The Biggest Threat to Apple Inc.’s Dominance Is This $80 Smartphone

"Based on my tests, I can't recommend the Optik 2," Re/code's Walt Mossberg wrote in his review of ZTE's latest tablet.

The Optik 2 is the quintessential cheap Android device -- buggy, prone to error, and loaded with bloat. Not a less-expensive alternative to Apple's (NASDAQ: AAPL  ) iPad or Samsung's  (NASDAQOTH: SSNLF  ) high-end tablets running Google's (NASDAQ: GOOGL  ) mobile operating system, but a crippled device that barely functions.

The steady market-share erosion of iOS has been met largely with indifference because most of Android's massive market share comes from cheap, low-end devices like the Optik 2 that aren't even in the same league as Apple's products. The stark difference in quality shows up in usage statistics -- despite having a minority of the market, Apple dominates when it comes to things like Web traffic, online shopping, and app revenue.

But not all cheap Android devices are garbage.

Less than $100 now buys you a quality phone
Case-in-point: the Moto G. Right now, consumers can get the device from U.S. Cellular for just $80 off-contract, or $100 for the Verizon version at Best Buy. Alternatively, a completely unlocked Moto G can be purchased directly from Motorola's website for $180.

While the Moto G is lacking in some features (4G LTE connectivity most notably), it's actually a quality phone. Mashable's Christina Warren wrote that it "isn't just 'good smartphone for its price,' it's a good smartphone, period." Gigaom said the Moto G providers users with a "high-quality device they can afford without a contract." The Verge said it's "competitive with many $500 or $600 devices."

Quantifying the Moto G's success is difficult given the lack of sales data -- Google didn't disclose its Motorla unit sales, and with the company now in transition, investors might never get an exact number. Yet anecdotally, there's growing evidence that the Moto G has been successful in the few months it's been on the market. Earlier this week, Indian e-commerce site Flipkart sold out of its Moto G allotment within minutes.

What's a real smartphone?
"I look at the mobile phone market as having three kinds of phones," Apple's CEO, Tim Cook, told The Wall Street Journal last week, "feature phones, smartphones that function as or are used as feature phones, and real smartphones. I care about the market share of that last one."

By creating the category of "real smartphones" Cook is segmenting the smartphone market in a way that is advantageous to Apple. If one defines a "real smartphone" as an iPhone or Android-powered equivalent (Galaxy S4, Xperia Z, HTC One, etc.) then Apple has a much larger share of the "real smartphone" market than it does of the whole smartphone market.

For example, while Samsung sold twice as many smartphones as Apple did last year, it sold fewer of its expensive flagship phones. While Apple sold about 150 million iPhones in 2013, Samsung shipped just more than 40 million Galaxy S4s and about 10 million Galaxy Note 3s. Google's other hardware partners have been even less successful.

That isn't to say Cook isn't justified in drawing that distinction -- a junky Android device with limited memory and a low-end processor isn't capable of performing the same tasks as an iPhone or one of Samsung's more expensive Galaxies.

But the Moto G is. 

Locking in at the low-end
It might not be as good as Apple's iPhone 5s, but the Moto G is arguably better than Apple's iPhone 4s, a two-year-old phone Apple still sells for $450. With its faster processor, larger screen, and expanded memory, the $180 Moto G is an easy winner over the iPhone 4s.

And that's ultimately the real problem: Google's dominance has thus far been superficial. Having 80% of the market doesn't really matter when two-thirds of the phones are junk that can barely surf the Web or run an app without crashing. But the Moto G isn't junk. It isn't as great as Samsung's high-end Galaxies but it's "good enough," and certainly good enough for consumers in emerging markets.

Apple still dominates the market for "real smartphones" -- problem is, the definition of a "real smartphone" is changing rapidly.

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Read/Post Comments (18) | Recommend This Article (21)

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 February 15, 2014, at 8:35 PM, bugnuts wrote:

    Yawn. Mattera issues more bloatware than Samsung, and that's a heck of a lot.

  • Report this Comment On February 15, 2014, at 8:40 PM, gsagi wrote:

    Yep, a Fool!

  • Report this Comment On February 15, 2014, at 9:10 PM, larryw101 wrote:

    It's the Motley Fool clown Sam Mattera again.

    Motley as became garbage journalism with pimple faced know-nothing authors such as this.

    Find another profession Mattera. A financial author you are not. You make a better clown.

  • Report this Comment On February 15, 2014, at 10:42 PM, tino1126 wrote:

    another positive fool article on Apple, is there any hope of objectivity or balance in the future, if not - i guess the fact that iPhone unit sales are up, EPS is up, majority of web traffic is on IOS, the majority of web purchases are on IOS, and the fact that there are significantly more apps on IOS than on Android all still mean the death of the iPhone. Time to sell this nonsense some where else.

  • Report this Comment On February 15, 2014, at 10:56 PM, margiecfl wrote:

    God, stop hating. He has a point, listen to it. You yawn at everything that doesn;t reinforce your position/ thinking. investment. That's what dumb people do.

  • Report this Comment On February 16, 2014, at 12:25 AM, dogmatica wrote:

    Hi,

    Any information on the profit margins for the Moto phone? Can any manufacturer make enough money off of it to continue to offer it for such a price; I mean, would their shareholders settle for such low returns? Could this pricing structure be profitable enough to sustain such a scheme? Seems like this might be difficult.

    Alooooooooha!

  • Report this Comment On February 16, 2014, at 12:53 AM, rocsoe wrote:

    Apple's CEO, Tim Cook sees divisions of high end devices without considering the low-end devices that range in cost from $5 to $50 that use the Java ME O/S and has the biggest share of the cell-phone market, notably emerging markets and in the US: senior citizens who use Tracfone for instance. These range from basic phones that also text to feature phones that can browse the internet with WiFi but cannot multitask. Apple will fade away like The Three Ps of the automobile industry, and for the same reasons.

  • Report this Comment On February 16, 2014, at 3:17 AM, PedroHMG wrote:

    $80 phone a threat to Apple? That's like saying a $20,000 car is a threat to BMW or Mercedes. What a waste of time.

  • Report this Comment On February 16, 2014, at 3:23 AM, Ostrowsr wrote:

    Don't understand this article. Verizon can sell you a iPhone 4S for $35 with a 2 year contract. Great performance, fair price.

  • Report this Comment On February 16, 2014, at 3:28 AM, GaryDMN wrote:

    The are and have been cheap Android phones, but the truth is, they compete with other Android phones, not Apple. Apple is consistently and constantly growing their customer base and had record iPhone sales last quarter. The number of Android phones is growing faster, while profits on Android phones fall fast, as more vendors enter the market and expand globally. The sales numbers is China and India are growing fast and the Chinese manufactures are dominating those markets, but they are expanding beyond Asia and Asian carriers. The Android market price wars will be a blood bath soon, while Apple profitably comfortably grows their customer base, which, by the way, is the the most loyal customer base in the mobile market.

  • Report this Comment On February 16, 2014, at 4:47 AM, normgarry wrote:

    Yet another STUPID article.

  • Report this Comment On February 16, 2014, at 11:19 AM, zippero wrote:

    $80 phone attracts welfare recipients, who are not really the target market for expensive data plans, app purchases, and everything else that makes a true smartphone a true smartphone. Mattera needs to open his eyes.

  • Report this Comment On February 16, 2014, at 11:52 AM, auggybendoggy wrote:

    pedrohmg, great line.......lmao.

  • Report this Comment On February 16, 2014, at 12:36 PM, Baddaboom wrote:

    So the biggest threat to Apple is an $80 phone, from a company that's going bankrupt/being sold to Lenovo

  • Report this Comment On February 16, 2014, at 4:43 PM, powerphrase wrote:

    Check Amazing Blackberry Z30 You will be Amazed.

  • Report this Comment On February 16, 2014, at 4:46 PM, tomcat2007 wrote:

    Apple has zero concern over these types of phones. Regardless of fact that this phone actually has better specs than the iPhone 4s, there is no status symbol advantage to buying this cheaper phone. Apple buyers partially need and want that little Apple icon on their phone. Buying a cheap Android phone is like wearing a dress from Target instead of Neimans and Apple buyers would never stoop so low.

  • Report this Comment On February 17, 2014, at 10:10 AM, sdpuff62168 wrote:

    The Moto G is a really nice phone. My brother in law works for Verizon and turned us on to this phone. Bought one for my son for Christmas and got a Straight Talk sim card and the phone works really nicely. Just bought 3 more.

  • Report this Comment On February 18, 2014, at 4:33 AM, colorist wrote:

    Apple tablets & phones outsell highend Android products 3:1. Therefore I can see Samsung and especially Google interested in changing their lot. What the Apple affectionados haven't comprehended is that Google sells advertising & Apple sells products. More precisely, Google is exceptional at selling advertising.

    Everytime a Moto G is sold, even as a loss leader, Google stands to make more profit from the advertising commissions it derives across the web per anum / per unit sold.

    Intrinsically, advertising has great durability, and long term staying power with an exceptional ROI than Apple which is put into the position of constantly refining or upgrading products which have high R&D costs. Apple has done a tremendous job doing this.

    As the marketing battle heads off shore to Asia, India and places in between, I believe it will become more difficult for Apple to stay abreast competitively with Google unless it also creates a downsized phone. Sure, plenty of people will buy topshelf Apple products, but don't forget that every Apple phone & tablet sold also generates advertising revenue for Google, and Google advertising isn't as generous returning the favor.

    Last month Apple purchased Aviate, a company with unique search engine querying capabilities .....

    In summary business teaches us that in the long term the market reaches equilibrium, however, the short term battles can be scintillating.

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