Categories

Pac-Man

I recently posted a comparison between the profit capture of phone vendors in 2007 and the most recent quarter:

The idea was to show what a disruption looks like. A phenomenon where an entrant with none of the advantages of incumbency takes the profits away from companies privileged with ideal market access and knowledge.

The view of profit shift is the ideal view since it shows the “bottom line” impact and thus the denouement rather than more nuanced sub-plot. However, we don’t always have access to profitability data. Sometimes we only have access to revenue estimates.

Fortunately revenues have a similar story and are often a good proxy. Consider how the evolution of revenue shares occurred in the same market:

Revenues for Apple and HTC combined doubled from 17% to 33% for the third quarter over three years.

Note the similarity between this evolution and that in the mobile games market (data courtesy of Flurry):

The increase of revenues fro iOS and Android games nearly tripled over a two year period. Although we cannot say the same for profitability as the profits are not comparable since they allocated differently between platform and developer depending on platform, we can say that iOS is certainly driving vastly more value than Nintendo.

Sony and Nintendo may take some comfort from their console businesses which have not felt the same impact from mobility, but one wonders how long those franchises will last. Using an iPad with screen mirroring to a large screen TV already shows promise.

 

  • Rick

    For games, why is iOS and Android lumped together? Is there breakdown between the two? I would say iOS gets more revenues than Android.

    • Canucker

      iOS probably does but then there is also a difference in measuring app sales verses advertising income. Flurry was trying to make the point of the emerging dominance of mobile phone/tablet devices over dedicated handheld gaming devices. Would have been interesting to break it down though.

      • Davel

        It would be very interesting. I would say Apple kills Android. How does advertising work in a game? How do you value a pop up or whatever? Payment is hard and specific. The other stuff is confusing and variable.

        Angry birds commented on this when saying they were forced into an ad model. I take it from comments like that that they are on the platform because they have to be and working out revenue comes after mindshare. Not a great financial position to be in.

    • Anonymous

      Because people love Coke and Pepsi. They always want to show the rise of cola, not the rise of a particular company, even if they invented cola.

    • Anonymous

      I too, want to see these numbers broken out as I first saw this report elsewhere with iOS and Android lumped together. Frankly, I think that this is a case of “an interesting use of “and”” that unfortunately allows for Android to ride iOS’s coattails to success thanks to either laziness, stupidity or bias of pundits.

      I wonder if our kind host could devise a way to break the 58% into its components.

  • Canucker

    Apple has only dipped its toes so far into the linkages between TV and iOS. There is little functional need* for an AppleTV aside from acting as a pass through device with an iPad2 and AirPlay and there are many advantages to this compared to the AppleTV remote interface (as seen by the Remote App). Why no apps/games on AppleTV yet? Perhaps Apple is evaluating whether the iPad can substitute as a primary TV interface, not just for controlling Internet content? They’d far rather sell you an iPad2 (or an iPod Touch) than an AppleTV. AirPlay negates the need for any interface on the AppleTV. Outside of the US, that’s the only way to play TV content via an AppleTV. It can simply act as a dumb transceiver for AirPlay. Is that what Jobs meant when he said he’d cracked TV? If the AppleTV needs only to function as a transceiver for iOS devices, then it could likely be incorporated into new TVs for $15 and be an HDMI dongle for $30.

    *There is a current issue with latency over AirPlay – especially for games.

    • Anonymous

      AppleTV ships with many apps: Netfilx, YouTube, Fox, ABC, ESPN.

      • Canucker

        OK, user-installable apps….. from the AppStore. I’ve no use for Netflix, ESPN , etc.

  • Marshall

    Is there a significance to the size of the pies?
    Were the revenues for the 3 Q3 years all about the same – or did it grow?
    Were the profits for 2007 v. 2011 twice as large (eyeballing from the pie size)?
    [ For example, was RIM’s 8% in 2011 really about 3x (in $ terms) their 5% in 2007? ]

  • Henry

    That’s a nice title. The charts look like pac-man and this post is about the entrants eating up the incumbents

    • kevin

      And not only in the phone market, but the portable games market. Great title.

      Horace, why does the URL say “mobile-games-the-denouement” instead of pac-man?

      • http://www.asymco.com Horace Dediu

        The URL slug is an alternate title.

  • Wilhelm Reuch

    Looking at the profits charts you can also note that many Samsung products are just plain copies of Apple products. This make that chart even more remarkable.

  • Eliot

    It would be nice to see these numbers on bar charts so better comparisons between time periods could be made. Pie charts are difficult to compare across time. But they are clever Pac-men. :)

  • Anonymous

    How many months before Nintendo bites the bullet and starts releasing its games on iOS & Android?

    12 months? 6 months? Or maybe 3 months from now, after its impending shocker December quarter?

    • Canucker

      Willingness to adapt to changing market conditions, even when it means going against your core, historical business, is the mark of a forward thinking company rather than a self-deluding company. Adobe is doing this, Nintendo, not so much.

  • Ab

    “A phenomenon where an entrant with none of the advantages of incumbency takes”

    I think you should also add “none of the disadvantages of the incumbant” also. Disruption only works because the incumbant has disadvantages and issues leaving opportunity for a new market entrant.

    • kevin

      What kind of disadvantages does an incumbent have, other than having products currently being sold in that market?

      If there are disadvantages, why did they not hurt Apple when it wiped out its very popular iPod mini with new iPod nanos? Or even now, when the iPad is cannibalizing MacBook Airs, and MacBook Airs are cannibalizing MacBook Pros?

      Not a challenge; I’m just wondering.

      • Ab

        Take Nokia as an example – Symbian was not moving forward fast enough and this affected Nokia reputation as being slow. A culture had set in that couldn’t react fast enough. Time wasted on the wrong issues and reorganizations that lead to departments competing against each other.

        Contracts signed with suppliers which are hard to modify and break. Sunk costs and investments that make it difficult to change your whole strategy.

        As to Apple – it cannibalised its own sales of succesful products – it did not have the bad stigma attached of being slow and unresponsive. Also as to Apple what is the most pertinent aspect is not to think about the product it sells ipad, iphone etc as what we ultimately want but the experience they provide. Yes we buy the ipads etc but its the experience we gain that we value and as long as the experience remains they can change the way it is delivered ie via their goods. What we want is the experience – the ipad, iphone etc is the delivery mechanism.

      • kevin

        Yes, incumbents can develop cultures and/or business models that respond poorly to change. But that disadvantage is not exclusive to non-incumbents; it’s not a necessary condition of an incumbent; it can be avoided. (When a non-incumbent has that same condition, it’s announced product never launches, or it is a brief one-hit wonder.)

        Jobs said Apple is the world’s largest startup, and one implication was that Apple is nimble and it’s focused on accurately foreseeing technological change that leads to better products, better business models, and new markets. Even when Apple is an incumbent in a market.

        So even as Apple was launching the iPod mini in Jan 2004, it had staff beginning to work on music players using flash memory instead of hard disk drives. The iPod nano launched in Sep 2005 – 21 months later. Similarly, I’m sure Apple was also thinking of iPads, when it was heavily investing two years earlier in perfecting the aluminum unibody for its MacBook Air launch in Jan 2008.

      • Ab

        If an incumbent avoided this culture issue it would then be more nimble and able to react and in fact make it difficult for entrants to disrupt. If a non-incumbant has the culture condition as pointed out then it’s not going to be entering other markets in a disruptive manner.

        Apple greatest strength is that it is willing to cannibalise its own profit centres / products before competitors do. Apple strength is in innovation and re-invention – it wasn’t the first to make an mp3 player, music downloads, phones, tablets but it timed its product entry well and answered the problems inherent with the current market participants. Invention can create a new market but innovation can take it over.

        In an interview with All Things D Jobs mentioned he had the idea of a tablet but the screen technology was not developed to the level he wanted so he put it on hold and when it was up to a level he was satisfied with he decided it was better to release a phone before the tablet. So I think he had the idea of a tablet around 2004/2005.

        But to put it bluntly the initial reaction of the ipod, iphone and ipad was that it would fail and current market participants were in denial of its impact – anyone remember Ballmer and OPK comments re the iphone.

      • Anonymous

        “So I think [Jobs] had the idea of a tablet around 2004/2005.”

        Maybe he had the idea in the early 1980s because Apple made a prototype of a flat computer with a keyboard in 1983. There are pictures in the first two links. The keyboard might make it more like a laptop though. They hired an innovation company, now called Frog, to help them.

        1. http://www.wired.com/gadgetlab/2010/01/apple-tablet-1983/
        2. http://designmind.frogdesign.com/blog/from-the-archives-frog-s-early-apple-tablet.html
        3. http://en.wikipedia.org/wiki/Frog_Design

      • Ab

        I think I should clarify I was referring to the ipad and not tablets in general. You can argue that the Newton Tablet and the original Palm PDA were pre-cursors to this and the first visual reference of a tablet was in Star Trek.

        The idea of a tablet in itself is not original.

  • http://profiles.google.com/simon.hibbs Simon Hibbs

    My understanding to now has been that Apple came in and gobbled up most of the profits in the handset market, but the revenue numbers make me doubt that. With such a moderate revenue share clearly Apple is hugely profitable, but if Apple were not in the market to what extent would the other handset makers be any more profitable than they are now?

    Yes Apple commands the premium position selling the most desirable products, and that must suck profits form other companies that would otherwise have access to that market. However the rise of HTC and Samsung compared to Nokia implies that Nokia was going to get knocked off it’s profits perch anyway. A market evenly split between a handful of competitors is inherently more competitive and likely to be less profitable, and that’s what the rest of the handset market, sans Apple, looks like.

    It seems possible that smartphone commoditisation would have squeezed much of the profits out of the other handset manufacturers anyway. It may be that only Apple’s ability to produce ultra-premium products and services, and the unique and unprecedented leverage over carriers has made their current level of profitability possible.

    • Omar Grant

      Samsung & HTC have ios to thank for that, after Google shamelessly copied it when schmidt was on the board right before it was unveiled to the public. I’m not totally against android os, at least iOS was there to pave and show them the way.

    • http://twitter.com/asymco Horace Dediu

      > if Apple were not in the market, to what extent would the other handset makers be any more profitable than they are now?

      Apple is only 5% of the market by units and captures over 50% of the profits. There is no law on the conservation of profits or sales but there is an overall demand for units. Apple’s entry did not cause a vast surge in new phone use–almost all iPhone users switched from another phone. Those iPhones are almost universally more expensive than the phones they replaced. Therefore Apple’s entry was entirely additive to the value of the market. You could say that Apple created value and was duly compensated. Normally this would mean there would be no effect on Nokia or others due to Apple’s entry. They should have kept on selling almost the same number of phones at the same price.

      But that did not happen. Nokia’s prices collapsed and the number of smartphones they’ve been selling has begun declining rapidly. Other, though not all, vendors also suffered the same types of declines. The loss of profits is primarily due to pricing drops. Why did Nokia have to drop prices? Arguably it’s because of Android, not Apple, but Android itself is a result of the shift in user experience that Apple pioneered. So the competitive pressures exerted on Nokia can be traced to Apple’s entry and the shift in profit is at least correlated.

      To prove causation we have to somehow prove that if Apple did not enter then Nokia could have maintained their price and volume growth. We can never prove that but it is certainly something that Nokia itself expected and planned for. They knew the market better than anyone.

      • Ab

        How long you ex[ect Apple to sustain its dominance of profits? Or has Apple created sucha shift in the mindset of consumers that it will retain its profit share? In fact what do you see as the major challenge facing Apple?

      • http://www.asymco.com Horace Dediu

        Apple will do well as long as they make products that offer meaningful improvements. Profit is a measure of unique value add. The challenge for Apple is in finding something that still needs to be improved in the iPhone. Not just improved because they can improve it but improve it because it adds meaningful value for the user. The dimensions of meaningful improvement seem now to be mostly in terms of software and speed of processing. The software is also not just local but also in the cloud. The uniqueness will depend on how they engineer the product and also on how it leverages Apple’s integrated approach.

      • kevin

        Isn’t the dominance of profits simply linked to innovation that is valued by customers? If Apple stops innovating to meet needs in better ways, or to meet additional valued needs through its iPhone, then people will buy other phones.

        In other words, is Siri, iCloud, better camera, faster performance, better reception, Find My Friends, and other enhancements in iOS 5, and other changes in Apple Retail/online stores, meeting user needs in better ways, or meeting additional valued needs today?

      • Ab

        The best way to look at this is how Samsung, Nokia etc still think. They start from the position we need to make a premium device so they make a good phone and then sell it. Profit first, user second.

        Apple decides they want to satisfy a user need and then build a phone / device. They put the user first and then believe profits will flow afterwards and they do.

        Nokia /Samsung etc are too busy making phones for different market segments – low, medium, high and not answering the needs of the consumer in a complete manner.

      • Anonymous

        How backwards.

        Apple’s first motive is profit. Specifically, they only provide a small number of models, and share a lot of components, not even changing the screen dimensions in 4 years. This helps lower the costs for Foxconn in China to produce their phones. They also get better deals buying large quantities of identical parts from suppliers such as Samsung for years at a time, rather than months or weeks like Android.

        Android OEMs have the luxury of customizing their device to meet the needs of a specific segment of the market. For example, Android devices include 3.2″ phones, 4″ phones, 4.3″ phones, 5.3″ phones, 7″ tablets. 9″ tablets, and 10″ tablets. You can get them from the vendor of your choice, with or without vendor customization, with processor, memory, storage space of your choice.

        To say that is not focused on giving the customers what they want or need is disingenuous. And it’s working. Those same companies’ profits are up.

      • Bbjolie

        Google believes they pioneered the smart phone, so it is possible that this could have happened without apple. Yes?

      • http://www.asymco.com Horace Dediu

        Google can believe whatever they want to believe but the smartphone was pioneered by Nokia in 1996.

      • Anonymous

        Of course your question wasn’t answered.

      • http://www.facebook.com/people/Daniel-Myers/100000160937869 Daniel Myers

        I doesn’t help that I considered being issued a nokia company phone as a form of punishment when it happened. Seriously, gimme anything Korean over that.. I may only be anecdotal evidence but I have an iphone anymore,

  • http://profiles.google.com/simon.hibbs Simon Hibbs

    My understanding to now has been that Apple came in and gobbled up most of the profits in the handset market, but the revenue numbers make me doubt that. With such a moderate revenue share clearly Apple is hugely profitable, but if Apple were not in the market to what extent would the other handset makers be any more profitable than they are now?

    Yes Apple commands the premium position selling the most desirable products, and that must suck profits form other companies that would otherwise have access to that market. However the rise of HTC and Samsung compared to Nokia implies that Nokia was going to get knocked off it’s profits perch anyway. A market evenly split between a handful of competitors is inherently more competitive and likely to be less profitable, and that’s what the rest of the handset market, sans Apple, looks like.

    It seems possible that smartphone commoditisation would have squeezed much of the profits out of the other handset manufacturers anyway. It may be that only Apple’s ability to produce ultra-premium products and services, and the unique and unprecedented leverage over carriers has made their current level of profitability possible.

  • Anonymous

    This is unrelated to the topic of this post but I have a retail question. I am returning the Kindle I bought last week at Best Buy. Best Buy will issue me a full refund but who is ultimately going to pay the cost of the return? Amazon or Best Buy? if Kindle is then will be sold as refurbished, who will get a hit Amazon or Best Buy? Just trying to understand how the value chain works here. If it is Amazon then I really have no idea how they planning to recoup their costs. They are already selling those Kindles below manufacturing cost. And that’s before packaging, credit card fees and other overheard expenses are even allocated. Not to mention they are also selling Kindle through 3 rd party channel, so they have to be 25% – 30% retail commission built in as well. Surely customer life time value can’t be that high to justify such subsidy???

    • Ab

      In future I suggest you do a search as there are two articles where if you read the posts as well will give you an idea of what Amazons plans / strategy is.

      http://www.asymco.com/2011/10/26/the-other-tablets/

      http://www.asymco.com/2011/09/30/the-case-against-the-kindle-as-a-low-end-tablet-disruption/

      • Anonymous

        Thanks, I’ve seen these articles before. The point I was trying to make ever so incoherently is that Amazon’s razor and blades business model is not going to work. The subsidy is just too big to justify in the future content sales. The math just doesn’t seem to work.

      • Ab

        Amazon said their current business model runs on low margins as will the Kindle Fire. If they can make low margins work because they have the strategy and infrastructure to do so.

        The maths look tight but so what if its 3% or 5% if it works for Amazon thats a darn high barrier for entrants.

      • Anonymous

        The problem is the 3% margin leaves very little room for error. Kindle Fire will likely make Amazon margins negative, making their strategy unsustainable.

        Also, I am not sure Amazon’s low margins create high barriers for entrants. Amazon participates in many markets. One doesn’t have to lower margins across all the markets to compete with Amazon. For example, what would stop Apple from dropping the 30% commissions on ebooks sold through iBookstore? They currently don’t sell that many books anyway. There will be ZERO cost impact for Apple. Ebooks is Amazon’s core market. The impact on them will be astronomical. And since Amazon’s margins are close to zero already and will possibly turn negative next quarter, the impact from such Apple move would be very painful.

      • Ab

        It seems unless someone has access to Amazons costs re Kindle its all conjecture whether you can say the strategy is unsustainable. Two years down the line we will know until then we can all keep on guessing.

        The ebook market for hardbacks is about 15% of the total book market. Of that what is Apple share of the ebook market? Also more books are available on Amazon than Apple store.

        Amazon may be known for retailing books but it sells far more than that – its key asset going forward is its infrastructure not any particular item it sells.

      • Anonymous

        Would be quite a coup if they quickly became the world’s biggest music retailer. TV shows would be even easier to dominate. And magazines are pretty much a given.

        Doesn’t 7″ seem like the perfect size for browsing Amazon and buying stuff? You can just buy in bed. No problem.

      • kevin

        Amazon profits by being a high-volume, low-margin business.So the first key is not just getting their Kindle owners to buy digital goods but all their other non-downloadable goods, in volume. The second key is those $79 annual subscriptions via Amazon Prime. Note how Amazon has offered free digital video and free monthly book lending to their Prime subscribers (along with the free 2-day shipping for non-downloadable goods).

        If Amazon doesn’t get into selling devices, they risk becoming vulnerable to Apple (or Google) expanding even further into online/mobile commerce for both types of goods, through their ownership of the platform/ecosystem for their respective devices.

      • Canucker

        The fact is that relatively few people return their products so quickly (and thus avoid a re-stocking charge). Hence, even though Amazon runs a razor thin (negative) margin, it makes it up in the healthier margins on sales through Amazon.com (mark-up on book content, etc). The satisfaction rate for Kindles is fairly high. Amazon is making a lot of money overall. It will be interesting to see whether the Fire is similarly successful (it has quite a few limitations but the price is going to be a significant draw). The biggest losers to the Kindle Fire will likely be the other Android tablets.

      • MOD

        After one week they will sell it as new, not refurbished. Best Buy is just a retailer. They will likely follow retail policies as they do with all returned items. If Amazon sold it at a loss to Best Buy, that is end of story. Amazon lost money, Best Buy makes money.

      • Anonymous

        Thanks, but still the Kindle would have to be repackaged and reprocessed. Who would pay for this – Best Buy or Amazon?

    • berult

      The cornerstone of Apple Business Model is ‘organically integrated’, fast-pace, disruptive creativity. It drives profit margin, …sets market share to a self-disruption feasibility threshold. It’s hard to manage for it demands short-cycle creativity bursts …on a template of streamlined familiarity, the iOS ecosystem.

      Qualitative changes in well grounded continuity colors up Apple’s bottom line; a long cycle of structure-wide undermining of value steams up Amazon’s low margin quantitative approach to profit-making.

      In the Amazon Business model, every step on the way to profitability is commoditized, every element transiting through Amazon’s ecosystem morphs into a commodity. From washing machines to Novelists to Dispatchers, from hardware to software to the CEO’s discourse, all must conform to an expansionary  law of diminishing return.

      1 unit at $N = N units at $1; a very dangerous equivalency for creativity’s sake.

  • Eric D.

    On one of the Critical Path podcasts from August, Horace pointed out that whereas the other phonemakers could compete with Apple through the carriers, when it came to tablets, they simply had no channel comparable to the Apple Stores. In the electronic stores and phone shops, there was no built-in incentive for employees to push other tablets over the iPad (assuming they carried it). But Amazon was different — it was its own channel.

    It sure seems to be playing out that way. The Kindles could even be considered a mobile extension of their on-line channel. From their point of view, it’s an infrastructure investment.

  • http://twitter.com/foofoohead Peter Sieburg

    I would love to see a comparison of the growth of the industry revenue compared to the growth of Apple’s revenue in the segment. I wonder how much more apple can grow considering the amount of revenue in the industry. If they are capturing 52% of the profits right now at 4% market share (estimated I know) the industry will have to grow exponentially to support future growth at the rate they are seeing now.

  • Pingback: Why Apple’s iPhone market share actually matters – SplatF()

  • Pingback: Why Apple’s iPhone Market Share Actually Matters | My Blog()

  • Pingback: Why Apple's iPhone Market Share Actually Matters()

  • Pingback: Why Apple’s iPhone Market Share Actually Matters | My Blog()

  • Kristian

    Last graph can now be updated:

    “Piper Jaffray: Android app revenue is 7% of iPhone’s”

    “Apple (AAPL) has about 85% to 90% market share of the total dollars spent on mobile apps.”

    http://tech.fortune.cnn.com/2011/11/21/piper-jaffray-android-app-revenue-is-7-of-iphones/

  • Pingback: Why The iPhone’s Market Share War With Android Actually Matters | SpreeCity Blog()

  • Pingback: Apples Konzentration auf Gewinnquote statt Marktanteile schützt sie vor Kartellrecht()