Cheap Smartphones? Apple Isn't Worried

Apple CEO Tim Cook. Source: Apple.

Cheap smartphones? Apple (NASDAQ: AAPL  ) CEO Tim Cook isn't worried. According to Cook, Apple is still dominating. In a recent interview with Bloomberg Businessweek's Sam Grobart, Cook reiterated his three favorite arguments for Apple -- this time in support of his decision to avoid introducing a cheap smartphone.

Usage stats
"Does a unit of market share matter if it's not being used?" Cook asked Grobart. The question was rhetorical. Citing usage stats for Apple's smartphones and tablets is one of Cook's favorite ways to highlight the company's dominance.

Cheap smartphones may be dominating the marketplace in terms of units sold, but not in usage, Cook argues.

Fifty-five percent of all mobile activity comes from smartphones and tablets running iOS, according to NetMarketShare. That statistic stands in stark contrast to data from IDC, which suggests that Google's Android accounts for 80% of the world's smartphones and almost two-thirds of its tablets.

Adoption rates
Cook also makes the argument that Android is so fragmented that it's not really one single OS. Only 45% of Google's Android users are using the latest version, "Jelly Bean." Even worse, the number of users still using a 2010 version of Android is grotesquely high, at 31%. Apple, on the other hand, reached 93% adoption on iOS 6 by the end of June.

With the launch of iOS 7 on Sept. 18, it looks like Apple's adoption rates are on pace to improve. According to data from Chitika, iOS 7 adoption reached 18% in 24 hours -- by this time after last year's launch, Chitika said that iOS 6 had reached 15% adoption.

Chitika's estimates, however, come in on the low end. Data by Mixpanel suggests that iOS 7 has already reached 36% adoption. MacRumors site analytics reports that 44% of its visits are from devices operating iOS 7.

According to Cook, Android's lower adoption rates result in complexity for developers and security issues for users.

Retention
Cook continues to make his usual case for Apple's higher customer satisfaction. For nine years in a row, Apple has had bragging rights to J.D. Power and Associates' award for "Highest Customer Satisfaction With Consumer Smartphones." The iPad, too, tops J.D. Power's list among tablets.

Customer satisfaction like this leads to higher retention rates. Based on the iPhone's 91% retention rate, Yankee Group argues that as Android ownership peaks, over time, Apple's retention rates will help the company gain market share. This phenomenon is already in full swing in the U.S. market, according to Yankee Group.

Source: Yankee Group survey.

Recent data from Kantar suggests that Yankee Group may be right. Apple's iPhone accounted for 43.4% of smartphones sold in the U.S. in the three months ending in July -- that's a whopping 7.8% jump from the year-ago quarter.

Line forms at Apple store in Paris for iPhone 5s and iPhone 5c launch. Source: Mac4Ever.

Is the market overreacting?
Sure, the iPhone 5c wasn't as cheap as investors had hoped. But is it possible that the market and investors are underestimating Apple's dominance?

Though Apple hasn't released any sales numbers yet, lines at Apple's stores formed for the iPhone launch, as usual. Usage, adoption, and retention all point to a solid future for Apple. All three of these arguments support the case for Apple's durability as a leader in the smartphone and tablet market.

Given Apple's conservative valuation today, tough times are already priced into the stock. Though it's always impossible to know where the stock is headed in the short term, Cook has certainly made a solid argument for long-term Apple shareholders.

What do Cook & Co. have up their sleeves?
Apple has a history of cranking out revolutionary products -- and then creatively destroying them with something better. Read about the future of Apple in the free report, "Apple Will Destroy Its Greatest Product." Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.


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