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

By Adam Levy - Feb 4, 2014 at 8:00PM

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Do Apple's PC market share gains indicate future share gains for the iPhone?

Samsung (NASDAQOTH: SSNLF) increased its share of the rapidly expanding smartphone market in 2013, while Apple's (AAPL -1.51%) 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 (GOOGL -2.46%) 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.

 

Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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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