What Apple Can Learn From Microsoft and Google

It's more than a coincidence that the two tech behemoths led the way last year in smartphone market share growth.

Feb 18, 2014 at 9:15PM

It's been coming for some time: Global smartphone customers are making the shift to low-end devices. No surprise there. The trend toward low-cost smartphones, and their close relatives feature phones, coincides with growth in emerging markets such as India and Latin America. The question is, what impact will this change in buying habits have on the big boys in the device market?

The answer to that question isn't quite as straightforward as it may seem. Take Apple (NASDAQ:AAPL), for instance. Though still growing, according to fourth-quarter 2013 and annual smartphone sales results put out by Gartner recently, iOS grew the slowest of the big three providers by volume, and actually lost market share. The reason is clear: no low-end alternatives for the rapidly expanding emerging markets. For Google (NASDAQ:GOOGL) and new kid on the block Microsoft (NASDAQ:MSFT), India's nearly 167% year-over-year jump in smartphone sales in 2013's fourth quarter is indicative of where the market is heading.

The specs
Gartner's final smartphone OS sales numbers both annually and for the fourth quarter of 2013 confirm that growing market share requires having some low-end device alternatives in the provider's arsenal. Of the three biggest OS players, Apple was the only one that saw a drop in market share, though its overall sales still grew. For the year, Apple's piece of the worldwide smartphone pie dropped from 18.7% to 15.2%.

Google's Android, on the other hand, jumped from 69% in 2012 to 78.6% last year, while Windows Phone OS creeped up to 3.3% last year from 2012's 2.4% market share. Android and Windows Phone devices had an average selling price at or slightly less than $300 per unit, compared to Apple's estimated $650, so there's clearly a direct correlation between price and sales volume. Gartner confirmed the shift to low-end devices, noting that the "sub-$200 smartphone market grow to 42.6% of global volume, or 430 million units." Much of that growth came from markets such as India, Latin America, the Asia-Pacific, and the Middle East-Africa.

Do the numbers suggest Apple should shift its business focus to low-cost smartphones in the sole interest of gaining market share? Not entirely, no. Apple needs to steal a page from Samsung, and by extension Microsoft's soon-to-be devices and services offerings from Nokia, and continue offering top-of-the-line smartphones to maintain its brand, but toss in a couple inexpensive but similar alternatives for the rest of the world.

iFans are quick to point out, and rightly so, that while market share may be decreasing because of Apple's strict adherence -- some might call it stubbornness -- to its costly iPhone, profit continues to climb. Not a bad problem to have, at least for now. But as the high-end domestic smartphone market becomes saturated, particularly here in the U.S., how does Apple intend to continue cranking out record profits without increasing its share?

Final Foolish thoughts
Growth for the sake of growth isn't why Apple should look to what Google and Microsoft are doing with their respective operating systems. Adding a few more arrows to Apple's smartphone quiver now, before it finds itself in catch-up mode, is just good business. Gartner, like a slew of other industry pundits, expects Apple to do just that by introducing a large-screen phablet sometime in 2014. That would be a good start, but still doesn't address the realities of the smartphone marketplace.

Yes, Apple's margins are likely to be squeezed by offering low-cost smartphones, but what's the alternative? Pushing out yet another expensive iPhone and placing its bets on China Mobile and current iFans trading up for an iPhone 6, or whatever it ends up being called, to fuel growth? As Google and Microsoft are demonstrating with increases in their respective operating systems, the market's changing, and it's time Apple does the same.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple, Gartner, and Google. The Motley Fool owns shares of Apple, China Mobile, 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.

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