Market position

At the beginning of 2012, the market looked very clear. Within five years, Apple had worked its way up to become one of the largest smartphone manufacturers, currently battling it out with Samsung for the top spot. How close is the competition? Apple sold 37 million phones during the 2011 Christmas season, while Samsung sold one million fewer smartphones, but Samsung sold two million more phones in total for the entire year. Nokia is lagging far behind: it sold 20 million smartphones during Christmas and 77 million in 2011, which is a 23% drop. Other manufacturers follow at a respectful distance, and it is Samsung that has helped Google increase Android’s market share.

But it’s not that simple. Every number has two sides. The iPhone segment is highly consolidated, with three models on the market (3GS, 4, and 4S) offering price diversity but a constant environment for developers. They are sold worldwide and very well, with the exception of the crucial Chinese market, which the iPhone is just entering and which could significantly affect sales figures.

Samsung, on the other hand, sells a significant portion of its production in South Korea, where its market share is 53% and, for example, half of the Galaxy S II models produced were sold there. Apple has also long complained that Samsung uses a “follow-me strategy,” meaning it copies all of Apple’s moves. It is involved in a number of patent disputes with Samsung and is trying to ban sales of Galaxy devices in a number of markets, including the EU, which will be discussed separately. Although it is not obvious at first glance, Samsung is tied to a single domestic market in terms of sales and has a highly fragmented development platform. In addition to Android, it uses several internal systems for regular phones and Bada for cheaper smartphones. However, it has another advantage: it also offers inexpensive Android phones priced below $250, a segment where Apple is not so prominent, although it is true that, for example, AT&T offers the iPhone 3GS for free with a two-year contract.

This is another aspect that will be interesting to watch: how much the possibility of fragmentation and the degree of its balance will determine the battle between Android and iOS. While Android is available in a range of designs, appearances, forms, and price ranges, which makes it difficult for developers who have to adapt to the confusion, Apple offers only a keyboard-less design in three very similar versions and does not venture into the segment of cheap phones without subsidies. On the other hand, it has a very clear platform for developers. Here, too, both sides are trying to eliminate their disadvantages. Apple continues to produce older models and sell them at lower prices, while Google is trying to unify its fragmented platform, but neither company wants to step out of its comfort zone and compromise its principles: Apple does not have a model with a keyboard, and Google does not want to set permitted resolutions. Whether this is beneficial or detrimental will become clear in the next five years…

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Caption: Market share of individual operating systems relative to total sales of all phones, including non-smartphones. Source: Asymco

Practical note: in the Czech Republic, which is not exactly an important benchmark for global sales, but will probably be important for readers of the book, in February 2012 the iPhone 3GS cost CZK 8,990, the iPhone 4 was CZK 11,990 (both 8GB models), and the 16GB iPhone 4S was CZK 14,490 including VAT at the Apple Store. Samsung Android phones ranged in price from CZK 2,800 to CZK 15,000, again without subsidies. This perhaps better illustrates the handicap that Apple’s uncompromising minimum performance requirements for phones bring to the purchasing decision.

What is important, however, is that since 2011, Apple has managed to maintain a majority share of mobile phone manufacturers’ profits. At the beginning of 2011, Apple had a total share of around 4% of all mobile phone sales (not just smartphones), but earned 52% of all mobile phone manufacturers’ profits. And both figures were rising. In 2011, the overall picture looked even better. While mobile phone manufacturers earned $14.4 billion in 2011, Apple claimed $11.5 billion of that revenue—roughly 80%. Samsung came in second with $2.2 billion, roughly a 15% share of the industry’s profits. Nokia and HTC also made a profit in the industry, while other companies either lost money (Motorola, RIM) or broke even (LG).

At the end of 2011, Android had a 48% share of the smartphone market, while iOS had 19%. For 2012, Android is expected to rise to 57% and iOS to 22%, with other systems, particularly Symbian and the RIM platform, losing ground.

For statistical purposes, it will also be important to see how the situation develops in China. The largest local operator, China Mobile, with more than half a billion customers, operates a network based on the GSM and TD-SCDMA standards, which is the Chinese version of 3G technology incompatible with both the “European” WCDMA and “American” CDMA2000. The iPhone does not support this standard, so its sales are very weak, with local (ZTE, Huawei), Asian (Samsung), and “non-traditional brands” such as Nokia and Motorola scoring well here. Even so, the iPhone reportedly has ten million customers on the China Mobile network. In 2011, the head of China Mobile said that Apple could also make a TD-SCDMA version, since it already makes a CDMA version for Verizon, and behind-the-scenes gossipers point out that ignoring Wang Jianzhou’s wishes would be an insult to the Chinese people.

Let’s remember that the local market does not end with China Mobile’s 650 million customers; there are also smaller operators such as China Unicom with 200 million customers, mainly on the GSM/3G network, and China Telecom with 100 million customers on CDMA. These are all customers who, until now, have been using Symbian or Android and have had little access to the iPhone.

But even that is not universally true. For example, China Unicom boasts that it achieved a sharp increase in customers on its 3G network precisely by offering the iPhone. In December 2010, China Unicom activated an impressive 1.28 million users on its 3G network, thanks in part to a generous iPhone 4 subsidy policy. Sales reached 10,000 iPhones per day, with a total of three million iPhones sold by the end of 2011. This is probably why China Mobile would like to see an iPhone version for TD-SCDMA. On its network, iPhone users will mainly enjoy GPRS, or at best EDGE speeds, which is not much to write home about.

The main problem with the iPhone on the Chinese market is its price. The phone should cost two-thirds of the average monthly income to sell well, but the iPhone costs two months’ income. Currently, the iPhone is losing ground in the Chinese market to ZTE and Huawei, but when the first Apple Store opened in Beijing in January 2012, it was so crowded with customers that employees decided to postpone the opening. The new iPhone 4S model sold out in China within a few hours, and the next shipment from Chinese factories was a long time coming. The huge and insatiable Chinese market can still sway sales statistics, and it will be up to Apple to come up with a pro-Chinese strategy.

In conclusion, we can summarize that Android will be the dominant system on the market, but for now, it will not have nearly as much economic significance as iOS. Apple’s dispute with Samsung could significantly impact this battle for position, although Samsung’s position is always secure on the South Korean market, where any sales ban is difficult to imagine. However, the growth in Android’s market share will be driven primarily by an increase in sales of low-cost phones (sub-$250 unsubsidized prices), where Apple has no offering and has repeatedly stated that it does not intend to enter this market. In the long term, iOS will maintain its financial dominance, and both of these markets will grow significantly at the expense of non-smartphones and Symbian in particular. The position of other systems will be negligible or tend toward insignificance in the next three years.

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Caption: The market shares of individual smart operating systems vary significantly by region. iOS dominates in wealthy regions, followed by Android. Nokia scores well in emerging markets.

The context of this story

Market position

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