The iPhone Is Alive and Well (At Least in the United States)

Much of Apple's (NASDAQ: AAPL  ) remarkable slide from more than $700 last fall to lows below $400 this spring can be explained by worries that the highly profitable iPhone is running out of growth opportunities. So far, the iPhone has achieved limited traction in developing countries, where incomes are lower and smartphone subsidies are minimal or non-existent. People in the developing world are opting for cheaper smartphones, most of which run Google's (NASDAQ: GOOGL  ) Android OS.

Meanwhile, Apple bears have cautioned that Apple has already saturated the market for high-end smartphones in the U.S. and other wealthy countries. However, while roughly 60% of U.S. cell phone users already have a smartphone, that still leaves room for growth. Moreover, Apple is continuing to gain share from rival platforms in the U.S. In short, the iPhone is alive and well in the U.S., with plenty of room for further growth.

iPhone gaining share
According to the latest data from comScore, covering the three-month period ending in May, 39.2% of U.S. smartphone subscribers had an iPhone. Meanwhile, Google maintained the top spot in the U.S., with Android representing 52.4% of the market. Apple's share was up from 38.9% in February, despite not having released a new phone since September 2012. Part of the share gain may have been due to the iPhone's launch on T-Mobile (NYSE: TMUS  ) in mid-April .

The iPhone 5 launched at T-Mobile this spring (photo courtesy of Apple).

Moreover, Apple's share of the U.S. smartphone market was up significantly compared with the three months ending in May 2012. In that prior-year period, Apple held just 31.9% of the market, compared with 50.9% for Android. Thus, while Android is still gaining share in the U.S., Apple has been the clear winner over the past year, gaining 7 percentage points of share, mostly at BlackBerry's (NASDAQ: BBRY  ) expense. BlackBerry's share has dropped from 11.4% in May 2012 to just 4.8% in the most recent batch of data.

Apple's U.S. smartphone market share growth demonstrates the success of its carrier expansion. Apple just added No. 4 carrier T-Mobile as a partner a few months ago, but it has also added Verizon (NYSE: VZ  ) and Sprint Nextel (NYSE: S  ) relatively recently (in February 2011 and October 2011, respectively). Given the prevalence of two-year smartphone contracts in the U.S., Apple is still reaping the benefits of this carrier partner expansion.

For example, Verizon recently reported that it sold more than 3.8 million iPhones in Q2, which represented an approximately 44% unit growth rate. More than half of the smartphones sold by Verizon last quarter were iPhones, even though the iPhone 5 launched more than six months before the quarter began.

The market still grows
It's also worth pointing out that the U.S. smartphone market is still growing, albeit more slowly than previously. According to comScore's data, there were 141 million U.S. smartphone subscribers at the end of May, up from approximately 110 million at the same time in 2012. The U.S. smartphone user base has thus grown by nearly 30% in the past year.

Putting that together with the market share data discussed earlier, we can calculate that the U.S. iPhone user base has swelled from 35 million to 55 million in just one year. That's obviously a very healthy growth rate for the subscriber base. Given Apple's legendary customer satisfaction scores, it should lead to a profitable long-term revenue stream from user upgrades.

Foolish takeaway
It's fair to view FY13 as a setback for Apple, as revenue growth hasn't been high enough to offset falling margins, leading to a decline in EPS. However, underneath the surface, most of Apple's business is still healthy. In the U.S., the iPhone subscriber base has continued to grow rapidly despite "saturation" fears. Apple's addition of new carrier partners in the U.S. -- most recently T-Mobile -- has helped the iPhone gain share consistently.

This experience also has significant implications for Apple's success overseas. There are still numerous carriers that have yet to offer the iPhone, such as China Mobile and Japan's NTT DoCoMo. If Apple can add more carrier partners in major international markets, it will probably boost its overall market share, offsetting the slowing growth rate of the smartphone market as a whole.

Apple may be rising to the top of the pile in the U.S. smartphone and tablet markets, but its rivals have their own plans to gain a bigger share of your mind (and your wallet). Find out "Who Will Win the War Between the 5 Biggest Tech Stocks" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged among the five kings of tech. Click here to keep reading.


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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 July 20, 2013, at 2:14 PM, Play13 wrote:

    Why is it that people like to compare a hardware device such as the iPhone to a operating system such as droid. There is no comparison of the two what so ever. Apple makes their hardware and software for their phones, while tons of phone manufactures make phones and then utilize the free OS from google to put on there phone. Why not compare iPhones to samsung, HTC, and/or LG's flagship phones to the iPhone. Compare hardware to hardware. If other phones manufactures could install apples IOS onto there phones they would and I'm pretty sure it would be a slaughter.

  • Report this Comment On July 20, 2013, at 7:49 PM, kevins71 wrote:

    "The iPhone Is Alive and Well (At Least in the United States)"

    And frankly that's all I care about, all other countries don't matter in terms of cell use.

  • Report this Comment On July 20, 2013, at 8:02 PM, kevins71 wrote:

    @Play13 Comparing hardware is foolish as well, just like in the desktop computer arena, in takes more CPU, GPU and RAM to run windows than it does to run OSX. This is a proven fact.

    Same goes for iOS and Android, Android is nothing but swiss cheese bloatware and requires more CPU, GPU and memory to run the darn thing.

    So when you compare specs, it really doesn't mean anything other than the Android phones "have" to have it just to run the POS OS.

  • Report this Comment On July 20, 2013, at 10:51 PM, vernr75 wrote:

    Alive and well in the US? For the last year - sure. But the future's shaping up to be a whole different story altogether.

    Apple just spent the last year eating what's left of BB's market share in order to grow their own US share - and doing 'well' as a result. Today there's almost nothing left of BB for them to feed on and there's no other vulnerable platforms left. They're certainly not going to eat Windows Phone share. The remaining ~ 90 million feature phone users aren't going to run off and and get themselves snared into buying the most expensive devices on the market. It's contrary to their very cost-conscious nature. In fact, many of them will likely be staying put on feature phones for years to come because they only need mobile phones for making phone calls. These are the reasons why Apple's contemplating setting up these iPhone trade-in programs in the US. They want to entice current iPhone users to 'upgrade' perfectly usable devices at a much faster rate just so that they can impress investors with big sales figures. They will be hoarding and hiding whole new piles of cash, I'm sure. None of that will give Apple any additional US market share, however.

  • Report this Comment On July 21, 2013, at 2:53 AM, Rockthebest wrote:

    @Kevins. Lol don't be so naive. The US market is only a fraction. There are a lot more opportunities in Asia and Africa.

    The world does not rotate around the US. Soon US will be irrelevant . What's based on corruption and interest will soon be crumpled.

  • Report this Comment On July 21, 2013, at 3:13 PM, le2o wrote:

    @ vernr75

    Yawn... we'll see.

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