Making Smartphones is Bad for Business — Except for Apple and Samsung

November 18th, 2015

I assume that most companies are in business to make profits. Sure, some might want to save the planet, but at the end of the day, if revenues and profits aren’t up to snuff, a business might go under. Well, maybe not Amazon, which manages to somehow prosper despite reporting barely any profit over the years. But look at the terrific cash flow!

I’m not about to evaluate Amazon’s business model. The company continues to expand, although the promise of one-day delivery hasn’t arrived in the slum of a neighborhood in which I live. Regardless, Amazon is happy, Wall Street is happy, and if everything doesn’t come crashing down on Jeff Bezos, that’s just fine. He also owns the Washington Post, by the way, and that property appears to be doing well I hear.

When it comes to selling tech gear, the critics want volume above everything, even if there are no profits in it. This is the source of the complaint that Apple isn’t doing well against Android, because it’s a distant second overall. It doesn’t matter that the iOS versus Android share in the U.S. is very close, or that iOS is gaining against Android around the world.

With PCs, it’s still true that Macs remain in the single digits around the world when it comes to market share, and the low double digits in the U.S. Windows won the OS wars years ago. Nobody disputes that, but Apple’s product line sits at the upper end of the price scale, which means each Mac sale accounts for a lot more money than the sale of the average Windows PC. Curiously, Microsoft’s new Surface tablet/PC/whatevers are relatively costly as such things go. Some configurations are even pricier than a 15-inch MacBook Pro. Curious indeed, or perhaps Microsoft is smart enough to know where the money is, even if volumes still aren’t terribly high.

I mean, you have to wonder how a company can make much or any profit when selling a PC for $400 or less. It’s not happening, but these companies, blissfully ignorant of reality, continue to push these things upon us in a declining market. At the same time, Macs have outgrown the PC market for years. Do you remember when Apple could barely manage moving a million Macs a quarter, and even less? Now it’s over five million.

Let’s return to the iPhone, which has really sucked the profits out of the smartphone industry.

So according to Canaccord Genuity, and investment bank based in Vancouver, Canada, Apple took some 92% of the profits in the smartphone industry in the June quarter. That number ticked up to 94% in the last quarter. Somehow Samsung managed 11%. That doesn’t quite come to 106% because some other companies actually lost money from smartphone sales.

On the surface, at least, it would seem that there is really no reason for any company other than Apple and Samsung to build them. Well, on the surface at least, though I suppose other companies hope that, if they keep on keeping on, they will be in a position to gain market share, revenue and profits if Apple or Samsung falters. Call them stalking horses.

Then again, if a company is otherwise profitable, not losing or earning very much in the way of profits from a mobile handset division still allows a company to stay the course. So if a product hits the mark, perhaps things will change. But the critics that insist Apple cannot be successful because they aren’t dominating many markets, well except for tablets and, evidently, smartwatches, aren’t really paying attention.

When it comes to profits, Apple remains unmatched. Sales, aside from the iPad and the iPod, continue to grow. Sure, I have little doubt growth rates will continue to flatten. Mac sales increased by only a few points in the last quarter, though sales fell for most of the other PC makers. Despite the potential to grow in emerging countries, iPhone sales cannot increase at their current rate without creating an impossible situation where everyone has one.

Sure, the pressure his high for Apple. Customer expectations are high. Industry expectations are high. Even the slightest indication of a miss, or an unsuccessful product, would attract the vultures. There are still folks who want to insist that Tim Cook is incapable of running Apple, though the financials and customer acceptance of new products appear to be off the charts.

Apple still has a lot to prove, and it would be nice if new operating systems were more stable at the outset. Although the situation seems pretty stable with iOS 9, OS X El Capitan is definitely not getting the love. It rates barely 2.5 stars at the App Store, with customers continuing to report performance issues and other glitches. True, some of that may be due to third-party apps, and aren’t Apple’s fault. The OS has been out less than two months, and I know developers are still working to make their software compatible.

An El Capitan 10.11.2 update is under development, with both developers and public beta testers getting seeds on Tuesday. Perhaps that’ll fix many of the remaining problems that are causing havoc for some users. We’ll see. But I would hope that Apple will find a way to get a better handle on bugs before an OS is released.

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One Response to “Making Smartphones is Bad for Business — Except for Apple and Samsung”

  1. jbelkin says:

    Apple confounds most companies and nearly all the analysts. Usually large firms get in a category and eventually win by releasing a bunch of products in a category. They get retail space by offering generous payment terms and co-op advertising rebates (ads you see in the Sunday circulars) – generally smaller companies (as Apple once was versus Sony/samsung, etc) lose out as those competing manufacturers simply compete by releasing a crapload of products with slightly different specs so buyers can’t totally comparison shop (this one has 5 HDMI plugs and 4K HD, that one has 6 HDMI and 4 USB plus Ultra 4K … what do you choose if one is $50 less?) and with their distribution deals out manuever out other companies which generally have to lower prices or lose their retail space and eventually get bought out or go out of business. Apple is impossible to compete against with this game plan. People line up to buy their products. People pay full price until nearly the next one is out. It’s like consumers actually want the best and not just the one foisted on them becayse of a sweetheart distribution discount and retail space footprint – that it’s not “all just the same.” Weird, huh. Of course, other companies do not understand that Apple simply stays above the fray – and while this is usually a niche market (Porsche doesn’t have to discount – sells about 190,000 cars, Toyota sells about 10-million). Apple is the world’s first Luxury Mass market company. No one has ever done this EVER (yes, you are a lux company when you outsell them at 300X the profit margin) or for more than a couple years – certainly NOT 10 years in a row with growth still coming.

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