Blackberry Review Series : Market Realist

BlackBerry launches its Classic smartphone to attract enterprises

Market Realist

BlackBerry has been reduced to a niche smartphone player (Part 4 of 12)

(Continued from Part 3)

BlackBerry introduced the Classic smartphone with a physical keyboard

In the previous part of this series, we discussed why BlackBerry (BBRY) couldn’t reap the benefits of the Passport’s successful launch last quarter. BlackBerry introduced another important smartphone last month—the Classic. As the name suggests, the Classic takes brings back old BlackBerry features along with the re-introduction of the physical keyboard.

After the launch of the BlackBerry 10 operating system in 2013, the company had stopped introducing smartphones with physical keyboards and launched touch-screen phones only. BlackBerry may have changed this strategy due to the increasing popularity of Apple’s (AAPL) iPhone and other touch-screen smartphones introduced by Samsung (SSNLF), Sony (SNE), and Lenovo (LNVGY). However, BlackBerry quickly realized that it can’t compete in this market—and it’s better that it focuses on what it had been doing best, which is catering to enterprise professionals’ productivity needs.

Enterprise customers have remained die-hard fans of BlackBerry’s smartphones due to their physical keyboard. The physical keyboard provides ease of use for working professionals—especially for writing emails and taking calls—which is why BlackBerry listened to their demands and brought back this feature.

BlackBerry introduced superior features in the Classic

The Classic has better specifications that its predecessor, the Bold 9900 smartphone. The Classic’s screen size is larger than the Bold’s at 3.5 inches, although much smaller than the 5.5-inch Apple iPhone 6 Plus screen size. It has a dual core 1.5 GHz Qualcomm (QCOM) Snapdragon processoralong with 2 GB of RAM. The above chart shows the difference between the Classic and the Bold 9900, which makes the Classic a superior smartphone to the Bold in terms of specifications.

Continue to Part 5

Browse this series on Market Realist:

Apple Pay Slammed by CVS, Rite-Aid, Wal-Mart in favor of CurrentC

The introduction of Apple Pay last Monday was widely described as the dawn of a new era for smartphone payments.

But within a week, two major pharmacy chains, Rite-Aid and CVS, rejected Apple’s version of the future: Both disabled Apple Pay (as well as other tap-to-pay mobile payments systems Google Wallet and Softcard). As expected, customers took to Twitter to complain, and they almost universally sided with the smartphone company over the drug stores.

CVS hasn’t publicly explained itself. Rite-Aid spokeswoman Ashley Flower defended the company in an email to Bloomberg Businessweek. “We are continually evaluating various forms of mobile payment technologies, and are committed to offering convenient, reliable, and secure payment methods that meet the needs of our customers,” she wrote.

That’s not the whole story. Objections to Apple Pay aren’t actually about convenience, reliability, or security—they are about a burgeoning war between a consortium of merchants, led by Walmart, and the credit card companies. Rite-Aid, CVS, Walmart, Best-Buy and about 50 other retailers have been working on their own mobile payments system, called CurrentC. Unlike Apple Pay, which works in conjunction with Visa, Mastercard, and American Express, CurrentC cuts out the credit card networks altogether. The benefit to the merchants is clear: They would save the swipe fees they pay to the credit card companies now, which average about two percent of the cost of transactions.
CurrentC is also likely to allow merchants to gather data about transactions and offer discounts and loyalty programs. This stands in marked contrast to the anonymity built into Apple Pay, which has drawn concerns even from some merchants who are actively supporting the system.

Apple chief executive Tim Cook would be happy to have this fight with MCX’s backers. When he introduced Apple Pay last month, Cook said mobile payments had failed so far because they were built to serve the business models of their creators, rather than to provide a useful experience for customers. Because Apple’s primary goal is to sell more phones, tablets, and laptops, its system is more straightforward.

Rite-Aid and CVS screwed up the optics on this one. It’s hard to argue that you’re doing right by your customers when you stop accepting a form of payment that you’ve already demonstrated presents no technical hurdles. They also don’t have an alternative to offer. CurrentC isn’t expected to be ready until 2015, and the specifics of the system aren’t public.
The irony of this conflict is that Apple, the innovator, is in the position of endorsing the status quo. Walmart and its brick-and-mortar allies, on the other hand, are actively trying to turn the payments industry on its head and challenge the entrenched power of the credit card networks. Apple is happy to help the incumbents make the existing system feel slicker to customers, without touching the underlying economics. In return, American Express, Visa, and Mastercard have been solidly in Apple’s corner.

Avago Technologies Limited iPhone Upgrade Target price $97

AVGO : NASDAQ : US$83.47
Target: US$97.00

Avago Technologies Limited is a designer, developer and
global supplier of analog semiconductor devices. Avago
offers products in three primary target markets: wireless
communications, wired infrastructure, and industrial and
automotive electronics. Applications for Avago products
include smartphones, connected tablets, consumer
appliances, data networking and telecom equipment, and
enterprise storage and servers.

Technology — Communications Technology — Semiconductors
Investment recommendation: Based on our analysis, industry
conversations, and recent iPhone 6 teardown reports, we believe Avago has
roughly doubled its dollar content in the recently launched iPhone 6/6 Plus
smartphones versus the iPhone 5s/5c models and has the highest RF dollar
content share among the RF suppliers. With our recent surveys indicating
extremely strong demand for the new iPhone 6 products, we anticipate very
strong Q4/14 iPhone sales and high-end smartphone market share gains for
Apple versus high-tier Android OEMs, particularly Samsung. Given Avago’s
strong dollar content in the new iPhones and our recently raised iPhone
estimates, we are raising our Avago estimates. We reiterate our BUY rating
and raise our PT to $97.
Investment highlights
 Our recent surveys and analysis indicate very strong iPhone 6 demand,
and we anticipate a record iPhone 6 upgrade cycle. Please see our
separate Apple note, published Sept. 22, titled “Monthly surveys
indicate record iPhone 6 upgrade cycle, strong market share gains,” for
our updated iPhone estimates.
 We estimate the RF front-end content in the iPhone 6/6 Plus increased
to roughly $15.25-15.50 per device versus $11.25-11.50 in the iPhone
5s/5c models due to increased LTE band support and features such as
envelope tracking and carrier aggregation. Due to the increased
number of higher-frequency bands supported that require FBAR filters,
we believe Avago increased its RF dollar content to roughly $6/iPhone 6
models versus roughly $3 in the iPhone 5s/5c.
 While we believe Avago has growing dollar content in other flagship
Android smartphones such as Galaxy Note 4, Avago has stronger dollar
content share in the iPhone 6 devices given Android smartphones tend
to support more regional LTE SKUs. Therefore, we believe Avago will
benefit from strong iPhone 6/6 Plus sales despite our recently lowered
Android estimates due to share losses to the iPhone 6 products.
 Given these trends, we raise our F2014/15 Wireless business sales
estimates, resulting in our F2014/15 pro forma EPS estimates
increasing from $4.63/$6.35 to $4.65/$6.45

Our $97 price target (was $95) is based on shares trading at
roughly 15x our F2015 pro forma EPS estimate.

NQ Mobile Update Target $ 29

NQ : NYSE : US$13.92
Target: US$29.00

NQ Mobile is a leading provider of consumer-centric mobile Internet services focusing on security and productivity. NQ Mobile has leading share of the mobile security market in China. The company was founded in 2005 and headquartered in Beijing, China.

Technology — Communications Technology — Software
Investment recommendation:

NQ Mobile’s analyst day in NYC  provided an overview of NQ Mobile’s expanding mobile security, advertising, and enterprise mobile products portfolio and discussed the pillars of its growth strategy. In addition, NQ management issued 2014 revenue guidance of $305M-$310M above our $289M estimate and representing 60% Y/Y growth versus our 2013 sales estimate. Finally, NQ management highlighted the special committee’s independent review stemming from recent short seller accusations is progressing and management remains confident in its findings. We believe NQ Mobile is well positioned in the mobile security and applications markets given its market share in China, expanding global international deal pipeline and customer base, and broadening product, services, and advertising portfolio. We reiterate our BUY rating.
Investment highlights
 During the analyst day, management highlighted an increasing focus on monetizing its large and growing global user base through a diverse set of new products including core products NQ Vault, NQ Family Guardian, and NQ Mobile Security. Further, we anticipate NQ will continue to grow its paying premium user totals within its underpenetrated active user base by leveraging new products including NQ Care, Music Radar, NQ Live and increasingly through gaming and both in-app and in-game advertising. We believe this is consistent with NQ’s strategy to grow into a larger mobile software company over time.
 2014 revenue guidance of $305M-$310M was above our $289M estimate. Similar to Q3/13 sales mix, given the increasing focus on non-subscription active user monetization, we believe 2014 sales mix will continue to shift toward Advertising and Enterprise versus MVAS. In fact, NQ’s 2014 sales guidance assumes a mix of 45-50% MVAS, 20-25% advertising, and 25-30% enterprise.
 Due to 2014 sales guidance above our estimates, partially offset by lower margin assumptions due to a higher mix of Enterprise sales, we are increasing our 2014 pro forma EPS estimate from $1.43 to $1.50.
Valuation: Our $29 price target is based on shares trading at roughly 19x our 2014 pro forma EPS estimate.

Sierra Wireless Update Buy

SWIR : NASDAQ : US$17.12
Target: US$20.00

Sierra Wireless, Inc. provides wireless solutions for the mobile computing and machine-to-machine (M2M) markets.
All amounts in US$ unless otherwise noted.

Technology — Communications Technology — Wireless Equipment
Investment recommendation

Sierra Wireless announced solid Q3/13 results with sales consistent with our estimates and earnings above our estimates due to solid gross margin and expense controls yielding leverage along with a one-time tax recovery. However, Q4/13 guidance excluding the AnyDATA acquisition was below our expectations due to a weaker European macro impacting the OEM division. Despite these trends, our long-term thesis is unchanged.

We believe Sierra is well positioned to benefit from strong long-term industry growth rates for the M2M market given strong global trends in Sierra’s core automotive, networking, energy, and sales & payment verticals and our belief Sierra’s automotive OEM sales growth will reaccelerate in 2H/14. In addition, we anticipate continued faster growth for Sierra’s higher margin Enterprise Solutions and believe management will soon deploy some of its $190M in cash as they continue to evaluate margin-accretive acquisition targets that could drive additional growth and leverage. We reiterate our BUY rating, but lower our price target to $20 due to the slower near-term growth reflected in our estimates.
Investment highlights
 Sierra Wireless reported Q3/13 revenue of $112.3M and pro forma EPS of $0.11 versus our $113M/$0.06 estimates. Enterprise Solutions sales were $16.4M and OEM Solutions sales were $95.9M versus our $15.1M/ $97.9M estimates. Due to very strong higher-margin Enterprise sales (up 38% Y/Y) versus our estimates that offset slower module sales, non-GAAP gross margin of 33.4% increased 330 bps Y/Y.
 Q4/13 guidance midpoints of $114M in sales and $0.09 pro forma EPS were well below our $121.5M/$0.12 estimates, even when removing $2M in AnyDATA sales that were included in our prior estimates. Management guided to a similar gross margin and operating expense levels to Q3/13 and we anticipate leverage on the modest sales growth.
October 13 we noted “Well positioned for M2M growth trends in 2014/15; AnyDATA acquisition adds new customers and channels”  thus our unchanged long-term thesis.
 With strong Q3 results offsetting Q4 guidance, our 2013 pro forma EPS est. remains $0.20; we lower 2014/15 from $0.72/$1.25 to $0.55/$1.12.

Our $20 price target is based on shares trading at roughly 7x our 2015 EV/EBITDA estimate

RDA Microelectronics

RDA : NASDAQ : US$9.98
Target: US$17.00

RDA Microelectronics designs, distributes, and markets RFIC, connectivity, and baseband solutions primarily to Chinese handset OEMs and ODMs. While RDA’s sales are primarily into the 2G market, RDA has introduced 3G power amplifier products and has EDGE and 3G baseband products on its 2013 roadmap to address the growing smartphone market.
All amounts in US$ unless otherwise noted.


Investment recommendation:

RDA reported strong Q1/13 results and guided Q2/13 sales and gross margin slightly above our estimates.
Following the acquisition of Coolsand, we believe RDA’s baseband portfolio has significantly increased its addressable market as evidenced by strong recent sales results. Further, we believe RDA’s roadmap that integrates its connectivity and RFIC solutions with its baseband platform
is well positioned in low- and mid-tier handset markets, and this should expand RDA’s dollar content share per handset in the near 1B unit
Chinese OEM handset market. In addition, we believe RDA remains on track to achieve volume sales of both EDGE baseband and 3G PA solutions in 2H/13 that should drive sales growth and steadily improving gross margin.

We maintain our BUY rating and increase our PT to $17.
Investment highlights
 RDA reported Q1/13 sales of $97.2M and pro forma EPS of $0.28 versus our $96.6M/$0.25 estimates. RDA posted strong sales of the higher margin 8851 baseband solution, including record baseband sales during March post Chinese New Year. In fact, RDA management shared a 40% 2G baseband market share goal for 2013 within the Chinese OEM market, and we estimate RDA will ship roughly 200M baseband chips in 2013, up over 100% Y/Y.
 With an improving mix of higher-margin baseband and connectivity products, including a new cost optimized solution to help offset
persistent pricing pressure in the 2G PA market, we anticipate modestly improving gross margin trends throughout 2013 with 35% remaining RDA’s medium-term target post the Coolsand acquisition.
 Given RDA’s market exposure and strong product roadmap, we have increased our 2013/14 operating expense estimates we expect will remain roughly 16% of sales. However, strong sales trends still result in an increase to our 2013 pro forma EPS estimate from $1.50 to $1.56 and our 2014 estimate from $1.80 to $1.87.

Our $17 (was $16) price target is based on shares trading at roughly 9x our 2014 pro forma EPS estimate

NQ Mobile

English: The Great Wall of China, near Beijing...

English: The Great Wall of China, near Beijing in July 2006. This is a section of Mutianyu. (Photo credit: Wikipedia)

NQ : NYSE : US$9.17
Target: US$17.00

NQ Mobile is a leading provider of consumer-centric mobile Internet services focusing on security and productivity. NQ Mobile has leading share of the mobile security market in China. The company was founded in 2005 and headquartered in Beijing, China

Investment recommendation:

We believe NQ Mobile is well positioned in the mobile security and overall mobile applications markets given its strong share in China, expanding international deal pipeline and customer base, and broadening product and services portfolio. We reiterate our BUY rating and $17 price target.
Investment highlights
 We believe NQ Mobile is well positioned for strong international growth in 2013 with a growing deal pipeline including recently signed deals with Russell Cellular, Axiom Telecom, America Movil, U.S Cellular, and others. We remain impressed with the NQ’s expanding customer/partner network and believe co-CEO Omar Khan continues to expand NQ’s customer reach through new deals. In fact, we believe NQ’s retail dealer program now includes nearly 2,000 mobile retailers in the U.S.
 We also believe NQ Mobile is well positioned to leverage its leading mobile security market share in the rapidly growing mid- and lowtier
Chinese smartphone market. Further, with NQ Mobile now offering its mobile security solutions for Qualcomm’s QRD platform and with NQ’s deep integration with MediaTek’s smartphone chips through NQ’s Hesine investment, we believe these initiatives should result in future OEM pre-installation agreements. Pre-installs generated roughly 40% of NQ’s 2012 Chinese registered user adds.
 With NQ issuing additional shares to finance its recent Q4/12 Feiliu acquisition, we have increased our share count along with our stock
compensation expense for GAAP earnings. Due to our increased share estimates, we slightly lower our 2013 pro forma EPS estimate from $0.95 to $0.91 and our 2014 estimate from $1.25 to $1.20.

Our $17 price target is based on shares trading at roughly 14x our 2014 pro forma EPS estimate.

RF Micro Devices Target $ 7

English: A ridiculous line of people waiting f...

English: A ridiculous line of people waiting for the iPhone 3G outside of the Apple Store on 5th Ave. between 58th St. and 59th St., NYC, July 12, 2008. I was not in the line. pictured: the Apple Store entrance (Photo credit: Wikipedia)

Target: US$7.00

RF Micro Devices is a leading supplier of power amplifiers, front end modules and other RF components for mobile devices (handsets, smartphones, tablets) and communications infrastructure.

Investment recommendation:

We believe RFMD is well positioned to deliver strong growth in C2013/14 driven by share gains in flagship LTE smartphone platforms including Samsung, Nokia, BlackBerry, and Apple. Further, given RFMD’s strong position in mid- and low-tier believe RFMD is well positioned to benefit from elastic smartphone demand in emerging markets including China.

Overall, we believe RFMD should grow faster than the RFIC market in F14/15 and improved capacity utilization should drive margin leverage. We upgrade RFMD shares from HOLD to BUY and raise our price target to $7 from $5.50.
Investment highlights
 Given RFMD’s improved LTE portfolio including Phenom PAs and antenna switching solutions, we believe RFMD is well positioned to gain content share in flagship smartphone platforms including the Samsung Galaxy S4, Nokia Lumia and Asha series, BlackBerry Z10 and Q10, and potentially Apple’s iPhone 5S. In addition, we believe RFMD is less exposed to softer near-term iPhone sales that should have a greater impact to RFMD’s competitors.
 Further, our market analysis indicates ramping sales of affordable 3G smartphones from Chinese OEMs powered by Qualcomm QRD, MediaTek, and Spreadtrum turnkey solutions, and we believe RFMD has strong share, particularly in TD-SCDMA smartphones.
 Finally, while we concede Qualcomm’s entry into the CMOS PA market could potentially shrink the long-term TAM for PA suppliers, including RFMD, we believe the intermediate impact to RFMD’s market share, design wins, sales, and earnings are negligible.
 We maintain our above-consensus F2014 pro forma EPS estimate of $0.42 and introduce our F2015 estimate of $0.63.

Our $7 price target is based on shares trading at roughly 11x our F2015 pro forma EPS estimate.

Google And Motorola Are Working On A Top-Secret ‘X Phone’

Image representing Google as depicted in Crunc...

Image via CrunchBase

Reuters) – Google Inc is working with recently acquired Motorola on a handset codenamed “X-phone”, aimed at grabbing market share from Apple Inc and Samsung Electronics Co Ltd, the Wall Street Journal said, citing people familiar with the matter.

Google acquired Motorola in May for $12.5 billion to bolster its patent portfolio as its Android mobile operating system competes with rivals such as Apple and Samsung.

The Journal quoted the people saying that Motorola is working on two fronts: devices that will be sold by carrier partner Verizon Wireless, and on the X phone.

Motorola plans to enhance the X Phone with its recent acquisition of Viewdle, an imaging and gesture-recognition software developer. The new handset is due out sometime next year, the business daily said, citing a person familiar with the plans.

Motorola is also expected to work on an “X” tablet after the phone. Google Chief Executive Larry Page is said to have promised a significant marketing budget for the unit, the newspaper said quoting the persons.

Google was not immediately reachable for comments outside regular U.S. business hours.

Amazon And Google Are On A Collision Course In 2013

* Amazon, Google rivalry will escalate in 2013


* Companies compete in increasing number of areas

* Areas include: Ads, retail, mobile, cloud computing

SAN FRANCISCO, Dec 23 (Reuters) – When Inc CEO Jeff Bezos got word of a project at Google Inc to scan and digitize product catalogs a decade ago, the seeds of a burgeoning rivalry were planted.

The news was a “wake-up” call to Bezos, an early investor in Google. He saw it as a warning that the Web search engine could encroach upon his online retail empire, according to a former Amazon executive.

“He realized that scanning catalogs was interesting for Google, but the real win for Google would be to get all the books scanned and digitized” and then sell electronic editions, the former executive said.

Thus began a rivalry that will escalate in 2013 as the two companies’ areas of rivalry grow, spanning online advertising and retail to mobile gadgets and cloud computing.

It could upend the last remaining areas of cooperation between the two companies. For instance, Amazon’s decision to use a stripped down version of Google’s Android system in its new Kindle Fire tablet, coupled with Google’s ambitious plans for its Motorola mobile devices unit, will only add to tensions.

The confrontation marks the latest front in a tech industry war in which many combatants are crowding onto each others’ turf. Lurking in the shadows for both Google and Amazon is Facebook with its own search and advertising ambitions.

“Amazon wants to be the one place where you buy everything. Google wants to be the one place where you find everything, of which buying things is a subset,” said Chi-Hua Chien, a partner at venture capital firm Kleiner Perkins Caufield & Byers. “So when you marry those facts I think you’re going to see a natural collision.”

Both companies have a lot at stake. Google’s market capitalization of $235 billion is about double Amazon’s, largely because Google makes massive net earnings, expected by analysts to be $13.2 billion this year, based on a huge 32 percent net profit margin, according to Thomson Reuters I/B/E/S. By contrast, Amazon is seen reporting a small loss this year.

Amazon shareholders have been patient as the company has invested for growth but it will have to start producing strong earnings at some stage – more likely if it grows in higher margin areas such as advertising. Google’s share price, on the other hand, is vulnerable to signs of slowing margin growth.


Not long after Bezos learned of Google’s catalog plans, Amazon began scanning books and providing searchable digital excerpts. Its Kindle e-reader, launched a few years later, owes much of its inspiration to the catalog news, the executive said.

Now, Amazon is pushing its online ad efforts, threatening to siphon revenue and users from Google’s main search website.

Amazon’s fledgling ad business is still a fraction of Google’s, with Robert W. Baird & Co. estimating Amazon is on track to generate about $500 million in annual advertising revenue – tiny, given it recorded $48 billion of overall revenue in 2011. By contrast, 96 percent of Google’s $38 billion in 2011 sales came from advertising.

But Amazon’s newly developed “DSP” technology, which taps into the company’s vast store of consumer purchase history to help marketers target ads at specific groups of people on and on other websites, could change all that.

“From a client’s perspective, the data that Amazon owns is actually better than what Google has,” said Mark Grether, the chief operating officer of Xaxis, an audience buying company that works with major advertisers. “They know what you just bought, and they also know what you are right now trying to buy.”

Amazon is discussing a partnership with Xaxis in which the company would help Amazon sell ads for the service, Grether noted.

Apple- A Declining Share Of Mobile Market

Nov. 19

This Trend Is Very Worrisome For Apple

Over the past couple of years, we have written often about a major long-term risk for Apple, which is the gradual loss of mobile market share to the Android platform.

This trend has continued in recent months, to the point where Apple has now been reduced to a niche player in the global market.

The more market share Apple loses, the more worried Apple shareholders should become. And the more Apple should consider making a subtle but important shift to its product and pricing strategy.

Why Market Share Matters

The reason market share is important is that mobile is a “platform market.” In platform markets, third-party companies build products and services on top of other companies’ platforms. As they do, the underlying platforms become more valuable and have greater customer lock-in.

Building products and services for multiple platforms is expensive, so platform markets tend to standardize around a single leading platform. As they do so, the power and value of the leading platform increases, and the value of the smaller platforms collapses.

The PC software market is (or was) a platform market, and we saw how powerful that eventually made Microsoft back in the 1990s.

Facebook and Twitter are platforms, and we’re seeing how powerful those companies are becoming.


Wintel Monopoly

Horace Dediu, Asymco

This chart from Asymco shows how “Wintel‘s” market share has been eroded over the past 10 years. No wonder Microsoft’s stock has been flat.

Mobile is a platform market, and at least in these early days, this has helped make Apple the most profitable and valuable company in the world. 

Importantly, the reason market share is important in a platform market has nothing to do with “current profit share.”  When confronted with Apple’s declining market share, Apple fans often snort that Apple doesn’t care about market share–it cares about profit share–and obviously Apple is cleaning up on that score. What this conclusion misses is that, in a platform market, having dominant market share is critical to maintaining long-term profit share.

Right now, the smartphone and tablet markets are growing so quickly that relative market share isn’t an issue. But at least in some regions, the market is maturing more rapidly than most people realize. And as Apple’s market share shrinks, its power and value as a development platform also diminishes, at least relative to that of the market leader.

The risk is that, ultimately, the mobile market will see a repeat of the history of the PC market, in which Apple went from being the dominant innovator to a marginalized niche player.

Apple Continues To Lose (Relative) Market Share

Android and Apple continue to dominate the global mobile market, but Apple is losing (relative) share fast.

According to a recent IDC report, these two platforms now have a staggering 90% of global market share, while everyone else is down to 10%.

Both Android and Apple are also still gaining share, while every other platform is losing it. But Android is still gaining share faster than Apple.

In the third quarter, IDC reports, Android sales accounted for a staggering 75% of the smartphone market. Apple sales, meanwhile, accounted for only 15%. Android is still gaining share rapidly, so Apple’s share may shrink even further.


US Mobile Market Share September 2012


US mobile platform share, September 2012.

In the US, Apple’s market share is stronger. According to Comscore, Android had 53% of the market in September, as compared to Apple’s 34%. A third of the market is a plenty healthy share, but the underlying trends aren’t so encouraging: 

  • In the past two years, in the U.S., Apple’s market share has risen from 25% to 34% (good).
  • But Android’s market share has more than doubled, rising from 26% to 53% (great).

All of these gains have come from the collapse of other platforms, namely RIM, Microsoft, and Palm, which, collectively, have collapsed from 49% of the market to 13% of the market. Combined, Apple and Android now have an 87% share of the US market, about the same as their 90% share internationally. The days of the easy market share gains from weak players, therefore, are almost over. Hereafter, the two platforms are mainly going to have to compete with each other.

Apple will likely see a temporary surge in market share in the fourth quarter, on the strength of the iPhone 5. But the trend is clear, globally and in the U.S.:

Barring a significant change in product strategy, Apple’s relative market share will continue to drop.

But Wait, Isn’t The Mobile Market Different Than The PC Market Was?

Apple fans frequently dismiss concerns about Apple’s market share losses by making five points:

  • The mobile market is different than the PC market
  • Android is hugely fragmented, so it’s not really “one platform”
  • Apple is in the “premium” segment of the market and has most of the profits–it doesn’t care about the rest
  • Apple’s content, app, and services ecosystem is better than Android’s
  • Developers can’t make money on Android

Each of these points has some validity, so let’s take them one at a time, starting with the differences between the PC market and the mobile market.

The biggest and most important difference between the PC market of the 1990s and the mobile market today is that many of the most common smartphone “apps” are available on all phones, regardless of platform. These include:

  • Phone
  • Email
  • Web
  • Texting
  • Popular games and apps

What this means is that you’re going to get most of your smartphone functionality regardless of which platform you use.

In the PC market, meanwhile, you couldn’t really do anything with a PC unless you had apps (for most people, the hardware and operating system itself was useless–like owning a car without gas or a flashlight without batteries). For a PC to be useful, you needed apps, and after Microsoft began to dominate market share, most apps were built for Microsoft first and Apple as an afterthought. All this began to change when the Internet arrived and some apps and services began to live in the cloud. After that, the importance of the operating system (“platform”) on the PC began to erode, which, ironically, opened the door for Apple’s comeback. But in the early years, the PC platform controlled everything.

The “platform” component of the mobile market is certainly less important than it was in the pre-Internet PC market, but it’s still important. The third-party app business is now huge. And one of the biggest selling points for Apple’s platform is Apple “ecosystem” of content, apps, and integrated services, as well as the way that Apple products tend to work well together.

Right now, most developers still develop for Apple first and Android second. But if Android’s market share continues to increase, and Android solves a few problems that continue to plague its value as a platform, the incentives for developers will begin to change.

“But Android Is Not One Platform–It’s Many Platforms”

The second knock against Android is that its highly fragmented, with many versions of the operating system and most gadget makers and carriers customizing each version in some fashion. This, combined with Google’s inability to update all Android phones to the latest version of the software at the same time, is indeed a disadvantage when it comes to competing against the unified Apple platform.


android software

Many versions of Android are running in the wild. But most of them run most Android apps.

Android’s fragmentation means that some new apps don’t run on older gadgets. And some apps don’t take full advantage of Android’s newer features. And so forth. 

But most Android apps do run on most Android gadgets, the same way that most PC software is compatible with most Windows PCs. And Google is getting more and more strict about Android licensing terms, which will increasingly limit the amount of customization gadget makers and carriers can do to the platform.

So, the fragmentation issue is indeed an issue. But it’s a huge stretch to dismiss Android by saying it is “many platforms.” And the Android platform is becoming more unified all the time.

“But Apple Doesn’t Want To Sell Cheapo Crap Phones–It Just Wants The Premium Market”

The next point that Apple fans make is that Apple doesn’t care about the Great Unwashed Smartphone Buyers who will buy any old thing as long as it’s cheap–a segment of the market that, Apple fans correctly observe, accounts for a big percentage of Android’s market share gains.

From a current profit perspective, that’s a fair point.

From a longer-term platform and future-profit perspective, however, it’s shortsighted.

More than 1 billion people in the world already have smartphones and tablets. The next 6 billion people who get them are going to be increasingly price sensitive–because they don’t have much money. Apple’s refusal to offer a truly cheap smartphone is one of the reasons that Apple is struggling in countries like India–a huge market, but one in which buyers are very price sensitive. (Samsung is crushing Apple in India).


Mobile profits by phone maker


Apple owns most industry profits–for now.

Furthermore, from a platform perspective, most developers won’t care whether the gadget their app runs on is a “premium” gadget or a mass-market gadget. They’ll simply care that they can reach a lot more potential customers on one platform versus the other. 

This argument also ignores the fact that Android is doing increasingly well in the high end of the market, too. Samsung’s latest phones, for example, are killing it. If the iPhone 5 really is still “better” than, say, Samsung’s Galaxy S3, it’s not much better. Amazon’s Kindle business also appears to be doing well.

Apple knows that selling truly affordable gadgets will mean making less money per gadget. It would also mean possibly threatening the immense per-gadget profit Apple’s makes on its top-of-the-line gadgets. But gadget buyers don’t care about Apple’s profits. As cheap Android-based gadgets get better, and high end Android gadgets continue to close the gap, Apple will face increasing price pressure. And if the company insists on protecting its profit margins at the expense of market share, it will risk losing even more of the latter.

One of the reasons Apple has done so well over the past several years is that it learned a critical lesson from its 1990s debacle. Specifically, it learned how hard it was to maintain “premium pricing” in a mass platform market (In the old PC market, Apple’s products were always more expensive than Wintel PCs).


Apple profit margin

Y Charts

Apple’s profit margin gains have helped drive the stock.

Apple’s decision to keep the iPhone and iPad prices in parity with other high-end gadgets, therefore, was brilliant, and it removed a huge potential advantage its competitors could have had. Thanks to its extraordinary efficiency, Apple has also been able to maintain these prices anda gargantuan profit margin while also offering the best products in the market. 

But this is becoming increasingly difficult as Apple’s advantage in the “premium” market narrows and massive competitors like Amazon and Google compete aggressively on price.

As the mobile gadget market continues to mature, Apple will not be able to maintain both its market share and its profit margin. And if it chooses to protect the latter, which it appears to be doing, it will risk losing even more of the former.

Apple’s recent decision to price its iPad Mini at $329 was instructive. Almost everyone agrees this price is expensive relative to the competition. In this case, Apple is clearly trying to protect its profit margin rather than driving for more market share. More decisions like that could begin to seriously erode the value of Apple’s platform.

“But Apple’s Content And App Ecosystem Is Way Better”

Another valid point Apple fans make is that Apple’s App Store and iTunes are much better than the Android alternatives, which, again, are fragmented and less convenient. And Apple’s payment system is easier, because “Google Wallet” isn’t everywhere. And so forth.

This is true, at least for now.

But Android’s offerings are getting better in this regard, especially Google. And with Amazon now a big player in tablets and likely to be a player in smartphones, there may soon be a competitor whose ecosystem is even more impressive and convenient than Apple’s, at least for content.

So, again, the competitive trend is working against Apple. Its lead is narrowing, and it doesn’t have such a huge installed market share of users that it will be able to fight off competitors because of inertia alone.

“But Developers Can’t Make Money On Android”

The last big knock against Android as a competitive threat is that developers make much more money creating apps for Apple platforms than they do for Android platforms (See Slide 17). That’s undeniable. And, thus far, it has been a huge source of Apple’s competitive advantage.


Cross-Platform Revenue Comparison: iOS vs. Android

Apple’s still where the money is. For now.

One of the reasons for this has been Android’s kludgy and fragmented payment systems–iTunes and the App Store are just easier. 

Another reason has been demographics. Android users have tended to be bleeding-edge tech folks who think everything should be free, or mass-market consumers who don’t have the time, interest, or money to spend a lot on apps.

Both of these factors are still in play, but…

Android’s payment systems are getting better.

And Apple is still being extraordinarily greedy when it comes to taking distribution fees–demanding a 30% cut of everything it sells. Apple is obviously entitled to charge whatever it wants, but as Android becomes a more viable option, it’s hard to see why developers won’t celebrate its lower fees. And if Apple tries to protect its profit margin by holding fast on price, it may drive some of these developers away.

The Bottom Line

The bottom line is that market share matters in platform markets, and Apple is losing share.

With each year that goes by, moreover, the competitive advantage that Apple has with its gadgets and ecosystem is continuing to narrow.

As the market matures, Apple will not be able to protect both its market share and its profit margin–it will be forced to choose between one or the other. And given the importance of market share in a platform market, the smart strategic decision is almost certainly to protect market share.

Unfortunately, protecting market share will almost certainly mean that Apple’s extraordinary profit margin will drop in the coming years, probably significantly.

That outcome would be much better than the outcome of the late 1980s and early 1990s, in which Apple’s loss of the platform war left marginalized and nearly bankrupt. But it’s not an outcome that will please short-term Apple shareholders who are focused on the company’s profit margin.

(BI Intelligence is a new research and analysis service focused on mobile computing and the Internet. 


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