In recent entries I asked: Can the iPhone reach 10% of the world’s 3G subscribers? and Can iPhone reach 20% of global smartphone market?
These were rhetorical questions designed to demonstrate that a growth rate of 50% (compounded) over three years was clearly possible through reduction to absurdity of alternative scenarios.
The question of iPhone as iPod vs. iPhone as Mac businesses is at the crux of any investment in Apple today and the key strategic question facing Apple and all its competitors. Anyone holding or considering buying AAPL shares should answer this question for themselves.
To the top-down market share scenarios above I add the following, more direct, signals Apple has made regarding their iPhone-for-all strategy:
- The fact that they entered the market at all. When they were building iPods, Apple came to understand that to be a device company means to be a phone company. The device business is much more sensitive to volume (i.e. economies of scale) than the PC business. Nokia proves this point every day. You can’t be in the device business with low volumes and stay profitable for long. This is because you can’t get component pricing low enough to sustain margins that can afford you R&D sufficient to differentiate your product. Therefore you cannot stay in the phone business with low volumes (see Palm).
- Apple repeatedly signaled that they will not permit a pricing umbrella for their products. Although the product seems priced highly now it’s only because that’s what the market can bear and because of the possibility of taking a cut from service revenues. The iPhone is not as expensive as it might seem relative to other smartphones, it just has a huge gross margin (50% at least). Apple can keep their costs low through volume but they can also tweak pricing down if they need to.
- The platform approach. Apple is putting in an enormous effort to orchestrating a mobile platform. This is the most obvious signal. Platforms are expensive to build. If the cost to build a mobile phone is x, the cost to build a mobile platform is 10x. Platforms are expensive to maintain but generate enormous rents if volumes are built and users are retained. The platform’s value grows as the n*log(n) of the number of users (Metcalfe’s law).