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The Great Profits Versus Marketshare Disconnect

So we know that there are a lot of people out there who believe that Apple is toast, what with stock price problems, and with an apparently declining share of the smartphone market. The perception is that, if Apple isn’t number one, they are doomed to a decline into irrelevance. If not today, tomorrow, or the next year. Or some day.

This is particularly true in the wake of Apple’s refusal, once again, to build a cheap iPhone. Instead, the long-predicted iPhone 5c came in at a “mere” $100 cheaper than the flagship iPhone 5s. How dare they?

Now in past years, Apple would have simply offered last year’s model for the lower price. This time, they fashioned a new model that contains most of the components of the previous model with a few enhancement,s and packed into a new, colorful dress.

That decision may be a more significant development than it seems. As wireless carriers add more family style plans, where you get unlimited talk and text along with a shared bucket of data bandwidth, it’s not very expensive to just add another phone. With a low price of admission on a subsidized contract, rather than buy an iPod touch for the kids, it may well be that many families will opt an iPhone 5c instead. Or at least that’s what one ZDNet columnist suggests, and there may be some basis for reaching this conclusion. On the other hand, ZDNet is often wrong about things, so make of that what you will.

Sure, such attractive packages may not be available in countries where some expected the iPhone 5c to be targeted towards, but that doesn’t mean Apple goofed, misjudging the market. Apple isn’t simply chasing market share at all costs, but that doesn’t mean there are no cheap iPhones.

Don’t forget that the iPhone 4S remains on sale, and, in some countries, the iPhone 4. Now some suggest that you can get a “great” Android smartphone with “great” apps for $400 or less, which is close to what an unlocked iPhone 4 will sell for in places where it remains available. Sure, it’s a three-year-old model, but it still has a Retina display, and will still work with iOS 7. The built-in camera is quite good, and it’s fast enough to deliver a good user experience with most current apps.

In contrast, it’s hard enough to get consistently smooth performance from a flagship Android smartphone. Calling those cheap models “great” doesn’t reflect reality, and calling Android apps, many of which work well only on some models, “great” also fails to recognize what’s really happening.

Apple could sell more product at lower prices, by sacrificing profits. But how much more gear would they have to sell to cover the difference? Consider that HP is the number one maker of traditional PCs on the planet. But profits from that division are a mere 3%. Apple earns more than ten times that number as a percentage on Mac sales. So which company is doing better? Apple also owns the market for personal computers priced at $1,000 or more.

Some might make the BMW argument, about a company that remains successful despite having a relatively tiny share of the auto market. Of course, a Mac, an iPhone and an iPad are not necessarily the equivalent of buying a BMW. But they are also aspirational devices for many people. Besides, there’s nothing wrong with a company making affordable gear at a good profit, rather than cheap gear for little or no profit. At the end of the day, Apple still has huge cash reserves, and is capable of funding massive acquisitions, expanded R&D, and still have plenty of money left for stock buybacks, and in case of ongoing economic downturns. And that’s supposed to be a bad thing?

That doesn’t mean that selling cheap stuff is necessarily bad. But in the smartphone industry, only two companies make decent profits, and that’s Apple and Samsung. After paying $12.5 billion to buy Motorola Mobility, Google is still losing money from the acquisition, and there’s little indication that the handset division will return to profitability any time soon. While Microsoft is acquiring Nokia’s handset division on the cheap, that division has hemorrhaged market share, with few buyers for the Windows Phone OS. It remans to be seen whether making Microsoft vertically integrated will somehow magically turn the company into Apple, or just end up with another failed acquisition that went nowhere. Consider the fate of the Zune music player.

Google should also fear for the future of Android. Samsung barely mentions the OS, and is doing more and more to add junkware to differentiate their smartphones and tablets. If Samsung’s goals to establish a developer base bear fruit, I suppose it would be possible to fork a new version of Android, or a different OS, and where would that leave Google?

As for other handset makers, both HTC and Samsung build Windows Phone gear, though not in high volumes. With Microsoft in control of Nokia, there’s no incentive to continue. So the Windows Phone market may contract slightly with the loss of these two makers, adding yet more pressure for Microsoft to get some traction out of Nokia. But why assume they have to chops to make it happen?

For Apple, it doesn’t matter how many new iPhones will be sold as of the first weekend. It’ll never be enough. Some bloggers are even suggesting that Apple should have simply created an iPhone 4c, colorful renderings of the iPhone 4, so they’d have something cheap to sell.