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What's the opposite of price erosion?

In the mobile phone industry, and indeed, in most technology sectors, price decline is a fact of life. Component prices tend to drop while their performance increases. This rapid obsolescence drives prices down constantly. Competition also plays a part as undifferentiated products are rapidly imitated.

This phenomenon has its own term: price erosion. It’s built into most business plans and forecasts.

But how real is it? What are the implications in terms of market share if one accelerates price erosion or reverses it?

This chart shows the average selling price for all the vendors whose data I maintain over a period of time.

Normally, a drop in price is followed by an increase in share, and an increase in price by a drop in share. To test this hypothesis, I tacked on another chart that shows how share and price have been traded off in the market over the last ten quarters.

Note how prices have dropped for all but three vendors. Two of those vendors (Motorola and Sony Ericsson) have lost share. One, Apple, has gained share. The rest, whose prices did drop, had increases in share, very roughly in proportion to the price drops. Again, we have one exception, Nokia, which suffered both price and share loss.

Except for these two anomalies, the vendors are placed on the -45 degree diagonal that would show expected price elasticity in the market.

I took the liberty of breaking the chart into four quadrants, and gave them names suggesting the strategies of the companies.

Lying along the traditional trade-off axis are either Profit chasing or Share chasing strategies. Anomalies off the axis are either Rule Breakers or Broken Value propositions.

This view of the companies allows us to abstract and think about market evolution.

It would be interesting to think how these players will evolve over time.

It’s quite possible that LG will move into the profit chasing model (as they already indicated they would by building more smartphones). These strategies are typical of companies squeezed from the bottom and the top. I once called this group “the biggest losers” and suggested that they are the best target for Android.

It’s also possible that Nokia will move into the same quadrant, though their profit algorithm favors share above all else.

The biggest question is whether Apple’s rule breaking is sustainable. It’s not clear whether they are interested in share as that does not have all that much to do with their definition of “greatness”. But a platform strategy begs for volumes.

This remains the biggest puzzle facing observers of this market.

  • Niilo

    Excellent stuff. Really like this one. Very thought provoking.

  • http://twitter.com/GoodyBird @GoodyBird

    I was started thinking about my previous question.

    Apple release one iOS device every year,
    and the price stays fix.

    The other vendors smartphone makers included release new devices all year long,
    as a result the older models now have to be sold in a lower prices,
    but since you're still manufacture multiple devices, it's less easier to optimize the assembly.
    So, production cost are higher, price is lower.
    That's what make the big difference.

  • O.C.

    "The biggest question is whether Apple’s rule braking is sustainable"

    Of course its not sustainable. Contrary to popular – fanboy – belief, no company, not even the "infallible" Apple, can keep growing at this phenomenal rate.

    • Kizedek

      Except, that Apple themselves know this, too. Thus, Apple's biggest competitor is themselves. They are constantly competing against themselves. They innovate against themselves. If anyone is going to make Apple products obsolete, it is Apple. This is one of their stated goals, consistently.

      They have a history and a good record of doing this, and they are not afraid to do it. As the iPod reaches maturity and has pretty much reached market saturation, Apple is ready to reinvent it and infuse it with new life — iOS (now in two models). So, iPod takes a backseat, so what? iPhone starts to mature and replace it as major source of revenue, so what? iPad begins to be the exciting new category in place of iPhone, so what? Along come new ultraportable mobiles that will yet again lead the industry in new trends (this time losing the traditional hard drive).

      Apple just does not stop and is NEVER satisfied with itself! —- THAT is what drives "fanboy belief", not a belief that no-one can resist this or that product.

      • Russell

        Kizedek,
        i agree that it can/has be done this way. MSFT is a great example of this in that even after it was one of the biggest animals on the planet, it continued to find new sources of growth to feed itself for a lot longer than AApl has been playing this game. The only differnce in strategy if MSFT would imitate and AAPL plans to innovate.

        As i've said before, its early in this cycle and this one is by far the biggest in terms of global scale from all the previous tech cycles. These factors could create mkt caps that exceed all previous. Saw a illustration that had all the devices to be shipped this time around to be in the neighborhood of around 10x the previous cycle. Don't recall all items in the list but some were: pc, phone, tv,tablet, smartHomes,smart Appliances, smartcar, smartgrid, Smart Medical,etc, etc, etc.

        Not saying Apple will capture all these areas, but tech cycles are very darwinian in nature and usaully the top 5% of companies capture 90% of the wealth. If history holds true again, then we could see a new market caps that haven't been reached before.

        Just my two cents about tech history.

        Russell

    • FalKirk

      "Contrary to popular – fanboy – belief, no company, not even the "infallible" Apple, can keep growing at this phenomenal rate."

      @OC: You call others fanboys for their unreasoning belief that Apple is "infallible" (a straw man, if ever there was one) yet you commit the same error when you ask us to accept your prejudices on faith. Don't tell us Apple cannot keep growing at such a phenomenal rate, rather, explain why. Win us over with facts and logic. Don't try to bully us with rhetoric and vitriol.

      • Joe_Winfield_IL

        You make two points here. On the first, your logic is tragically flawed. You are assuming a static market size. The PC market is still growing after decades, so methinks there is still room for growth in smartphones. With this in mind, even if Apple had 100% share, there would still be room for exponential growth over the next few years. Also, the article was about pricing power, not market share. There is an obvious disconnect between the two, which you could learn by reading more of Horace's analysis. Also, market share is currently 4% globally, hardly at the "flatten out" phase of growth, where there is nothing more to gain.

        On the second point, take a moment and read the other posts on this site. While there are unarguably some blind followers among the group, there is also a healthy amount of respect and candor. Your posts stand out not for their content, but for their tone. Even in your first point, you act as though it is painfully obvious that growth is stalling. You have a condescending manner that implies your thoughts to be complete and correct.

        I enjoy reading the comments on Asymco because I learn about the company and industry in ways that the financial analysts and tech review sites don't cover. This is invaluable information to investors, and comments like yours detract from the experience of this well curated site. You are entitled to disagree, but try to be kind when you do it.

      • O.C.

        Talk about assumptions.

        First: I never said Apple can't expand its market share anymore. I simply pointed out that in time their growth rate was not sustainable. In the end, everyone who wants one will have one and thus growth will flatten out. Never said its occurring right now, just that it will.

        Second: I said you guys – fanboys – I didn't say ALL you guys are fanboys.
        Calling a fanboy, a fanboy, is not condescending neither are my comments. That's not mean,
        that's just calling it like it is.

        And that's no disrespect to Asymco or his site!!

      • Joe_Winfield_IL

        1) Mantaining share = growing volume. Everyone who wants a PC has one, but Windows just put up another record quarter. Children are born, the poor find wealth, and the uneducated learn. These are have positive effects for large-cap tech companies. RIMM has fallen to 3rd US/ 4th globally despite major growth. People refresh their phones much more quickly than their PCs, so this is very good for the major players.

        2) You quite clearly were speaking in a derogatory manner. The difference between "you fanboys" and "all you fanboys" is semantics. But my original point was that you are the only one "calling it like it is" on this thread. If you omit the name calling and just respond to the critique, you will learn from your cohorts on these boards. If you aren't hoping to do that, why bother commenting?

        You strike me as a last word kind of guy, so go ahead. But I'm done on this topic.

      • O.C.

        I won't disagree with you on your last sentence, but the rest are just assumptions.

    • Pat S

      What is not sustainable? How can Nokia or Android have a large market share and Apple not. If your point is folks at the bottom of the market buy only on price and never consider value, I would argue they are not a good candidate for a smartphone because the cost of data vs the value of data will be never be apparent. Until Apple reaches a dominate market position they can disrupt other providers with their integrated vertical solution. Of course when you reach a market penetration like Windows has in desktop OS or Google has in search you need to find a new business area to sustain the growth, and this is part of what Apple has excelled at. Many refer to the Halo effect. Fanboys as you call it, purchase multiple Apple devices. This is done by design and is a network effect in by adding additional devices you get more value. For instance the App I bought for my iPhone is available to my son on his iPad Touch.

      • O.C.

        I consider value – fair value – when purchasing a new phone and in doing so I came to the conclusion Apple is not the brand too go to when one is seeking fair value.

        Here in the Netherlands you can get a iPhone4 on a 1yr contract (€ 45 a month). But you have to pay an extra € 460 for the iPhone itself. Fair value in wonderland maybe, but not in this life.

        I bought a Nokia smartphone on pretty much the same 1 yr contract – € 45 a month – for € 75. I can make phone calls, sms, mms, email, take pictures, video call, browse the web, download apps, use my gps, multi task and than some. All that for almost € 400 less.

        So how does paying such a premium for an Apple have anything to do with fair value. Let me guess: the user experience / UI demands €400 extra?

      • CndnRschr

        Umm….. for many people, the answer to that is yes, given that iOS4 is viewed by many as being the best touch OS out there. What's the screen resolution of your Nokia? Does it have the diverse applications available (I know a lot of AppStore apps are crap but that's true of all app stores – the value apps tend to be released on the iPhone before other ports – much like Windows applications used to lead Mac application development).

        Nokia makes some great phones and their tech specs are often industry-leading. Their systems integration is not however, hence the mess that Symbian is in (and the lacklustre progress of its successor). Nokia is still the easy leader in popularity of sales. It's tech team is second to none. Its software/usability is second rate and that is why it is handing over profits to Apple (and Android).

      • SFO

        Fair value is really consumer preference. Phone, cars watches, any merchandise has its' own consumer base. You found your value and the Apple consumers found their value. Enjoy your purchase as others enjoy theirs.

    • Joe_Winfield_IL

      My inclination is to agree with you at first blush. As the Androids race to the bottom, they will be discounting heavily. Also, as per Horace's post last week, the modular model of Android will gain additional share as "good enough" is acceptable to many buyers. Eventually this will mean something to ASP.

      However, @GoodyBird makes a great point about Android cannibalization. The ASP of many vendors is artificially lowered by their decision to iterate very quickly. It is near impossible to sell model "n-1" at the same price as model "n", so discounting comes into effect. The opposite effect of this same decision is that the newest models are always priced in line with the iPhone. The competition allows Apple to hold their price steady and increase features to justify the price. Android fanboys will tout iPhone's lack of HDMI or Flash as a reason to buy a competing product for the same price, but in reality Apple LOVES the competition. Without the race for more useless connections and features, iPhone couldn't justify the price. iPhone's lack of features are obviously not restraining sales, so it's a bit of a coup for Apple.

      I seriously doubt that we are reaching a maturation of the smartphone market, where innovation dries up and gives way to true cost cutting. As long as there is another chip, protocol, port, etc. to add, Apple will be able to keep iPhone ASP very high. I would only begin to feel nervous about iPhone ASP if the OEMs and carriers begin to discount the retail price of the premier Android devices (not including BOGO). Again, this seems unlikely, as these gadgets are expensive to make.

    • kevin

      "Of course its not sustainable."

      Below you argue that it's not sustainable because the remaining market share becomes too small for continued growth. But the global mobile market is less than 20% smartphones, so the whole smartphone pie has plenty of room to grow, and Apple, with only 18% share of smartphones, still has plenty of room inside the pie to grow. Plus, people replace their phones fairly regularly – every 18-24 mos – so even when this 4-5 billion unit market is saturated, there is still lots of room for replacement sales.

      So the question is when will Apple's rule breaking become no longer sustainable?

      • O.C.

        Business is not an exact science Kevin.

      • kevin

        Do you have any metrics or indicators that you'd track to estimate/project when it is no longer sustainable?

        Or is just a wild guess, and you have no knowledge or data to contribute?

  • HD Boy

    Just found your interesting site, but I’m gonna’ have to read using my Mac instead of this iPhone 4. Has anyone complained that ironically, your text font is too small and the landscape view column width is too wide to render readable posts and comments on mobile devices?

    Consider yourself informed! Please update the design to address these shortcomings for readers with slightly older eyes. Also, those squeezed headlines are pretty unreadable too.

    • asymco

      Are you reading the site using the Mobile Theme on? The site uses WPTouch for iPhones (http://www.wptouch.com/)

    • Stu

      I read the articles & headlines just fine without the advantage of Retina Display.
      And I have 20/500 vision, with the beginnings of cataracts. At 40.

      • http://twitter.com/tommy4490 @tommy4490

        OUCH! Well, you have much to "look" forward to: the cataract correction is vastly improved over previous decades, and the results for quite a while have been 20/20 or better!

  • Iphoned

    Those lawsuits vAndroid camp better work soon….otherwise trouble…charts notwithstanding. Also Verizin iPhone can’t come soon enough. Or is it too late already?

    • asymco

      More data will follow on Android and the licensing landscape.

  • Iphoned

    Or,better yet, that battlestar they are building in NC had better be opeRRational soon:)

    • Joe_Winfield_IL

      Think about the increased value proposition of MacBook Air if Apple is able to move massive amounts of user data to the cloud. Small onboard storage and a lack of optical drive seems like much less of a concern if your computer is seamlessly connected wirelessly to terabytes of media.

      • r00fus

        The flaw in that reasoning is the poor state of US internet access.

        Lack of fiber rollout and regional monopolies in cable and DSL have left the richest country in the world with substandard data access choices…. and that's not even taking into account mobile, which recently took a huge step back with the removal of unlimited data plans.

        Media is expensive in storage and bandwidth… and the internet and content providers are proving to me every day with regressive actions that disk trumps streaming.

      • Joe_Winfield_IL

        I know, what a shame. It's the downside of the capitalist system I love so much – the private companies that own the pipes and airwaves don't have enough incentive to improve quickly, and the government isn't going to subsidize the projects. To be fair though, rolling out super-high speed access to a country as large as the US isn't the same project as in Scandinavia or small southeast Asian countries. The US does well compared to Russia, China, Brazil, and Canada. These are probably more fair comparisons due to the land mass.

        Fortunately, Apple doesn't need universally good internet to sell a bunch of the things. On iOS devices, 3G/4G internet access will be ubiquitous within a couple years. For MacBook Airs, most landline and wifi providers offer unlimited as the default. I'm not saying that the world is quite ready for the new model to replace the old one. But at Apple's volume, there should be enough demand to significantly increase share.

      • unhinged

        *cough*Australia's National Broadband Network*cough*

      • Charel

        The US may be large, but Australia is also big with far fewer inhabitants. They seem to have speedy internet connections with plans to provide fast broadband access for all.
        The government mandates, but private business provides.

      • EricE

        "The US may be large, but Australia is also big with far fewer inhabitants."

        With over 80% of the population clustered conveniently in cities along the coast.

        How good do people spread out in the interior of Australia fair?

      • Joe_Winfield_IL

        Oh, and Apple is allowed to sell these things all over the world. Mac is obviously concentrated in US so far, but the volume opportunity is global, and the halo effect of iOS should work everywhere – especially in locations served by Apple retail locations.

  • timnash

    'But a platform strategy begs for volumes.'

    The iOS platform will sell 80 million+ units in 2010 unless there is a production problem. Apple managed to sustain OS X on sales of under 10 million Macs a year before this year.

    As your previous graphs have shown, Apple already has over 50% of the smartphone profit and it is the profit erosion that makes Android as a platform unsustainable in its current form.

  • kevin

    Except Apple, which didn't have price erosion, also didn't lose market share. Why is that?

    So you'll likely point out that Apple didn't grow as fast as the combined Android-based phone makers (so in that sense, it lost market share opportunity), but based on what we've seen, it's a supply problem not a demand problem for Apple. Having multiple manufacturers of Android-based phones allows for greater supply, as the risk of having oversupply is shared among all the manufacturers; that is a positive for Android/negative for Apple.

    But how will this play out in the longer-term? How might the negatives of having multiple manufacturers of Android-based phones impact the mobile market in the next year or two or five? Will it result in fragmentation? Will it result in early commoditization? Will it result in domination? That's what I think Horace and a great deal of the commenters here are trying to figure out, bit by bit, by looking at the data from all kinds of viewpoints. A few commenters just regurgitate simplistic, shallow statements not backed by any data; those statements can be safely ignored..

  • asymco

    I assume you are referring to the Canalys data. They claim Android sold 20 million units world-wide vs. 14.1 million iPhones. Apple share of smartphones is about 17% which is about where it's been for a while. I think you will find that most share was lost by RIM.

  • berult

    Paradigm shifting power is a paradigm in itself. Identity artistry has no precedent for it sets the consummate artist up for peering with its primal matter. 

    As long as Apple paints with a sensitive brush as others widen theirs, "Apple scratches our back and so we scratch theirs", market share remains a non sequitur by definition. Profit share's wide discrepancies reflect the singularity of the moment in tech/human co-opting evolution.

    Profit rewards, the market "stewards".   

  • TomCF

    Apple hasn't been growing just by making more of the current iThing. They grow more by making the iNextThing.

    The current iThings are the iPad and iPhone which still have a lot of room for growth. Eventually they'll level off.

    It's not too hard to guess a general direction of where Apple will make more stuff. Look where there are points of pain where the incumbents almost inexplicably can't or won't make it better: television/cable/DVR. They've already got a hobby in the mix that's doing ok.

    But with the iNextThing comes new integrations which will eventually require new iThings to work seamlessly. So while the iThing levels off, it won't die, and will just become a cash cow.

    Apple will stop growing when it stops finding consumer points of pain and stops creating iNewThings. That's when, as an investor I will move out.

    • unhinged

      Best comment I've read so far. Brilliant.

  • CndnRschr

    Supposedly $15 is the per device license for Windows Phone 7. Of course, for Android it's $0. The companies will charge whatever the market will stand. Apple (and RIM) do charge more for their phones in europe than in North America (unsubsidized) but the price differential is clearly a value assessment or people wouldn’t buy them. In Canada, our subsidized prices are over three years (no short term contracts for most phones). A Nokia C6 is $0 w/3yr contract, an iPhone4 is $170 w/3 year contract (similar plans). So our UI premium is 120 euros.

  • EricE

    "Apple's biggest competitor is smartphone non-consumption."

    Bingo. There's the real truth the rest of the vendors are hoping that no one picks up on.

    • asymco

      If you only look at smartphones, you miss the biggest competitor. This is why the main focus of my analysis is the whole market.

  • http://twitter.com/TektonikShift @TektonikShift

    Apple has lots of room to continue its growth;

    Phones
    i) an iPhone "nano" device in 2011
    ii) Verizon iPhone in 2011
    iii) iPhone with 4G technology 2011/2012

    MACs (and PC's)
    Increased value-add thru "interdependence" with iOS devices 2011 and beyond

    TV
    Apple branded flat panel with IPTV built-in – 2011/2010

    -Tek

  • Russell

    EricE,
    I see your point, but i think you missed mine. You can delete "new sources of revenue" and insert "increasing amounts of market share" if you like. The fact/point is that MSFT was a big company that could still move the needle long after it was listed as a large cap, hence the comparison to Apple.

    I do agree with your final sentence.

    Russell

  • http://twitter.com/flixvis @flixvis

    I keep coming back to the very useful ASP graph above and I wonder whether RIM's self-reported ASP is really that. I say this because RIM is able to charge users an infrastructure fee (on average for 2 years, which is the length of a standard US contract) so that revenue, which is a certain stream of income for RIM, I believe should be factored into the ASP. I quickly did a back of the envelope calculation, looking at RIM's 2nd quarter data and it seems like they get on average about $16/quarter/device in infrastructure fees. That totals to about $126/device over 2 years, or $113/device over 2 years if one wants to be fancy and discount those payments with a 10% discount rate to take into account time-value of money.