What Can We Learn About the iPhone's Future From Apple's Past?

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Samsung (NASDAQOTH: SSNLF  ) increased its share of the rapidly expanding smartphone market in 2013, while Apple's (NASDAQ: AAPL  ) share contracted, despite shipping 153.4 million iPhones last year. With the high-end smartphone market beginning to saturate, Apple's sales growth is slowing as the adoption phase transitions into the replacement cycle phase on the high-end.

Although there's plenty of growth left on the low-end, Apple remains uninterested in the market. If the past is any indication, however, Apple will begin taking back market share from Google's (NASDAQ: GOOGL  ) Android when the total market saturates. Meanwhile, Samsung will face significant pressure to maintain its gigantic share of the market.

Why can't the iPhone be more like the Mac?
On Apple's first-quarter earnings call, Tim Cook was asked what's different with the smartphone market compared to the PC market, and if Apple plans to do anything differently going forward in order to gain back share, like the company has done with the Mac. Cook stuck to the message that Apple is interested in making the best, not the most, and pointed out that it's growing sales very well in emerging markets.

He neglected the fact that most of the market growth is coming from the low end, a market Apple is purposefully neglecting.

Although the iPhone gets all of the attention, Apple has gained market share in PCs in 30 of the last 31 quarters. Last quarter, Apple increased Mac sales 19% year-over-year, despite a 6% contraction in global PC sales, according to research from IDC.

A quick history lesson
In Apple's early years, the Apple II was once the best-selling PC. Then, IBM introduced its PC in 1981, and it took just two years for it to overtake Apple.

Apple had a bit more hubris in the '80s Source: Flickr Keng Susumpow

IBM and Microsoft combined to dominate the next 20 years by flooding the market with PCs at different price points and providing better business software, while Apple focused on its graphical user interface and its high-end target market.

After Steve Jobs was fired from the company, Apple tried to compete in the early '90s by introducing various lines of Macs, and even went so far as licensing Mac OS to third parties.

The company managed to maintain its position as the second largest PC manufacturer until 1994, and grew Mac sales every year through 1995. Although the licensing strategy helped increase market share, it gave Apple less control over its products. So, Steve Jobs ended it in 1997 upon returning as CEO. Jobs had always proposed Apple maintain its strong integration between hardware and software in order to differentiate the company's products.

After its licensing agreements ended, Apple's market share sank to new lows before beginning its revival in the mid-2000's. The introduction of the iPod, iTunes, iPhone, and iPad have helped with Mac adoption, as did new designs. Indeed, the biggest thing driving Mac sales was platform adoption, as we saw a shift from Windows users to Mac users even as overall PC sales began to decline.

The same thing is already happening in smartphones, and will eventually translate into growing market share for Apple once the market saturates.

The smartphone market is different
There are a lot of differences between the smartphone market and the PC market, but Apple's position in each market is very similar.

In fact, one big difference between the PC market and the smartphone market works in Apple's favor: the replacement cycle is shorter. As consumers are forced to make a decision about which smartphone should replace their previous smartphone, Apple stands the best chance to gain new customers.

A study by the Consumer Intelligence Research Partners found that the number of consumers switching from Android to iOS was three times higher than vice versa. Moreover, CFO Peter Oppenheimer cited a 90% loyalty rate for iPhone owners on Apple's conference call. It stands to reason, then, that once the market saturates, Apple will begin to gain share, just as it's done with PCs.

Samsung, on the other hand, is at the greatest risk. Not only does it have to compete with Apple and the affinity toward its brand, it has to deal with competing Android makers, including Google. Samsung has tried to differentiate itself by layering its own software on top of Android, but Google made a deal with the electronics maker to focus on more standard features.

Samsung is also susceptible to pricing pressure as it competes in the low-end. In fact, last quarter the company posted its first quarterly decline in net profit in two years, as smartphone sales lagged. Apple is significantly more resilient to pricing pressure; its iPhone ASP remained flat year-over-year in the first quarter.

Forget the market
A lot of analysts seem to have short memories. A long-term investor looks at the big picture, both the past and the future. Apple grew Mac sales very well until it hit a lull in the late 90s. Now, after learning its lesson, Apple is gaining share in a much more competitive and saturated PC market. If Apple can do the same with the iPhone, it would be stupendous, but selling "just" 150 million iPhones per year is pretty good, too.

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  • Report this Comment On February 05, 2014, at 1:16 AM, JaredPorter wrote:

    Very good article. I remember the first year of the iPhone, RIM dominated the high end US market and Apple's goal was to sell 10 million phones, which they managed to achieve. Now they are selling 15 times that and are getting their cross-selling to other devices on the platform (iPads, Macs, Apple TV, iTunes) to percolate. And they are getting a lot of repeat customers. One aspect that helps this repeat business in the US is the fact that when the iPhone matures after the two year contract, it can be traded in for nearly enough money to move up to the latest version for "free" upon contract renewal for two years.

  • Report this Comment On February 05, 2014, at 8:04 AM, TimMLocke wrote:

    "In Apple's early years, the Apple II was once the best-selling PC. Then, IBM introduced its PC in 1981, and it took just two years for it to overtake Apple."

    The Apple II was never the best-selling PC. When the Apple II came out in June 1977, the first PC, the Sphere 1 ( ), had already sold 1,300 units. By the end of 1977, the Apple II had sold around 600 units. In August 1977, Tandy released the TRS-80 which quickly outsold the Apple II and the Commodore PET by a wide margin, selling 125,000 units and attaining nearly 70% market share by the end of 1977. The Apple II didn't catch up to TRS-80 (discontinued January 1981) sales until the spring of 1984.

    The Commodore 64 arrived in August 1982 and by the end of 1983, the Commodore 64 had been out for 1 1/2 years and had sold 2.2 million units, while the Apple II had sold only 1.03 million units since 1977. The Apple II (discontinued 1993, 5-6 million units sold) never caught up to the Commodore 64 (discontinued 1994, 13-17 million units sold).

    You are correct that the IBM PC (released October 1981) overtook the Apple II in two years, but the Commodore 64 came out in August 1982 and by mid-1983, it had outsold the IBM PC and continued to do so until the IBM PC caught up to the Commodore 64 again in late 1985 with over 7 million units each, both leaving the Apple II in the dust with just shy of 3 million units.

  • Report this Comment On February 05, 2014, at 8:05 AM, TimMLocke wrote:

    I forgot to include the source of my sales numbers:

  • Report this Comment On February 05, 2014, at 5:29 PM, adamlevy wrote:


    Thanks for these very interesting data.

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Adam Levy

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinal mania

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