way Apple  (Nasdaq: AAPL  )  not only straddles the burgeoning tablet and smartphone markets but also holds sway across the computer, home-entertainment, and media fields, the moves it makes can have an impact on the future of hundreds of companies. With that in mind, we're taking a look at the week in Apple news to see how the latest activity affects the Cupertino giant, its suppliers, and even its competitors.

Shrinking Apple market share? Not so fast ...
One of the key areas pointed out by investors who feel Apple's valuation has become overheated is the company's slowing market share growth rates. Apple sells a product that commands a premium price relative to its competitors, so as smartphone growth increasingly shifts to emerging markets with less spending power, cheaper smartphones powered by Google's (Nasdaq: GOOG  ) free Android platform logically should continue taking share. That theory has gained some momentum as Apple's global market share has stagnated in recent market share surveys.

For example, here's a snapshot of Gartner's most recent global market share results.

Company/OS

3Q10 Market Share (%)

3Q09 Market Share (%)

 
 
Symbian (Nokia's OS) 36.6 44.6  
Android 25.5 3.5  
iOS (iPhone) 16.7 17.1  
Research In Motion 14.8 20.7  
Microsoft Windows Mobile 2.8 7.9  
Linux 2.1 4.7  
Other OS 1.5 1.5  
Total 100 100  

Source: Gartner.

The takeaway from the chart is fairly obvious: Android is stealing gobs of market share from every other smartphone vendor. While Apple has fared relatively better than rivals Research In Motion (Nasdaq: RIMM  ) , Nokia (NYSE: NOK  ) , and Microsoft (Nasdaq: MSFT  ) , its total market share is still falling behind.

However, it's always important to note that market share numbers aren't what they seem. The numbers measured by Gartner and competing research firms are based off total units sold. While Nokia might be dominant in units sold, the company has also aggressively pushed cheaper phone options and has struggled to create a capable high-end competitor to the iPhone.

Take this chart below, which compares average selling prices (ASPs) among three of the largest smartphone players.

Company

Q3 2010 ASP

Q3 2009 ASP

Apple $610 $600
Research In Motion $315 $337
Nokia $190 $283

Source: Company filings. Includes only reported results for smartphone or "converged devices" segments. Due to fiscal quarter timing differences, uses Apple's fiscal fourth quarter ASP.

Not only is Apple's average selling price two to three times as large as its key rivals', the amazing part is that the lead is expanding. Thanks in part to this growing ASP advantage, when comparing Apple to its rivals, it managed to grow its market share when measured in terms of revenue, a far more important metric than the usual units measurement seen in market share studies.

Here's how smartphone market share stacked up in third quarter 2009 based on revenue.

Source: Company filings, Gartner, author estimates.

Now here's the updated market share for third quarter 2010.

Source: Company filings, Gartner, author estimates.

It might not be completely obvious from the chart, but Apple's "slice of the pie" actually grew between last year and the current year, from about 28% of smartphone revenue to 31%.

Does this mean Apple's momentum should continue roaring unchecked into the coming years? Probably not, it's true that as smartphone growth pushes into emerging markets Apple will either have to fall behind in terms of broader market share or it will have to cut back on its selling prices to introduce a cheaper model into those markets. However, there are a couple of takeaways for investors:

  1. Apple has managed to maintain its premium pricing level amazingly well for such a competitive market.
  2. Android's lead in terms of unit market share should continue growing. However, that growing market share will be accompanied by quickly declining prices hastened by both fierce competition and handsets moving into poorer markets. If prices are dropping at a clip relatively close to unit gains, the reported growth in total Android sales will be far less than headlines would indicate.

In the end, the smartphone market increasingly looks headed to a duopoly situation between Android and iOS. If Apple can simply nudge its market share a few points higher at the stake of competitors like Nokia while keeping a higher pricing point as the premium alternative to cheaper Android phones, broader growth in the smartphone industry should drag phones sales to a level that more than justifies Apple's current share price.

The slowing Android march?
Speaking of Android phones, reports continue to flow in that the Android's momentum has slowed in the wake of the iPhone 4's release. Research which was first published by Asymco, showed slowing growth on Verizon's (NYSE: VZ  ) Android-heavy smartphone activation count. In fact, AT&T (NYSE: T  ) -only shipments of iPhones were predicted to have outsold Verizon's Android sales by a "factor of 2.5."

Given this information, it's not surprising to see reports of Verizon not only redoubling its efforts to get the iPhone, but also willing to make price concessions to keep the phone off both T-Mobile's and Sprint's networks.

While this news has obvious implications toward the market share battles already discussed between Apple and Android, the more important point is pricing. Apple's move to Verizon was largely seen as a blow to its pricing power, as AT&T is widely acknowledged to have cut Apple a sweetheart deal for exclusivity. However, if Verizon is desperate enough to make wide concessions of its own, the iPhone's pricing level in the U.S. should hold up better than expected, with the added bonus of more phone buyers to sell to.

That's it for the week's Apple news. As we close out 2010 and investors look ahead to next year's winning investment ideas, The Motley Fool has created a brand-new free report called The Motley Fool's Top Stock for 2011. In it, we reveal the little company set to profit from the broadband Internet expansion. Get instant access by clicking here -- it's free!

Eric Bleeker owns shares of no companies listed above. You can follow his articles and musings on Twitter @bleekertech. Google and Microsoft are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers selection. Apple is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (16) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 27, 2010, at 9:38 PM, ConstableOdo wrote:

    All the companies peddling Android smartphones are merely going to be beating up on each other with price wars since there won't be much else to distinguish one Android device from another apart from changing the UI slightly. Consumers looking to merely find the cheapest Android smartphones are not very loyal and companies will have a difficult time getting repeat customers.

    On the other hand, you can only buy the iPhone from one company, Apple. Apple will have to continually innovate, keep quality high and offer superior customer support. All of Apple's products will be integrated and they'll always have a halo effect for selling all their product line. Android OS is going to be as fragmented as can be being altered by various carriers and companies at will.

    As a shareholder, I won't be concerned if Apple doesn't have the highest market unit sold market share in smartphones. I want them to have the highest number of repeat customers and have the highest satisfaction ratings. That's what I expect Apple to do. If Apple sells devices in large enough volume, individual rival companies won't be able to touch them.

  • Report this Comment On December 27, 2010, at 9:59 PM, Thompr97 wrote:

    Here's another reason not to worry about Apple's relative share of the pie: the pie is growing at a tremendous rate and will continue to do so for several years. Don't cry for Apple's market share, they are going to increase sales a bunch, even while maintaining profit margins that are the envy of everyone else. This will keep investors rolling in earnings growth for some time to come.

    Thompson

  • Report this Comment On December 27, 2010, at 11:28 PM, baldheadeddork wrote:

    This information is great if you're trading Apple and you want to know the value right now.

    But if you want to invest, what are these numbers going to mean a year from now?

    ConstableOdo is mistaken. You do buy an iPhone from only one company in the US, but it's AT&T. Even the handsets sold in the Apple Store are sold on behalf of AT&T, at the same prices as the AT&T store in the mall. Or, more recently, at WalMart.

    AT&T is Apple's customer, not us, and that's a tricky situation for Apple. The $600 average selling cost means AT&T eats between $300-400 on every iPhone they sell in their store and everywhere else its sold.

    When there was nothing that remotely competed with the iPhone that was a good deal for AT&T. But that time is gone. If Nokia charges under $200 average for each smart phone they sell, what do you think the average cost is for Motorola or HTC to make an Android, which has very small OS costs and doesn't use a proprietary-design SOC chip? Droid phones can have a price war all the way to zero and AT&T would still lose more money on each iPhone they sell.

    Apple's fat revenues from the iPhone come at the expense of AT&T. How long will AT&T allow that to continue?

    I don't see it going on for very much longer. If AT&T keeps its exclusive hold on the iPhone it's still in their best interests to get Droids to compete directly against Verizon and Sprint, and then allow the iPhone price to rise for the market that wants it. You can see the first part already happening and the second will probably be coming soon. After all, Apple buyers practically brag about paying 50% more than "lesser" computers, tablets and MP3 players. Why should the iPhone be different? Let the 10% of the market who loves Apple products pay for the privilege, and give everyone else a Droid for $100 less.

    If Verizon gets the iPhone, that happens rightnow. Verizon doesn't need to cannibalize their Droid sales and AT&T's reasons to subsidize the iPhone disappear with their exclusive rights to sell it.

    So what do Apple's iPhone revenues look like if the retail price goes to $299 and $349? Or if the average selling price comes down to $300 instead of $600? Both are much more likely in the next year or two than any telco taking a $400 loss on each iPhone 5 and 6 they sell.

  • Report this Comment On December 28, 2010, at 1:01 AM, joshpritchard wrote:

    Android growth isn't slowing down, per the company's own activation figures. The last update was that they are seeing 300K new device registrations *daily*. Which actually shows an acceleration in the growth rate.

    Check your facts, do more research.

  • Report this Comment On December 28, 2010, at 3:16 AM, nikster555 wrote:

    @baldheadeddork - The USA is the trickiest mobile market in the world - the AT&T situation Apple is in reflects that, but the VZN deal should put it on an equal playing field. My prediction is that that will seriously damage the two smaller providers, and Android sales at VZN will fall off a cliff.

    Then there's the rest of the world, where the markets are free - the USA is an important market but by far not the only one.

    The reason I don't worry about Apple is their profit margins - they're remarkable in the electronics world.

    Because of that, Apple can decrease prices any time they want and still make a nice profit. Which means that Apple's current market share is of their own choosing. If they wanted to rack up bigger numbers, they could at a moment's notice.

    I believe Apple will eventually go for a "good, better, best" business model with its phones - 3 models in 3 different price ranges. Right now they're preparing the market and building a premium brand. Once component prices have fallen enough, they'll make one cheap and one expensive model, and later on introduce a 3rd option.

    This is in anticipation of the commodization of most of the components in a modern smartphone. Here in Asia I see plenty of Chinese no-name brand phones with large high quality screens for $100. In 2 years Apple could build the equivalent of an iPhone 4 for $100 and still make a profit - I am sure they anticipate this and that's when they are going to come out with the cheap model (and stuff the expensive model with even better features of course, as they have done).

    Look at the iPod to see how Apple can crush the competition with a combination of very high quality and - hard-to-match prices. Alternate mp3 players don't look as nice, but are not much cheaper simply because of the cost of Flash storage. The iPad also falls in this category - once the competition has figured out how to make a tablet that's just as good, they still have a serious hurdle in making it as cheap.

  • Report this Comment On December 28, 2010, at 3:19 AM, nikster555 wrote:

    "If AT&T keeps its exclusive hold on the iPhone ..."

    Verizon is getting the iPhone - that ship has long sailed. The exclusive deal with AT&T has cost Apple 10s of millions of sales to date - Apple is as eager to get out of this as VZN is in getting the phone.

    Android sales graph at the iPhone 4 release says it all. Sales basically stopped overnight.

  • Report this Comment On December 28, 2010, at 8:15 AM, TMFRhino wrote:

    Hey baldheadeddork,

    I'd recommend you look to other countries around the world as a precedent. For example, I believe the iPhone is sold at 5 or 6 carriers in Great Britain and still retains high pricing.

    Remember, even other company flagship models (IE a Nokia N8 sells for around $500-$530 wholesale) sell wholesale for often more than $500.

    After leaving AT&T could the iPhone ASP take a hit? Definitely. Does Verizon's desperation help alleviate that for the coming years? I think so.

    Can Apple, for some intermediate period, keep ASP's in the mid to high $500's. Given our evidence across several geographies, I believe so.

    All this being said, I don't find Apple to be the best holding if I was required to maintain a 5-year time frame. However, in the intermediate run, my belief is the company's potential is vastly underrated.

    Thanks for commenting!

    joshpritchard,

    You can still grow from say 200K to 300K and have slowing growth if your rate of growth is decelerating. Perhaps before encouraging someone to "do more research" you should click on the research I linked to from Asymco. It's all there in front of you, and its very good.

    -Eric

  • Report this Comment On December 28, 2010, at 8:43 AM, baldheadeddork wrote:

    Nickster - how many times in the last three years have we heard that the iPhone for VZ is a done deal? It's the tech and investing equivalent of Lucy letting Charlie Brown kick the football.

    iPhone sales performance in overseas markets is part of the research I did to see how the iPhone performs when it's not sold at an artificially low price. It's not good. After three years, and following the launch of the iPhone 4, Apple had an 18% share of the smartphone market in Europe. They beat RIM and Microsoft, and Android for the moment, but they trail Nokia by 3:1 and the Android is gaining fast. Charging twice or three times as much for the handset does hurt sales.

    The US isn't the only market for the iPhone but it's Apple's largest by far. Would Apple cut prices if US carriers raised the retail price on the iPhone? It's theoretically possible but they've never done it in the past. But if they cut prices or if they accepted a 1/3rd drop in market share is really irrelevant. Either one would cause a very big drop in their iPhone revenues and that would totally change the picture Eric is presenting.

  • Report this Comment On December 28, 2010, at 8:50 AM, jonkai wrote:

    "The exclusive deal with AT&T has cost Apple 10s of millions of sales to date"

    this is completely ill informed... Apple was never able to build iPhones fast enough to keep up with demand, it finally reached parity in this area in september... having Verizon or any other carrier would have not only NOT added 10s of millions, it would have made it impossible to ever keep up with demand...

    in other words Apple through accident or planning, did the launch of the iPhone exactly correctly, which shows in it's share price, being the biggest market cap company of all time, with the exception of Exxon.

    to say Apple made any sort of mistake, while they increased their market capitalization more than any other company in history, is more than a little silly....

    when they do expand to Verizon, the gains in units will only be incremental, because Apple is still having a hard time keeping up with demand as it is.

  • Report this Comment On December 28, 2010, at 10:35 AM, stefna wrote:

    Apple's success as a "top feeder" is astonishing. Even more astonishing is the lack of brains/brawn in its competitors in the mobile space. Apple innovates. Apple integrates. Only Apple. Why? Google slopes along behind. Microsoft wanders in the wilderness. And where the heck is Sony, which I long admired?

    What I see Google do is creepier than the old Microsoft schemes. Instead of using its bucks to crush its direct competitors, as did Microsoft, Google cannily uses its search cash to firebomb new areas it wants to move into, thereby avoiding federal scrutiny for monopolistic practice.

    Meanwhile Google hands out freebees and tips its white hat. Can you say "China price"?

  • Report this Comment On December 28, 2010, at 11:58 AM, beetlebug62 wrote:

    The reason why there's confusion when looking at just share data is that it presumes a mature market growing at a modest rate. That is NOT the smartphone market. The smartphone market doubled in size from Q3 of 09 to 10.

    96% according to the same Gartner stats. The iPhone share may have fallen 0.4%, but actual shipments almost doubled, a 92% increase.

    And, while revenue share is interesting, it's far more enlightening to look at profit share.

  • Report this Comment On December 28, 2010, at 12:05 PM, beetlebug62 wrote:

    And, while Android has had tremendous growth, when you actually look at the mfrs of Android handsets, HTC, Moto, Samsung, etc., you realize that their total share is not that different than a few years ago. They've replaced making WinMo, Symbian, and other handsets with making Android ones. For example, HTC had 8% share making WinMo handsets 3 years ago, and they have 8% share now, making Android handsets.

    The success story of Android can't be told, without also talking about the failure of WinMo. If I were a Microsoft shareholder, I would have called for Ballmer's head a couple years ago.

  • Report this Comment On December 29, 2010, at 3:12 PM, IPHONEWINS wrote:

    Blackberry Torch? Playbook? IS this a joke? Blackberries suck. Blackberries are for old businessmen who dont have smart kids to tell them to switch. Hows that physical keyboard working for you? I had a treo in 2000 that had one of those.

  • Report this Comment On December 30, 2010, at 12:25 AM, ModernConfucious wrote:

    @TheMillerMan: Go back to the good old days when only BlackBerrys can do emails. Unfortunately for you, we can do that for years. And without a brick looking handset as well.

    10% of 400,000 Apps is 40,000 useful Apps. You have less than 40.

    Playbook! Really? And you are saying all iOS Apps are Games. BTW: Be prepare to play once and run to get it charged.

    I am sure not all Canadians are as dumb as you. But since you are a Canadian, I assume, you work for RIM. I wish your CEO have as much enthusiasm as you have.

  • Report this Comment On December 31, 2010, at 1:13 PM, NYCOMPOSER wrote:

    I wonder what all this impolite ranting has to do with the success or failure of Apple the company or Apple the stock. Apple vs Blackberry? Why would anyone care except to analyze the growth possibilities of each?

    I swear, people will argue about grilled cheese sandwiches.

  • Report this Comment On January 04, 2011, at 8:26 AM, FoolishKwai wrote:

    @TheMillerMan-

    I don't know how it is in Canada, but I know for a fact that it's very difficult to buy an iPhone in Hong Kong right now (for the Apple price - you can always pay more and get one on the street in Kowloon). The guys in the shops haven't been getting product and they speculate it's because all the supply's been shipped to China. So I'd pretty much say that Apple's been selling them almost as fast as they've been making them.

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