To defend its margins, Apple (NASDAQ:AAPL) has refused to release a low-cost iPhone. Google's (NASDAQ:GOOGL) hardware partners, meanwhile, have had no such qualms, offering Android-powered handsets for as little as $100.
But Apple's margins have come at a cost: market share. While the iPhone remains dominant in some developed economies like the U.S. and Japan, its global market share has dwindled, down to less than 13%. Meanwhile, Google's Android has exploded in popularity, and it now accounts for more than 80% of smartphones sold worldwide.
While Apple's founder Steve Jobs is often quoted as having compared his company to BMW, he understood the nature of market share -- and why it's so important when you're running a platform business.
Jobs on profits and market share
While reading the following Jobs' quote, try to guess which product he's discussing:
They cared about making a lot of money... they had this wonderful thing... they got very greedy, and instead of following the original trajectory of the original vision which was to make this thing an appliance and get this out there to as many people as possible, they went for profits. And they made outlandish profits for about four years. One of the most profitable companies in America for four years. And what that cost them, was their future. Because what they should've been doing is making rational profits, and going for market share... would've had a 33% market share right now, maybe even higher... now it's got a single-digit market share and falling. And there's no way to ever get that moment in time back... [it] will die, in another few years.
The year was 1995, and Jobs was talking about the Macintosh. But his quote could just as easily be applied to the iPhone. Sure, the iPhone still has double-digit market share, and probably won't die anytime soon, but Jobs clearly understood the forces that come into play when a platform's market share begins to dwindle.
Companies tend to have long glide slopes, because of the installed base. But Apple's just gliding down its glide slope, and they're losing market share every year... things start to spiral once you get under a certain threshold, developers no longer write applications for your computer.
A Google fanboy? No -- once again, Steve Jobs on the Mac.
Why market share matters
While there are numerous reasons customers may choose Apple's iPhone over a competing Android handset, one of the biggest remains Apple's app advantage. While Google Play eventually gets most of the major mobile apps, developers in the U.S. continue to favor Apple's platform.
Case-in-point: Facebook Paper, the social network's new mobile app that's received rave reviews (in fact, some believe it's better than Facebook's normal app). If you want to use it, you'd better own an iPhone, otherwise you're out of luck: There's no Android version available.
Facebook obviously has the resources to release Paper for Google's platform if it wanted to, and in time, I'm sure it will. But since Paper remains exclusive to the U.S., and Apple's iPhone dominates the U.S., going iPhone-first is the obvious choice.
But it wouldn't be if Facebook Paper was aimed at the Chinese market, or just about any country in Europe or Asia, where Google's Android is the favored platform. When Facebook decides to release Paper internationally, I'm sure it will be in the form of an Android version.
Apple needs a low-cost phone to compete in emerging markets
Apple is looking to the emerging markets for growth, but if it doesn't release a cheaper iPhone, it may not get it. Low-cost Android handsets have allowed Google's mobile operating system to conquer emerging markets, with Asian developers increasingly favoring Android.
I can't say for certain Jobs would've endorsed offering a cheaper iPhone (he famously resisted the netbook trend) but the iPhone's dwindling market share wouldn't have sat well with him. Although he kept the Mac a niche item during his second stint at the company, Apple's resurgence was built on the back of market-dominating products: the iPod was, for most of its life, the top-selling mp3 player, while the iPhone, at the times of Jobs' passing, had almost one-third of the market.
Jobs understood the perils of dwindling market share; the same can't be said for Apple's current management.
Sam Mattera has no position in any stocks mentioned. 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.