Apple (NASDAQ:AAPL) competitors Google (NASDAQ:GOOG) and Samsung (NASDAQOTH:SSNLF) aggressively moved forward in 2013, while Apple's global market share for its iPhone dropped over 18% -- from 19.1% of the market in 2012 to 15.6% in 2013, according to Gartner. Samsung's share of smartphones increased a little -- from 30.3% to 31% -- as all smartphones with Android's OS climbed over 15% -- from 66.4% to 78.4% of the worldwide market.
Apple's worries came to light recently in a document that Samsung presented in its court battle with the iPhone maker. The document was an internal memo, which suggested that the Apple sales force was wringing its hands over its competitors' progress in hardware and Google's improvements in its Android OS.
What's driving smartphone sales?
The memo from an offsite sales meeting indicated that budget phones (under $300) and larger-screened phones (in the over-$300 segment) were driving sales growth and the iPhone was losing ground to its competitors. The traditional iPhone fits into neither category, as it has a smaller screen (for now) and a higher price tag. However, the lower-cost iPhone 5c did hit the shelves in fall of 2013.
Google's Android winning the OS battle
In the U.S., Apple should be concerned that Android is building momentum again, while the Apple's iOS is tapering off after a strong push when the iPhone 5c and 5s were first released. Apple iOS's share of the market has dropped 5% over the last year, while Android has increased 3.9%. Android has 55% of U.S. sales share, while iOS has 38.5%.
The sales memo also included concerns about the "obscene" amounts of money Apple competitors, like Samsung, were spending to advertise Android devices. According to Reuters, Samsung shelled out $14 billion on advertising, while Apple spent a mere $1 billion in 2013.
While Phil Schiller, Apple Senior VP, discounted much of the memo by saying it was not Apple policy, he did send an email in 2013 lamenting a Samsung Super Bowl ad. In his words, "these guys are feeling it (like an athlete that can't miss because they are in a zone), while we struggle to nail a compelling brief on iPhone."
The iPhone: Apple's biggest revenue generator
However concerning the market share numbers are, Apple still sold over 150 million iPhones in FY 2013 and generated over 50% of its revenue from the device. By comparison, Apple's next biggest money maker, the iPad, produced only 20% of 2013 revenues, Macs made up 13% of sales, and the iPod (a media player) contributed 3%.
Apple also generated record-breaking quarterly revenues of $57.6 billion in Q1 of 2014. Also, quarterly net profit reached $13.1 billion or $14.50 per diluted share for the quarter ending Dec. 28, 2013. This was a jump of nearly 5.7% over Q1 2013 revenues, but margins decreased from 38.6% to 37.9%, primarily due to declining prices on the iPhone 4 and 4s, as well as the availability of the lower-cost iPhone 5c. Again, the iPhone led the way with 51 million units sold for Q1 2014, a nearly 6.7% gain from a year ago. It was also responsible for over 56% of Apple's quarterly revenues.
iPhone vs. Samsung and Android
By cross-referencing the market share trends with the percentage of Apple's revenue that comes from the iPhone, you can see why Apple might be worried about aggressive competition from Google's Android, as well as low-priced and big-screened Android devices from chief global competitor Samsung. Not to mention other competitors, like China-based Huawei (from 4.2% to 5.7%), Lenovo (NASDAQOTH:LNVGY) (from 3.8% to 4.6%), and Korea-based LG (from 3.9% to 4.5%), which all cut into Apple's market share in 2013.
Android revenues, which Google does not disclose, are a relatively small percentage of Google's $50 billion in annual revenues, but app revenue is set to become a bigger part of the story as researchers like Gartner expected Google's app revenue to hit $6.8 billion for 2103. Apple generated over $10 billion of app revenue in 2013. Obviously losing market share -- and revenues -- to any smartphone manufacturer or operating system is a cause for concern, but particularly when the share transfers to Samsung or Google.
A Fool's pitch
While one internal memo is insufficient evidence for an investment decision, it does highlight some areas of concern for Apple going forward. How Apple handles these "worries" without Steve Jobs at the helm will be a telling indicator of how Apple will fare against tough, aggressive competition going forward.
Right now Samsung and Google are winning the battle with Apple. However Apple is still performing well and has a pile of cash to weather some short-term losses. But to restore investor confidence and win the war over the next five years or so, Apple must create and invest in some trend-changing marketing, as well as newer, game-changing versions of the iPhone and iOS that evoke the same passion (and sales) from users, as other great Apple products did under Jobs.