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A disruption is not sufficiently described by the success of some. Others must fail.

Last fall I introduced the “vector space” model of visualizing vendor performance. It shows performance along two dimensions: market share growth vs. profit share growth for a set of competitors.

When introduced, I chose a long time frame (15 quarters) to see the long-term pattern. This quarter I add two more time frames: year-on-year and sequential. This allows a view of how market change is itself changing. The three diagrams are shown below (note difference in scales)

One way to interpret this is movement toward the upper right is positive while movement down or to the left is negative. A deeper meaning can be obtained from noting that the vector sum or “net” of vertical and horizontal data points should be zero (i.e. the gains in share should be at the expense of losses in share). In terms of phone market share the “net” is not zero as “others” are excluded, but the difference is visually not perceivable.

Since we’re dealing with share, one way to interpret the data is that “improvement” in one’s position is offset by the “decline” in another’s. We cannot ascribe the benefit of a vendor directly to the loss of another but overall net gainers are offset by net losers.

By tracking this position change over time we can see if there is a set of consistent winners and a set of consistent losers. The pattern does show that:

  • Smartphone vendors grow consistently
  • Apple in particular has consistent growth with profit growth faster than share growth
  • Nokia in particular has consistent decline with profit decline faster than share decline
  • RIM shows profitability concern in the near term. In particular vs. HTC
  • Samsung shows some near term share loss, probably due to unbranded vendors
  • It’s very rare to have a company lose market share while gaining profit share or to gain market share and lose profit share. This implies that in this market one does not trade off volume for profit.

The correlation between profit and volume growth is very telling. As is the consistent clustering of winners and losers. This analysis demonstrates the shift in the industry is not a short term phenomenon but a disruptive changing of the guard. If history is any guide, this change is not going to be undone.

 

  • Walt

    Horace, very clear visual representation of data as always.

    What would a similar analysis of mobile OS share look like? My (very rusty) visual vector addition has Android pretty much stationery.

  • Brad F

    Very nicely done.

    Another interesting way to look at the data would be to show all 3 sets on the same diagram, but with each vector representing the average quarterly growth for each set instead of the overall growth. I think it could help visualize any acceleration or deceleration in growth over time.

  • Childermass

    "This implies that in this market one does not trade off volume for profit."

    Absolutely.

    When combined with yesterday's graphs showing how the 'other' phone market (so-called feature phones) works, this clearly demonstrates that quality and profit define growth markets and price and market share define static markets.

    This is a further pointer to why analysis of growth markets in general (and AAPL in particular) is so poor. Static markets (growth below 10%) conform to the accepted wisdom. We live in them, we understand them, we teach classes about them. Growth markets are unusual and innately unpredictable. Who knows where they will end?

  • pk de cville

    I'd love to see these redone on a platform basis: iOS vs Android vs Symbian vs Windows M Vs …..

    • asymco

      Not a bad idea. Trouble is that I don't have a profit measure for a given platform, only for a given vendor.

      • westechm

        If you 'average' the vectors of HTC, SAM, MOT, LG and SE you have a fairly good proxy for the Android platform. It shows that the OS isn't going anywhere.

      • asymco

        Perhaps that's reading too much into it. It says that Android is used by companies that are going nowhere.

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

        All those vendors still sell phones on other platforms, quite probably more than they do Android even.

  • pk de cville

    Also second Brad F's good idea…

  • newtonrj

    Stunning!

    " history is any guide, this change is not going to be undone"

    Since the market players are currently incapable of dealing with AAPL, could new players such as IP, regulatory and market collusion be disruptors? -RJ

    • asymco

      Disruption as I use it means growth. IP, regulators and colluders never "disrupted" anything, rather they tend to sustain existing paradigms.

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

    "Smartphone vendors grow consistently"

    That's kind of the problem with these graphs. We already know smartphones are growing rapidly and are more profitable so it's no surprise that pure smartphone vendors are winning. It would be perhaps interesting to split out the smartphones from the non-smartphones and see where the arrows point.

    Apple, RIM, HTC etc are operating in just a subset of the market compared to the old guard.

    • CndnRschr

      But the point is that growing marketshare in this sector is the best path to growing profit. The old guard isn't going to ditch the non-smartphone segment, but they sure as heck need to make sure that they can compete in converting that market segment into smartphone sales. Whomever converts, wins.

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

        Agreed. However, I would guess that Nokia's non-smart market share is holding steady-ish and their overall market share losses are because of their unfashionable smartphones being unavailable in the USA where most of the smartphone growth has been recently as the USA finally 'got' smartphones.

        Are Samsung holding share because of growth in non-smart? Are they growing because of Bada or Android?

        Overall market share is one thing but the market is much more subtly nuanced.

  • poke

    What I'm having difficulty figuring out is, Who are the Android winners? Android has incredible growth, but which vendor is really benefiting from it? Samsung shows growth along a time frame that's probably better explained by non-Android devices. More recently growth has reversed. Only HTC appears to be really benefiting from Android adoption. Perhaps all these companies would be bleeding more rapidly if they hadn't adopted Android but can we expect Android to really reverse these trends? How can a platform maintain such rapid growth when it's used almost exclusively by companies losing market share?

    • mrrtmrrt

      The thing is that Android Growth has been slowing in recent quarters and according to NPD actually shrank 6% to 50% unit sales marketshare in Q1 2011 while the iPhone grew 115% to capture 28% of the smartphone market in the USA.

      And this isn't even counting all of the iOS platform which according to comScore was 59% (in installed base terms) larger than Android in April in the USA and 116% larger in Europe.

      -Mart

    • asymco

      What we see sometimes is that Android gives a temporary growth. This happened with Motorola first then with Samsung and HTC more recently. It could be sustainable but it's been a short while since Android took off so the evidence is scant. I would add that with ZTE coming faster on stream and with Windows Phone also getting attention from vendors, the chances are not very good that we'll be able to declare Android as an unambiguous savior.

  • CndnRschr

    The relative stability of the Apple/Nokia vectors is notable. Nokia is in deep do-do. However, the unknown here is Microsoft. Will WP7.1+ pull the Nokia vector into the upper right quadrant? I predict it will slowly move counter-clockwise as it restores some market share but without initial profitability.

    • jmmx

      It may move to profitability faster than you think, depending on how it is measured. You actually imply up a good question: WHAT profitability? Is it measured in gross margin or in net? Asymco?

      Two companies can have the same share and gross margin but have different net margins.

  • gctwnl

    Very nice. This begs for an animation or two (the development of the vector plots over time.

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

    Very interesting. Also the incumbents vs entrants lens is valid here too no?

    (BTW: Thanks for "We cannot ascribe the benefit of a vendor directly to the loss of another but overall net gainers are offset by net losers."!)

    • jmmx

      "We cannot ascribe the benefit of a vendor directly to the loss of another but overall net gainers are offset by net losers."

      Well, when you talk about share this statement is tautological – i.e. contained within the definition of share. The sum of share is always equal to 100. Therefore any player's gain must be offset by another's loss.

      The problem with overfocus on share – even on profit share – is that it disregards the fact that in a growing market, you may be losing share even while growing. This suggests a new graph: Share X Real Profit (i.e. in actual dollars).

  • Sam doji

    Great Horace as always.

    This looks like a BCG matrix where market share and growth are also the two variables.The BCG however is more elaborate. Can we gain any insight from BCG methodology to improve the vector methodology

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

      I think I can pick the farmyard animals already…

    • asymco

      BCG matrix seems to be a measure of current strength vs. future strength (proxy: growth). My charts are measuring two separate share metrics (units and profits). Since it's a vector space model, you can do some basic math on it. [a third dimension could be growth in revenues, but it gets hard to visualize]

  • westechm

    The BCG growth/advantage matrix is a powerful tool but is often misapplied. Basically it is a cash generation analysis and management tool, The position of companies or business segments are plotted on a market share/growth rate matrix, with the size of the data points representing cash generation. Because Apple is making most of the money in the smart phone business one might say that Apple has already won the war but it is much too soon to assume that.

    Cash cows dominated in slow growth markets. This was Nokia before the iPhone. It was presumed that stars had high growth rates and needed lot of cash to grow. Dogs didn't grow and didn't generate cash. Question marks were in potential growth areas, had little market share and required cash to grow but had no certainty of success (tablet wannabes?). Somehow Apple has overturned this whole scheme because the iPhone is generating unprecedented amounts of cash in a high growth market. I can't think of this ever having happened before in such a large market.

    I think to understand this you must view the iPod, the iPhone and the iPad not so much as product innovations (although they certainly are) but as business model innovations. Along with the product innovations they required changes in how music, apps and data were distributed, when and how subsidizes were appropriate, marketing and sales methods, and on and on.

    I find it hard to picture where this will lead to in a few years but barring a war in China I believe that Apple has become a juggernaut.

    • asymco

      Thanks for pointing me to the BCG growth/advantage matrix. I had not heard of it before. It's something a bit different than what the vector diagrams above show. http://en.wikipedia.org/wiki/BCG_growth-share_mat

      The charts above are not trying to show cash generation as much as a zero-sum transfer of wealth.

      • westechm

        The charts demonstrate the transfer of wealth very well.

        The BCG matrices are often misused. They are all about having enough money to compete, and when they talk about market share it is because unit market share is often correlated with profit market share. That is clearly not the case here.

        One thing that market share normally leads to is moving down the learning curve (thus lowering costs) more rapidly. Because the hand set market is so fragmented none of Apple's competitors has enough volume to compete with Apple, so Apple is probability widening their manufacturing cost gap.

        Who has the cash to stay in this business? On the OS side, clearly Google, but their ability to generate cash depends on the advertising income they generate and whether they are successful here is not clear. They have the cash to last almost indefinitely, but at some point it can become a drain on the company's overall profitability. IF so, they should probably get out of the business.

        On the hand set side, Samsung is also cash rich. They have a chance to be a survivor.

        HTC also has a chance.

        Rimm needs to get its technology act together.

        The Nokia/Microsoft duo has the cash and the market access but Microsoft's inability to grasp the need for a new business model and their heavy handedness probably dooms them in this matket.

        BTW, Microsoft's prime business objective should be to defend their cash cows, and they are actually doing this fairly well. As long as MS generates cash for Bill Gates to use in his charitable endeavors, Steve Balmer is safe.

      • westechm

        Permit me to add that the BCG had also been very active with the experience curve. I suggest looking at:
        http://en.wikipedia.org/wiki/Experience_curve_eff

        as a starting point if you wish to learn more.

        Here again, Apple is way ahead of the herd on the iPod, iPhone and iPad.

      • jmmx

        With all due respect, it does not show a transfer of wealth, rather a transfer of wealth share. In a static market they would be the same, but smartphone market is growing rapidly.

        (BTW – I don't believe you specify in the article whether this is global all mobile phones of smartphones only. Did I miss it?)

  • Viswakarma

    May I suggest posting a video similar to the Gapminder Videos to show the changes. You can see the Gapminder methodology here &lt ;http://www.gapminder.org/>

  • KenC

    I think the x-y axis ratio should be similar between charts, so that the vectors can be more directly comparable. The first is 4:1, the second 5:4, and the last 7:3.

    • r00tabega

      Ken,
      I imagine this is done simply to "zoom" the arrows for minimum wasted space, though your point is valid.

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  • EricE

    Just don't call it a magic quadrant!

  • Sam doji

    Thnx westechm
    I would like to point out that Apple business model is acting as an integrated platform when you look it’s leadership in term of innovation. So in a BCG model clearly Apple is only in the wining quadrant of cash cow (iPhone,iPod and mac computers), stars(iPhone,iPad).

    It’snot easy to predict if Apple will keep it’s competitive advantage of innovation for the distant future but it looks difficult to defend it’s turf when major competitors are only trying to copy with little energy spend on innovation.

    Just look the data consumption that is exploding for mobile devices and yet advanced 4G and higher networks are clearly lagging behind to cope with increasing data consumption.

    Even carriers such as France telecom,deutchtelecom and certainly American giant telecoms are increasingly putting preside on Apple and Google to share the cost of building those future networks.

    I’m pointing those issues because clearly future is mobile yet there is no concerted efforts to face the tremendous demand of
    technological means to support such flood of data tsunami.

  • Martin Knestrick

    Horace … the below intends to put disruption on a different level … Martin

    Apple has a problem … they’re a victim of their rapid and to some, surprising, success … and shareholders are suffering. What can be done about this ??  Maybe it’s time for something truly disruptive.
     
    It’s 1978 … I’m the young buck MBA on the 4 man acquisition team at Transamerica … and we’re acquiring one company a week.  What is Transamerica … in essence a family of all-risks insurance companies which has used the enormous cash flow in the insurance business to finance acquisition of other companies.

    Finally the Street realized we weren’t adding all that much real value to the acquisitions … they started calling us a conglomerate … declared Trans, and the now 20 others like us, were essentially investment portfolios which someone had created … then asked … why would you want to own that portfolio.  Good and fair question !
     
    go back to the year 2000.  Warren Buffet has a problem … how to unlock the value his earnings record deserved.  Berkshire was and is core group of insurance companies … and a larger orbit of unrelated companies he has bought as a “value investor” with the cash left over after setting up proper insurance claim reserves. Buffet’s solution was wise.  He divided his equity into 2 classes of common shares.  You can invest in his insurance assets and the related portfolio management activities in Berkshire class A shares … you can invest in the collection of other companies in Berkshire class B shares.  And the combined value of the two classes is greater than the whole. His combination was hard for stock salesmen and financial analysts to understand and evaluate … and now people could buy one part, the other, or the whole.
     
    Now fast forward to today.  Apple has delivered 12 + quarters of huge growth in their top line and bottom line … CAGR of 30%+ in revenues and 50%+ in EPS.  Yet for the past 2 quarters the stock has gone nowhere.  The increasing earnings have just been valued at ever smaller P/E ratios.  Tracking the P/E itself over time can be depressing … it looks like you’re looking at a company which is substantially under-performing !! not one which is substantially over-performing
     
    The proposal for consideration here is that Apple learn from Warren Buffet … and to unlock shareholder value by creating different classes of equity.  There are several possible ways to do this.  And Apple’s circumstance is far different from Buffet’s. One of the keys to Apple's continued success is their tight linking of hardware to software to services to cloud activities to retailing to supply chain.  Nothing can destroy or disrupt this integration.
     
    Apple has been the Great Disruptor in nearly every market it has entered.  The Mac II  GUI was a huge innovation in computing input … and Steve stole it fair and square from Xerox PARC.  
    That John Scully dropped the rock on his foot and gave this all to Microsoft is not relevant.

    Disruption then restarted … animated movie production with Pixar … then digital music … then mobile phones/devices … now tablets … in process is the glancing light effect on OSX based computers … soon will come the integration of user with cloud  … and I believe soon enough an assault on the largest media bastion of all … high definition video entertainment on large screens in the living room.
     
    Just as they have disrupted these markets … Apple needs to disrupt another … Wall Street.
     
    There are probably several ways to create the share classes.  Mine below is but one possibility.
    ​​Class A shares participate in all of company’s activities … just as today
    ​​Class B shares  participate only in Mac iOS products and O/S software
    ​​Class C shares participate only in Mac OSX products and O/S software
    ​​Class D shares participate only in Applications, App and Store , and cloud activities
    This plan is implemented by a distribution to each existing shareholder of one share in each of the above 4 classes for each common share held today.  This creates in effect a 4-1 stock split, which might be a good thing anyway.  Now those who see the leverage of Apple’s integration can buy the A shares.  Those who think the future is in iOS based products can buy B shares.  Those who like the leverage of increasing market share from it’s small base in the OSX world  of desktops and laptops can buy C shares.  Those who might like to see Apple as a pure S/W play can buy D shares.

    Any way you cut it … I believe all the modeling will support the fact that the pieces will have greater value apart.  I hate to say this, because I’d be nothing but an A class owner.  But this will offer other possibilities who in effect put no value today on the leverage of Apple’s tight coupling of their businesses.
     
    Yes … there will have to be some transfer pricing.  And yes … the story will have to be explained and justified.  I think both are possible. What think thee all ??

    Martin

    • Jeffi

      Brilliant, but unlikely to occur. Apple is not shareholder friendly. They serve their customers and believe their stock will take care of itself. They're wrong, as their stock price/ low valuation proves it. Only a new board of directors could enable such a change.

      • Martin Knestrick

        I much agree Jeffi. See my response to Horace for more

        best
        M –

    • asymco

      This is well beyond my abilities to discuss, but thanks for sharing. The only concern with this plan is that I don't think management is concerned with "unlocking shareholder value." It's not that they don't care about shareholders but they probably feel they don't need to mess around with the company to keep them happy. They probably have a lot more attention for the satisfaction of employees and thus may feel pain from a lack of share upside.

      • Martin Knestrick

        Much agree Horace. They see specifically managing share prices as somehow beneath them. It is the vogue in the tech world to do what they're doing … make great products … keep your people enthused … and the rest will take care of itself. I've sung that tune myself at times.

        And it's been easy so far. Over any period of 10-12 quarters … the stock has done very well. But the game seems to have changed. They're in uncharted territory. But they're good when in uncharted territory vis markets and products. Maybe they'll apply it here … maybe not.

        Eric Schmidt is the bset I've seen at making it appear to the tech community that Google only cared about it's mission, it's products and its customers … while posturing to the Street that they should continue to buy Google when IT was the most valuable tech company on the planet.

        Too bad he had to leave the Apple board. I understand why, and we'd all agree he had to go, but something was lost. Hopefully they will find another who can advise on how one might do the balancing act. We'd all be better served if they did. Steve could probably pull it off … and it might actually be that this is where his health might impact the company. Don't know enough about Cook to know, but he seems like the consummate Mr. Inside.

        And … on the next question … is anybody asking you about a look at what Apple might do with what will be $100 billion in cash by year end ??

        Regards
        Martin

      • Feldur

        Apple has the great good sense to remain focused on what they do well. Diverting their energies towards a "Wall Street financial product" would only dilute their creative resources, leading to disaster.

    • ljp

      That's not how Class B shares work for Berkshire or any other company. Warren Buffett did not want to create Class B to "unlock shareholder value" but to stop unit trusts from packaging Class A shares as "Berkshire Trusts" and marketing them to investors using Berkshire's track record as a selling point.

      The only difference between Class A and Class B shares are the voting rights (Class B holding 1/200th before the recent split) and the limit on value that a Class B share could hold (1/30th before the recent split). Class A shares could also be split into Class B shares by the stock holder but Class B shares cannot be converted into Class A shares.

      For someone who claims to have knowledge of major company acquisitions, I find it strange that you are suggesting that companies divide profits depending on the Class type. There is no company that does this. There are companies that offer Preferred shares but that still is all based on the performance of the company as a whole.

  • asymco

    Nokia does, and I track that but that is not sufficient for comparisons.

  • Hdufera

    Thanks Horace. It is astonishing how consistently profitable the smartphone only vendors (Apple, RIM) are. I wonder how long it would take for the rest of the vendors to realize this trend and change their strategy toward full smartphone adoption as HTC is quietly doing. Also, it would be very interesting to see what happens to Apple's and RIM's profits as the smartphone adoption rate accelerates by other vendors.

  • Bazz

    I'm disappointing that you do not have another category (s) that adds OS to the mix.
    Motorola Nokia and RIM all have OS's
    I'd like to see Google's OS's there also.
    As some do not make OSs.

  • http://www.cyclelogicpress.com Neil Anderson

    Shouldn't the Nokia graph line be red? They are, after all, the burning platform.

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