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Apple, RIM and HTC captured 75% of mobile phone operating profits in Q1

May 17, ’11 8:19 AM
Author Categories Market

I produced two alternate views of the primary mobile phone brands in terms of volumes sold and operating profit in Q1.

These views[1] allow a comparison by categorized competitors. I grouped dedicated smartphone vendors (SMART) vs. diversified and used color coding for profitability (blue colors indicate loss-making vendors).

The same view is drawn for profitability. Loss-making competitors are excluded.

This view shows how 16% of the volumes for the smartphone vendors generated 75% of total profits. As smartphone penetration grows, those vendors who maintain a diversified portfolio will continue to see their average price and profitability slide.

I’ve suggested before that I don’t see non-smart devices being interesting to vendors in the near term. Each additional dumb phone added to a portfolio will decrease a company’s operating margin. The market dynamics are such that I think non-smart phones will disappear entirely from branded portfolios in 3 to 5 years.

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Notes:

  1. These are called “tree views”. I used Many Eyes experiment from IBM Research to create these charts.
  • timnash

    Non-smart devices are not interesting for manufacturer profits. For Nokia and Samsung however, the large volumes allow them to manage their supply chains and drive prices down. Their diversified ranges also give them more carrier shelf space and make it more difficult for rivals to establish themselves in these transition times.

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

      This is certainly true of Nokia and Samsung.

      One thing we should be careful of though is applying other company's business models to Apple. Many analysts still assume Apple is playing the same game as the other mobile manufacturers and don't understand why Apple hasn't offered a range of products while assuming Apple is just on the cusp of doing so. Apple's stubborn focus is simply not understandable by these people and it is easy for even myself in a moment of weakness to wonder why Apple doesn't offer a more diverse range of products. But Apple's impact on the industry is undermining competitors by pulling the legs out from under the volume producers. The volumes they have to produce to make a profit are evaporating with the shift to smartphones. If Horace is right and in 2-3 years few dumb phones will be sold, then these companies no longer have this option of large volumes of cheap phones for sustaining them and taking up shelf space. One question is whether they can offer a range of smartphones with different price points that can serve the same function. Right now, I don't see that happening but perhaps this will change over time.

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

        Good points emphasizing the fact that commodities never command economic “rent,” or prices above the marginal cost of production.

        I would emphasize that Moore's Law works for everybody and that in 5 years we'll have the same disparity between an innovator's capabilities and the followers', with all prices lower unless the innovator can keep introducing new *highly desirable* features faster than the marginal-cost-of-production followers can copy them.

        There are two very clear paths for Apple: [1] keep adding new features, redefining what a phone is on its own terms, and keep the type of charts shown above. Or [2] get bogged down into a consolidation phase where their phenomenal profits are shrunk down to the only advantages being economies of scale or branding of the Coke/Nike sort.

        Which path will they follow? Their history is down route [1], while business history suggests that [2] is eventually the fate of the great innovators such as IBM, WalMart, (old) AT&T and many others. Route [1] is exceptionally difficult.

      • Sandeep

        @waltFrench

        You forget a third option. Stay obscenely profitable by creating a large ecosystem and gathering rents on hardware accessories, software, services and content.

        Remember iTunes just posted a $1.4B quarter. I wonder where it will be in 10 years.

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

        Absolutely did not overlook that option; rather, if it's different than my “consolidation” story I reject it as impossible. Those easy high-margin profits are the frosting on the cake, not the cake. They cannot exist without a reason to be in the ecosystem.

        Economic monopolies allow bad price distortions but they, too, eventually get chipped away. (In my field, it's called “arbitrage,” which is more appropriate because it's hard to figure out a way to undercut an over-pricing monopolist. But nobody has a monopoly on the desire to make money. Companies lose the fire in the belly to create the next magical thing and settle for the comfort of doing what they're good at.

        Right now, Apple's business is totally dependent on its ability to be a technological disrupter. It amazes and awes me. But it wouldn't be hard for them to be the next Microsoft, sitting on their laurels while the excitement goes elsewhere, staying profitable for many years.

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

        @Sandeep, I don't think it's actually an option. These high-margin accessories are just high-sugar icing on the cake; they're not the cake itself.

        You're describing one aspect of my “consolidation” alternative. Businesses create monopolies to protect profits this way, but the human mind is always looking for innovations and new purposes; eventually these monopolies become so expensive to defend that they drain out the very dynamic spirit that created them, and the business rots.

      • Sandeep

        I disagree.

        If the future value of providing access to content, services, software and charging rents is a much larger value proposition than selling hardware.

        ie there is a change in the fundamental game.

        -S

      • KenC

        If you look at your two choices and apply them to where Apple is in the PC market, they've maintained their position on Path 1, intro'ing new features, and redefining the laptop on its own terms and maintaining high margins in the segments it competes in. This is even more true if you include the iPad as a redefined netbook replacement.

        Also, as long as there are large cellphone markets with postpaid subscribers who buy subsidized phones, then the true price of the phone will be hidden from the consumer, so that your Path 2, consolidation phase will be delayed, perhaps indefinitely.

    • Sandeep

      Tim this assumes that the same parts and components are going to be important in both smart and low end phones. The truth of the matter is making a lot of low end phones does not give Nokia buying power over smart phone components like Touch screens, Flash Memory, Apps Processor, Gyroscopes and other sensors.

      Guess who does have a pricing advantage over these components buy leveraging them across Pods, Pads and Phones? And guess who is Not going to leave a price umbrella once the component shortages and manufacturing bottlenecks sort themselves out?

      • timnash

        My comment was about the advantages for manufacturers of non-smart devices and that assumption was not made. Nevertheless for many smartphone components, there are a limited number of suppliers and those suppliers often supply components for feature phones too and suppliers will treat better those customers taking larger volume and giving them more profitable revenue. This means that Nokia and Samsung can continue to profit at the low end of the market and can benefit from those supplier relationships for smartphone components both for pricing and supply when they are not readily available.

        Apple's willingness to buy out production of critical components and to enter into long term supplier contracts is a large part of their pricing advantage as those contracts probably guarantee that Apple is charged no more than the lowest price available to other manufacturers.

      • Sandeep

        Tim,

        While there is an overlap of suppliers between smartphones and "mobile phones", consider the fact that there are now new suppliers/vendors for smartphones over which Samsung and Nokia have little leverage (for instance: Corning, AKM, Audience, PowerVR, Wolfson etc) are all suppliers who dont serve the dumb-phone segment.

        -S
        •

    • Joe_Winfield_IL

      Could you explain further the benefits? When you say "manage their supply chains and drive prices down," what prices are you referring to?

      As far as shelf space, it's a good point when comparing Nokia and Samsung to the other integrated manufacturers. I'm sure it's been a historically very important tactic. But on the smartphone market, many shoppers don't need to see a whole portfolio of products to make a decision. They walk into the store asking for a product by name. The profits are so much better on high end phones that the manufacturers and carriers have the budget to create a brand around each product. The obvious example is iPhone, but the Droid lineup at Verizon has caché with buyers, as does the Samsung Galaxy brand. No amount of low-end-phone shelf space for competitors will distract a buyer from plunking down their cash on the latest, greatest superphone.

      • timnash

        Shelf space is still important as most consumers still buy through the carriers retail operations and smartphones aren't yet commodity. So if a consumer buys a cheap phone now and has a good experience, they are more likely to give that brand's smartphone range a trial. Also creating a brand will become more difficult, the more smartphones look the same and are boxed up next to each other.

        From the carriers' point of view they would sooner deal with a limited number of suppliers, as the more business they do with them, on the whole the lower the cost of each smartphone or cellphone. This will squeeze the mid volume manufacturers like MMI (Motorola) if they fail to offer a smartphone that stands out from the crowd.

        One of Apple's strengths is that it realised more than 10 years ago, that it needed to stand out in retail in order to survive. Hence Apple Retail, which now partly bypasses carrier retail operations, and Store within a Store, which carries on with separate display areas for Apple products and staff training so they can be reasonably demonstrated.

  • yet another steve

    Apple, as always, skates to where the puck is going to be. And they do offer a low end… but it's a low end ios device, sans phone (ipod touch) and more importantly in the US, sans contract. An iPad nano if you will and DS killer.

    • Hamranhansenhansen

      An iPod touch with 3G data would be very compelling for many people. Especially if FaceTime were expanded to be a complete VoIP solution, not just video calls.

      • http://www.noisetech-software.com/Y.A.S.C..html Steven Noyes

        There is an iPod Touch with 3G data. It is called an iPhone.

        What the iPod Touch needs is a speaker and microphone like the iPhone. It would then be a great VoIP phone.

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

        And the fact that Apple chooses not to market such a product tells you that they are not ready to attack the market that @Hamranhansenhansen (and I) want them to.

        If, as I assume, they soon will, they face an interesting challenge: how can they scale up production 5-fold, without incredible business risk, expenses and causing impossible expenses from swamping their suppliers with huge increases in orders that they can't economically fulfill?

      • dongmin

        AFAIK, the latest iPod Touch can do FaceTime, so it must come with mic and speaker.

      • PGiese

        It can – but I think that Steven is looking for a phone handset configuration with ear speaker and voice mic rather than general purpose mic and speaker.

  • guest

    I think your second paragraph should read sales and not profitability

    • asymco

      Color represents profitability, size represents volume.

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

    Great stuff. I love me a variwide! Just one niggle, I think you should have Smart on the right in the second graph too.

    I'd also like to see you take a crack at volume forecasts for smartphone and dumbphones, given your comments above…

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

      … as the mainstream industry analysts (Gartner, iSuppli, Oppenheimer etc.) are predicting a graceful decline in the dumbphone market not a sudden extinction.

      I am sure you have a great Future of the Dumbphone post inside you that I'd really like to read

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  • westechm

    It would help me understand the 'tree views' a lot better if you included the actual % in each rectangle.

  • DeadParrot

    Two suggestions to improve the charts.

    1) The charts are big enough to use full names. Instead of Sam, Mot, etc. you should use Samsung, Motorola, etc. This probably isn't important at this site, but your graphs are reused in many places. Full names will help in wider comprehension.

    2) Chart 1 has area = sales, color = profits. Chart 2 has area = profits, color = profits. Chart 2 has redundant information (area and color show the same thing). If Chart 2 had area = profits, color = sales, it gives better contrast to the two measures

  • Davel

    I think phones will be data only in the not too distant future. Is there anyone out there able to offer a data only plan since the carriers probably won't offer it?

  • Ashok

    Much as I like your site and agree with most of your interpretations, there is a world outside the US. One in which smartphones do not – emphatically – rule the market.

    Approximately 1.5 billion phones in the world are in two countries: China and India. India is also the fastest growing market in the world. It's also the market where Nokia has a 60% share of both sales and, in all likelihood, profit. In these markets, manufacturers can make a significant profit selling basic and basic + handsets. North America for instance, accounts for just 5% of Nokia's sales, with 52% from EU, China and Asia-Pacific. I suspect that in a couple of years, Nokia (and possibly SE) will happily leave the US market and go where the real money is going to be.

    And specifically in smartphones, guess which company totally ignores the Indian market? The same company that has yet to launch its newest smartphone, over a year after the US launch. Much as I wish it weren't so, India is going to be an Android and Windows Phone market, with RIM coming in third… For years to come, even Symbian will have a larger share than you know who!

    Take a look at these sites for info:
    http://www.99cblog.com/wp-content/uploads/2011/05…
    http://mobithinking.com/stats-corner/global-mobil…

    (Approximate conversion rate: 1USD = 50 INR; 1 crore = 10 million; size of handset market = USD 5 billion)

    Thanks for your great site

    • asymco

      I am aware of the non-smartphone consuming market. I track it separately but it's not particularly interesting because it's not growing. It consists of three main brands and "Other". Nokia, Samsung, LG are the last big brands to still make material revenues from non-smart devices. I may write a post about how it looks.

  • James Katt

    If you exclude smartphones, which are only 16% of the market, then you can say that Nokia and Samsung are making money with dumbphones just like they always have.

    The vast majority of people in the world CANNOT afford a smartphone. How many people in the world can spend $2000 a year on a smartphone and contract????

    Thus, dumbphones will always exist.

    Dumbphones have to be considered a different market from the smartphone market. Then profits in each market can be compared.

    If this analysis was done, of course, Apple has zero profits in Dumbphones. But it may have 80 percent of the profits in the Smartphone market.

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

      I like the idea of treating them as two separate industries and also your (implied) suggestion to look at absolute profits. That would be a nice and illuminating chart — to be part of Horace's upcoming Dumbphone post???

    • asymco

      Smartphones are not 16% of the market. They are at 27%. In some markets they are well above 50%. Historically technologies are adopted in S curves which means acceleration followed by saturation. I suspect we'll enter the rapid growth phase in one or two years. These growth rates are always accompanied by lower prices. http://www.asymco.com/2011/05/19/smartphones-the-…

  • mbaDad

    You are correct that most of the world is still on dumb phones, and nailed the reason, data contract prices. But Nokia is looking to the future for a good reason, it can no longer maintain margins on dumbphones. This is the first sign of a failing product, the huge sales today simply mask the pain. The second mistake is assuming status quo, we are headed to essentially everyone owning a smartphone. Will some of these be akin to an iPod touch with phone that do not need a data plan? How long before data plan prices come down to zero (just normal plan price)? Will someone put up a data only service that is essentially voip only? It will take a few years, but the CEO's know the writing is on the wall.

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