The verdict is in and the jury is unanimous: Apple's long overdue decision to build iPhones with larger screens is a winner. According to market research firm Kantar, the iPhone gained share everywhere in the world except Japan for the three-month period that ended in November thanks to the launch of the iPhone 6 and 6 Plus. In the U.S., iPhone caught up with Android smartphones for the first time in nearly two years and in the U.K., Apple hit its highest ever market share in the Kantar survey. Of course, these numbers are buoyed by the newness of the current iPhones but it's possible they also represent a sea change. If so, Tim Cook may have captained Apple through one of its murkiest missteps in the iPhone era.
Here's the story: Though skeptics doubted Apple would play in these markets (see here and here), Apple has actually been aware for some time that it had a strategic vulnerability due to its decision to offer the iPhone in only smaller screen sizes. By April of last year at a company offsite, it put that vulnerability in the most stark terms possible: "Customers want what we don't have." All the growth in smartphones was coming from two places (1) the under $300 segment, where Apple clearly didn't intend to participate as no one was making any profits and (2) the >4-inch screen segment, where Apple had nothing to offer, but could continue to charge a premium price.
By then, the iPhone 5s and 5c were already well into production and the company could do little about the fact their screens were already considered small by nearly everyone not using an iPhone -- and some who already were. But it could fix the vulnerability in 2014 and even take steps to expand its profitability in the process. By launching the iPhone 6 as a replacement for the 5s and then adding the phablet-sized 6 Plus for $100 more, Apple managed to raise average selling prices for the iPhone line, capture share in growing segments and keep the 4-inch models around for at least two more years for those looking to buy cheaper, smaller models.
Cook likely was most focused on making sure iPhone customers had no reason to leave the fold and perhaps attracting a few Android switchers in the process. While the headline numbers show Apple is indeed gaining share, an analysis by Charles Arthur suggests that there isn't much wholesale movement in the direction of the iPhone. Looking at the U.S. Arthur found that the proportion of switchers between the two platforms was very close, with a slightly higher percentage of iPhone users actually jumping to Android. Because there are more Android users, Apple gained share anyway.
What's important for Apple is what happens next? Neil Cybart at Above Avalon wondered about that very question. He suggests that it's at least possible Apple might find itself selling 60% of new smartphones in the coming months here in the U.S. If it does, that puts Apple in a strong position vis a vis Apple Pay, Beats Music, Car Play, the Apple Watch, Apple Health and any number of iPhone-centric technologies. ComScore, which tracks the installed base of the mobile operating systems, had Apple slipping a bit with iOS to just under 42% through October. If sales continue to trend for Apple, that number will reverse and trend upward, perhaps eventually catching and passing Android.
That kind of majority (or even near majority) share, though, is only possible in a handful of places, including the U.K, Australia and Japan. But Cybart's thinking reframes the debate about what Apple's goals ought to be regarding how much of the market it's seeking. For some time now, there has been a debate over whether's Apple's relatively small share of the total smartphone market (low teens) is important given its high share of profits (upwards of 3/4). Many have noted that continued developer support and a gigantic installed base of iPhones and iPads means that iOS is surely guaranteed a place at the platform table for years to come and therefore Apple's market share is more than sufficient.
But all that "sufficiency" has become a limited reward for the company, which finds itself increasing using the profits from pricey iPhone sales to buy back its own stock in ever-greater amounts. It's certainly true it could later reissue that stock to engage in some types of acquisitions, which is why Eric Jackson's claim Apple "wasted" $100 billion is so absurd. But it's equally the case that selling to less than 1/4 of the customers in the 5 largest European markets and fewer than 1/5 of those in China only to then plow the cash back into another share repurchase hardly seems like the kind of bold thinking that has made Apple the most valuable company on the planet.
Which bring us back to that Apple offsite and Cybart's rather trenchant analysis. What is the threshold of market share by which Apple's technologies have the chance to become "standards"? Would reaching, say, 1/3 in Europe's big five allowing Beats to challenge Spotify, assuming Apple marketed the service properly? Could Apple Maps (especially with the boost from Nokia Here) challenge Google if it were on enough phones? How valuable is incremental share in Apple's biggest markets?
Of the growth in smartphone sales, Apple had identified that just 1/3 of it was in the >$300 segment. But the company's phones still begin at $650 for current models and $450 for the iPhone 5c, which is based on 2-year-old technology. Apple has mastered taking essentially all the share of a market it solely owns and has even managed to grow that market annually. By diversifying the product line this year, it should eclipse 200 million iPhone sales. But what if it finally decided to offer something at $350 as well? With IDC expecting 1.4 billion smartphones to be sold this year at an average price of just under $300, there are conservatively 50 million incremental sales for Apple at $350 and quite possibly twice that.
It's certainly true that margins on such a phone would be lower and that some would choose a cheaper model instead of the latest and greatest. But cannibalization of more expensive options would apparently be minimal, as Apple's experience with the 5c demonstrates (it was thoroughly outsold by the 5s), not to mention the spectacular success of the 6 Plus (which is somewhere around 1/4 of iPhone 6 sales per data at Fiksu and Mixpanel). And the margins would still be strongly positive, albeit less strong. Now consider the impact on possible music streaming customers, HealthKit data customers linked to insurers, iCloud storage customers and repeat Apple customers.
Because it's certainly the case that someone with an iPhone -- any iPhone -- is more likely to buy an other Apple product down the road than someone without one (especially the Apple Watch, which requires an iPhone). What the Kantar and ComScore data really show more than anything is that people aren't especially likely to switch. If Apple understood the move to larger screens in 2012, it likely wouldn't have waited so long and allowed so many people to get hooked on them with Android. Further, it could have struck a mortal blow to Samsung sooner, as it would likely have blunted the growth of the Galaxy business.
That's all water under the bridge. Looking out into the vast ocean of opportunities, Cook has to be thinking about the next phase of growth. And he has to be wondering whether it isn't time for Apple to seek its next several hundred million customers in Spain, Italy, Brazil and India -- along with continuing its focus on the vast Chinese market. Apple will report spectacular revenues and earnings three weeks from now. The pirates will call for taking some of those profits and buying still more of the company's stock. Maybe it's time to ignore them and sell more of the company's most important product.
