The phone market in 2012: a tale of two disruptions

May 3, ’12 11:31 AM

Author Horace Dediu Categories Industry

During the first quarter this year HTC, RIM and Nokia all surprised investors with bad news. The effect is evident in the share price of these companies which, in the case of RIM and Nokia is around book value, and in the case of HTC, neared 12 month lows and a 70% drop from peak.

These “misses” in earnings and expectations are on top of the already woeful news from Sony Ericsson and Motorola, which have not had profits for years and LG, which has been borderline since late 2009.

In combination, this seems to imply a dearth of profits in an industry that is, by all measures, booming. Units are up 7% with smartphones up 47%. Revenues are up 20% and overall profits are up 52%. This are exceptionally strong numbers. Few industries can measure growth in double digits.

So if the industry is booming but the majority of participants in the industry are loss making (and surprisingly so) then what is going on? There are two answers: new market disruption and low end disruption.

The new market disruption is the migration of a large number of demanding customers away from phones-as-voice-products to phones-as-computing-products. The low-end disruption is the migration of a large number of less demanding customers from branded phones to unbranded, commodity phones.

The New Market Disruption

The new market disruption is evidenced by the shift of fortunes to Apple and Samsung and away from every other device maker. Here is the profit picture:

Of the vendors tracked (public companies who report mobile phone divisional performance), Apple obtained 73% of operating profits, Samsung 26% and HTC 1% [1][2].

The “share of profit” picture is potentially misleading because it could imply that the profits available are a constant. They’re not. The absolute profits picture below shows how the industry actually expanded available profits by quite a lot. Two years ago the vendors generated profits of $5.3 billion in the first quarter and last quarter they generated $14.4 billion.

Seen this way, the story isn’t so much that Apple “took the profits from the incumbents”. Rather, it’s that Apple created a vast new pool of profits. And one need not look far to find out where they came from: operators. These profits were mostly carrier premiums for the iPhone 4S.

Before shedding tears for operators, consider that although this does amount to a current transfer of profits from carriers, the decision is a popular one. Hundreds of operators have made it. It’s unlikely that they all colluded to be robbed. Indeed, they willingly hand over these premiums because the iPhone ensures a competitive advantage or preserves their customer base from churning. The calculations that go into a decision to range the iPhone are compelling enough that 250 operators made the decision (though, crucially, there are still 250 who have not).

Following this value proposition to its logical conclusion would suggest that the industry is rewarding those who can supply computers-as-phones which preserve the cash flows of what is essentially a trillion dollar data services business. Vendors which cannot offer this solution saw their businesses implode. At least on the high end.

The low end disruption

Simultaneous with this shift of the high end to smartphones-as-app-and-service-platforms came an explosion of growth in unbranded phones. As Apple led and most brands followed the new market, the old market of voice-oriented phones was abandoned to new entrants offering cheap “good enough” phones. Nokia tried to preserve its volumes and margins there but it’s becoming increasingly difficult.

The following chart shows how the “Other” vendors have come to make up about 44% of the market.

Note that although this “feature phone” segment is not growing, it is still a large market (250 million units a quarter). The entrants in this market are numerous (perhaps in the thousands) and they are offering white label and unlicensed knock-off products. They are also offering unregulated (i.e. without IMEI numbers) products which are technically illegal and sold mainly in underdeveloped countries which have no incentives to enforce regulations.

This is a consequence of feature phones reaching the point of being “good enough”. The feature set and quality are adequate for voice, text, games and even media playback and are priced at $30 or less.

This commoditization of the low end is pressuring what would normally be the fallback cushion under an underperforming smartphone business. The crisis for the incumbents comes from not only being unable to shift to the new market as fast as needed but also from not having cash flows from a low end that was thought to be sustaining.

This combination of two disruptions is why we see an explosively large and growing market failing to reward all but two of the participants.[3]

—

Notes:

You can download, view and interact with a motion chart for the industry data here. All data is sourced from company filings except for some estimates where data is missing.
Operating profits are sales minus cost of sales minus operational expenses attributed to the business. When not available, opex is estimated as a percent of total in proportion to sales. Note that operational income excludes taxes, depreciation and other capitalized costs.
We cannot say that the thousands of low end entrants are unprofitable. They are probably enough profits to sustain them and even to attract more entrants, but we have to also recognize that there are likely to be very low margins.

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obarthelemy

I’m not sure how you can be so certain Apple’s profits come from carriers. Since both Apple and the carriers get their money from customers, I’m thinking Apple’s -and the carriers’- profits both come from customers. And since iPhone contracts are often more costly than other contracts, I’m not sure operators make less money on iPhone than other phones. Are people getting cheaper contracts to afford a better phone ? Especially when the facial costs of both usually move in tandem (bigger contract = cheaper phone) ?

The cost of phones is obfuscated by subsidies. It’s amazing how expensive “free” phones turn out to be after 24 months on a $30 more expensive contract. It has been shown time and again that customers are not that good at realizing that $200+24x$60 is more than $500+24x$25, or even than $300+24x$25. Several studies have shown that “subsidized” phones on a more expensive contract end up costing several times what a bought/leased phone + bare contract cost, especially once the opportunity cost of being locked in is taken into account. Most people don’t seem to realize that though, or to care.

In my country (France), things have been somewhat moving towards non-subsidized phones (sometimes sold at the same time as the subscription, with a same-length credit, but still) and no-commitment contracts. This will isolate the price of phones as a separate issue from contracts’ prices and features.

I’m guessing better price visibility will hurt premium phones, at least as a % of the market, especially since though the market is growing, it is now reaching less high-tech/high-end segments that might be less ready to pay big bugs for lots of features or performance (though not for style/brand image ?). The flip side of a basically unlimited voice/txt/data contract going down from $100 to $30 in France, is that people who are willing to pay only $30, not $100, for a contract might also be less ready to pay $500 instead of $200 for the accompanying phone.

I’d be interested in seeing a premium vs mainstream vs budget smartphone breakdown and history, correlated with contract prices and market penetration. MS going rather low-end with Windows Phone must have a reason.
- http://www.asymco.com Horace Dediu
  
  Carrier short term profitability decreases when they introduce the iPhone. It’s a matter of pain now to obtain benefit later.
- http://twitter.com/handleym99 Maynard Handley
  
  ” has been shown time and again that customers are not that good at realizing that $200+24x$60 is more than $500+24x$25, or even than $300+24x$25. ”
  
  I have no idea what life in France is like, but in the US we are not given the option to choose “$500+24x$25”, so, no, I don’t think it actually has been shown that “customers are not that good at realizing…”.
  
  All that has actually been shown is that, in the US, carriers very much prefer the “$200+24x$60” model, and customers have no choice in the matter.
  - ftaok
    
    I think the main reason for the differences in plan availability between Europe and the US is frequencies/technologies. In Europe, they all use the same frequencies and GSM. In the US, all 4 carriers use different tech (GSM or CDMA) and frequencies.
    
    This allows a typical European customer to move from one carrier to another. All they have to do is swap a SIM card. It’s much more complicated in the US (thank the FCC for that).
    
    Another reason is that in the US, the consumer has been trained to pay a small amount over a long duration. We’re a consumer base that loves subscriptions and leases. All we see are the low up-front cost … we’re blind to the total overall cost. Not sure about the culture in Europe, but I’d bet that their financial mentality is different.
TLonnegren

Interesting that HTC/Nokia/RIM are the only players in the smartphone market that are only in the smartphone business. For all the other players, smartphones is only one part of their business and supporting the rest -when Apple sells more iPhones, that will drive the sale in iTunes. Also interesting that Motorola was aquired by Google and Sony Ericsson by Sony, a clear trend towards an integrated business model, where the actual devices, the HW, will only play a supporting act.
- ftaok
  
  Not exactly true. I believe Nokia is a major player in the wireless gear industry. They bought out Siemens telecommunications gear division a few years ago, I believe. And I think RIMM is also involved in that type of business as well.
  
  As for HTC, aren’t they a device maker for other brands as well? Kinda like a Foxconn or Pegatron.
Harry Kek

Smartphones are relatively expensive as they cost just as much as a home refrigerator !

Now that Nokia and RIM are mortally wounded and Nokia has deep skills, knowledge, reach and crucially, a focussed leadership with execution capability (but with weak cash flow); I expect it to bring new price levels for smartphones and featurephones and these devices will very affordable to most people such that subsidies by operators are no longer necessary/attractive. Nokia’s design & hardware capabilities can certainly spruce up the tablet offerings and rejuvenate the company’s fortune and at the same time, SHIFT down the pricing levels and widen the capabilities of tablets beyond what is currently the norm.

We are at the verge of a new industry or market.
- http://kaizenity.blogspot.com/ FalKirk
  
  “Smartphones are relatively expensive as they cost just as much as a home refrigerator!”-Harry Kek
  
  I take your point but smartphones – which are actually pocket computers – are easily as powerful as desktop computers were just a few years ago. And since smartphones are easier to operate and since the App economy puts a seemingly infinite number of free and inexpensive applications at my beck and call, I think your original statement should read:
  
  “Smartphones are relatively inexpensive as they only cost as much as a home refrigerator!”
http://twitter.com/wifidave Dave Wright

Good post and comments here.

Not sure I’d say that the operators are “willingly” paying the iPhone premium, in fact I’d describe it as “grudgingly”. Apple (with some preparation from RIM) has created this whole “mobile computing” market. The operators aren’t really thrilled about what this is doing to their business models and majority revenues from voice and messaging, but they can’t put the genie back in the bottle. Witness the recent comments from Verizon about the need for a 3rd device option (WinPhone), and allegations that European operators were colluding to break the grip of Apple, and to a lesser extent Google, over the smartphone market.

I tend to agree with the points obarthelemy makes above. I assume that Apple must now be thinking about how to reach the 50% of the population who can do the math, or simply cannot commit to paying $100+ monthly for a smartphone data plan. VoIP and Wi-Fi would seem logical ways to expand their device and services businesses into the budget conscious area of the market. I also think there is a large market for an unsubsidized iPhone (perhaps financed) tied to a low cost Wi-Fi centric data plan (republic wireless or Free Mobile as examples). IMO this would be the logical move by Apple to sustain iPhone growth as the high-end segment becomes more saturated.
- http://kaizenity.blogspot.com/ FalKirk
  
  “Not sure I’d say that the operators are “willingly” paying the iPhone premium, in fact I’d describe it as ‘grudgingly’.”
  
  I take your point, but by “willingly” I think Horace was merely pointing out that no one was forcing them to subsidize the iPhone.
  
  Further, if you’ve been keeping up with recent mobile news in the U.S., you know that Sprint was more than willing to acquire the iPhone – in fact, they were desperate to acquire the iPhone – and that T-Mobile would sell their soul to do the same.
  
  That sounds an awful lot like “willing” to me.
  
  Of course, like most of us, once the carriers have what they once so desperately desired they no longer wish to pay for it. Such is life. So long as the benefit of the iPhone outweighs the cost of the iPhone then it does not much matter whether they pay for the iPhone “willingly” or “grudgingly”. All that matters is that they’ll continue to pay.
  - http://twitter.com/wifidave Dave Wright
    
    No argument about the operators’ preference to subsidize the iPhone with a 2yr contract versus no subsidy and no contract. But I think it’s safe to say that they wish they could get the iPhone at the same price points they are paying for Android handsets. They’re giving Apple a much larger percentage of that 2 yr revenue stream than they are to other vendors. That was the point of my “grudgingly” comment. It only matters in that it means they will actively pursue alternatives.
    
    Sprint is fighting to remain relevant, so I’m not sure that I’d hold it up as a typical example. We’ll see if getting the iPhone saves them, or exacerbates their issues. But again, I’m not disagreeing that the iPhone has become virtually a “must have” for Western operators.
  - http://kaizenity.blogspot.com/ FalKirk
    
    “I think it’s safe to say that they wish they could get the iPhone at the same price points they are paying for Android handsets.”-Dave Wright
    
    I understand and respect your point.
    
    “Sprint is fighting to remain relevant, so I’m not sure that I’d hold it up as a typical example.”
    
    Again, I understand and respect your point, but I have a different take. I see Sprint as being emblematic of what is going on with the carriers.
    
    Verizon saw that AT&T was surpassing them with the iPhone so they acquired the iPhone for themselves. Do you think that wasn’t a bitter pill to swallow? The Father of the “Droid” now sells more iPhones than all their other phones?
    
    Sprint saw that they had no chance without the iPhone so they acquired it despite the costs and the risks. T-Mobile is about to do the same. 5 of the regional carriers just signed on too.
    
    None of them want to pay the higher subsidy. They just all know that they have to if they want to survive.
  - ftaok
    
    “But I think it’s safe to say that they wish they could get the iPhone at the same price points they are paying for Android handsets. They’re giving Apple a much larger percentage of that 2 yr revenue stream than they are to other vendors. ”
    
    Ahh, but of all of the smartphones, only the iPhone is able to keep it’s subsidized price for an entire year (or more). Android/BB/WinMo phones are sold to the subscriber at lower price points shortly after they debut. The US carriers will sell an iPhone at $200 for at least a year.
    
    Now, I can’t say that the carriers are paying the Sammys, Motos and RIMMs the same unsubsidized price for the lifespan of a particular model. It would be interesting to see the price a US carrier pays the vendor for a flagship Android phone over a period of one year.
- melgross
  
  I don’t agree. I think the operators are very happy with Apple. Before the iPhone, smartphones were a very small percentage of users, about 10%. So most customers were using voice, with occasionally the purchase of small amounts of texting. There were the very limited data services for feature phones, but very little.
  
  The iPhone led to an explosion in smartphone purchasing. This led to extensive purchasing of data required contracts, texting, etc. this led to much more expensive contracts. Now, smartphones are more than 50% of new phone purchases. That number is still rising. As Tim Cook recently said, at some point, all phones will be smartphones.
  
  The carriers are ecstatic over this! They grumble because Apple took away their control over phone features. Remember when you couldn’t use the Bluetooth some phones had? Or WiFi? Remember having to buy ringtones for $2.75 to $4? Remember how they had to be renewed every 6 months to a year? All that’s changed due to Apple. So some things the carriers Rent happy about. So what? Should we care? Of course not. They were restricting the manufacturers from coming out with better phones. That hurt us. I vote for us rather than them.
  
  Another reason why manufacturers aren’t doing as well is because Apple forced everyone to give free OS upgrades. That never happened before. We had to buy a new phone for that. So if carriers and other manufacturers aren’t happy with that either, tough!
  Apple has benefitted us a great deal with better phones, a better OS, and many really cheap, of free apps. I used to pay an average of $20 apiece for Palmphone apps. Now iPhone apps average less than $2.
  - http://wmilliken.livejournal.com/ Walter Milliken
    
    I think you underestimate the carrier control-the-customer mindset, at least in the US. They still remember what being a monopoly was like, and they’d *love* to get back there.
    
    Yes, the carriers wanted everyone to buy their expensive data plans, and they got it. But what they really wanted was for everyone to buy them and *not use them* like existing “smart” phones. Somehow they overlooked the fact that most people don’t want to pay for things if they’re not useful, but they *will* pay if they use them. I believe this failure was at the root of the “unlimited” smartphone data plans — data use was originally self-limiting because the phones were so bad. Once people actually could use a lot of data, “unlimited” wasn’t financially (or technically) viable for the carriers.The other deadly issue with Apple, from the carrier viewpoint, is that Apple owns the customer and the endpoint device, not the carrier, and this has turned the carrier into a commodity bitpipe. The carriers already went through this with landline service, and they know where it leads, and they *don’t* want to go there. I don’t think they have a choice, but they’ll keep resisting as much as they can. Right now, in the US, they’re partly saved by the fact that phones aren’t very interoperable between carriers, so customers are semi-tied to one carrier. But the iPhone is the same on all the carriers, and Apple makes it easy to migrate from one iPhone to another. That’s *not* in the carrier’s interest. Android is similar, though there’s more room for carrier shenanigans there.The major carriers have, so far, managed to force all smartphone customers onto expensive postpaid plans. And the fact that data roaming isn’t evenly accessible to smaller carriers (the way voice is required to be) keeps the riff-raff out, for now. The FCC is poking at this issue a little, we’ll see what happens.The only thing that’s saving us customers at the moment is one of the few upsides to oligopolies: they pretty much *have* to copy one of their number that demonstrates a successful new strategy. In this case, that led to the other carriers having to copy the iPhone once AT&T opened Pandora’s box and the customers saw Hope in there (in a rare working of karmic justice, the telcos got all the nastier stuff in the box this time). They’ve tried to copy only the bits they wanted, and leave out the bits they didn’t, but it didn’t work. They had to actually have the iPhone from Apple, substitutes weren’t good enough for enough customers.
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MattF

It’s interesting that only one Android phone manufacturer is really making a significant profit, and according to the charts it’s a relatively recent development. What’s Samsung doing right?
- poke
  
  I think part of the story is branding. Everybody knows “Galaxy.” Few people know what the HTC or Motorola equivalent is. I think Verizon’s “Droid” branding and Google’s “Nexus” branding were destructive to participants. Overall Android (in the US at least) has been a huge brand mess. Samsung emerged relatively unscathed. They’ve produced several “hit” phones under the “Galaxy” brand.
  - vatdoro
    
    I also think there is something to the fact that Samsung copies design, UI, marketing material, packaging, chargers, etc from Apple.
    
    I don’t think it is the only reason for their success, but I believe it is part of it. It’s not coincidence that the one company who is slavishly copying Apple is the only other company having great success in the phone market.
- http://www.asymco.com Horace Dediu
  
  During the Windows Mobile era only one vendor made significant profit (HTC). There may be many factors at work but rate of product development and distribution power seem to be necessary conditions.
kankerot

Apple forces operators to sell a minium number of phones so the only way they can do this is offer bigger subsidies on the Iphone. This larger than average subsidy distorts the price of the Iphone and makes it cheaper than it would be and thus as its a normal product if price falls demand increases.

Operators are tied into stupid metrics like ARPU which analysts use to assess performance. Once way of maintaining or raising this is by bundling phones with contracts. If they unbundled phones and contracts then ARPU would fall but how this reflects on profits depends on how much subsidy they were providing.

Operators fear is that they will become “dumb Pipes” – so to delay this they bundle phones with contracts as a value add. As people are not too clever in working out how things cost over time they can only assess costs right now. They also are affected like the financial markets with the “herd mentality” – so if one player makes a decison others will follow suit.

If you look at the recent financial mess caused by the financial markets leading to huge losses and bailouts because they all colluded to make the same mistake. At the moment the market is expanding and it seemed that there would be no end in sight for this but when it corrected it was fast and harsh. I wonder when the day of reckoning will come for smartphone subsidies.

If you track the increase in ARPU vs the increase in profits what does that show you as to the impact of smartphones on the profitability of operators?
- r.d
  
  Carriers are afraid of pre-paid more than subsidies.
  NPD’s latest numbers are 61 percent Android, 29 percent iPhone — not from carrier data but from a survey of 13,000 people.
  This means that most of Android sales is coming from pre-paid grey market chinese phones just masquerading as Android.
  This is the reason carriers want to go with Windows Phone this fall.
  Subsidies is the least of the problem for carrier on their way to be dumb pipe.
  Apple has 100 billion to subsidize and has direct relationship with customer if
  carriers really want to play rough.
  - kankerot
    
    Can you expand on your logics as I can’t seem to fathom what point you are making re Android sales are grey market pre-paid. Also NPD numbers are for which geography?
    
    If carriers continue offering subsidies they will indeed become the dumb pipes they are trying to avoid.
    
    When I choose an internet provider I dont go for the cheapest I look at a number of factors even though on the surface of it they provide a homogenous product. The word “dumb pipe” is not as dumb as most of the analysis that goes with it. it’s like the term “post PC” is just as dumb and gets repeated ad infinitum.
    
    Carriers have a direct relationship with their customers its just that they have been too conservative and lack creativity to expand on it.
  - kankerot
    
    Can you expand on your logics as I can’t seem to fathom what point you are making re Android sales are grey market pre-paid. Also NPD numbers are for which geography?
    
    If carriers continue offering subsidies they will indeed become the dumb pipes they are trying to avoid.
    
    When I choose an internet provider I dont go for the cheapest I look at a number of factors even though on the surface of it they provide a homogenous product. The word “dumb pipe” is not as dumb as most of the analysis that goes with it. it’s like the term “post PC” is just as dumb and gets repeated ad infinitum.
    
    Carriers have a direct relationship with their customers its just that they have been too conservative and lack creativity to expand on it.
  - melgross
    
    Except that NPD’s metrics are wrong. You can’t survey a number of people to come up with a number like that. All it means is that in the group that agreed to be part of the survey, that percentage equaled the numbers they published.
    
    But let’s look at the real numbers. Verizon announced that of all the new phones bought for their network, 52% were iPhones. AT&T announced that 78.5% were iPhones, and Sprint released numbers that give about the same percentage as Verizon. Remember that neither Sprint nor Verizon sell the 3GS which was the third most popular phone on AT&T, and T-Mobile doesn’t sell the iPhone at all yet. According to Forrester Research, those three companies that sell the iPhone comprise 80% of the cell phone customers in the US. That means that the last quarter, the iPhone was actually well over 50% of all cell phones bought in the US. That’s a startling number.
    
    What will happen late this year when T-Mobile will likely get the newest model, and the others will have three models, beginning with the 4?
  - melgross
    
    Except that NPD’s metrics are wrong. You can’t survey a number of people to come up with a number like that. All it means is that in the group that agreed to be part of the survey, that percentage equaled the numbers they published.
    
    But let’s look at the real numbers. Verizon announced that of all the new phones bought for their network, 52% were iPhones. AT&T announced that 78.5% were iPhones, and Sprint released numbers that give about the same percentage as Verizon. Remember that neither Sprint nor Verizon sell the 3GS which was the third most popular phone on AT&T, and T-Mobile doesn’t sell the iPhone at all yet. According to Forrester Research, those three companies that sell the iPhone comprise 80% of the cell phone customers in the US. That means that the last quarter, the iPhone was actually well over 50% of all cell phones bought in the US. That’s a startling number.
    
    What will happen late this year when T-Mobile will likely get the newest model, and the others will have three models, beginning with the 4?
  - Ted_T
    
    “Except that NPD’s metrics are wrong. You can’t survey a number of people to come up with a number like that. All it means is that in the group that agreed to be part of the survey, that percentage equaled the numbers they published.”
    
    This doesn’t make sense — that is how surveys, including political polls work. You survey a “random” group of people — in the case of political polls typically 500 to 1,500, and a well designed poll has a margin of error of between 4% and 2% depending on the sample size.
    
    Now I have no love for market research firm surveys and especially their faux accurate predictions, but what exactly is wrong with NDPs metrics? The only potential contradiction you point to is the Forrester Research claim the Verizon + AT&T + Sprint == 80% of the customers. Do T-Mobile, plus all discount and regional carriers really account for only 20%? I don’t know, and you don’t explain why Forrester is credible (George Collony, their CEO has been on “Apple is doomed” tour recently) and NDP is not credible.
Walt French

Masterful display of info, yet again.

I think the notion of Apple taking profits from carriers is overstated, though.

With only general impressions to go on, let me guess that the wireless data services market must be huge compared to 5 years ago— twenty- or maybe one-hundred-fold increases, no? Apple could almost be credited with creating that market, or at least causing it to explode in popularity versus the little scraps of SMS or whatever other non-voice revenues the carriers got.

Apple has been quite happy to take a good share of that revenue, but as you say, the carriers are happy to use Apple to gain the rapid increase in revenues, as well. It’s just that, like any business, they want more. If they can get the revenues with less sharing to Apple, wonderful!

I don’t claim to understand Google’s revenue arrangements with carriers, but I *have* seen many scraps that suggest Google is happy to let the carriers take the lion’s share — maybe all — of data revenues, letting the manufacturers pick up the smallish subsidies, and even to share much of their app revenues. In that case, the carriers would be strongly incented to push Android phones over Apple. But the fact that Apple sells so well indicates carriers’ limited ability to influence customers’ choices.
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NEDentist

So you say that 250 carriers have already collueded(as the US DOJ would say) to take a financial hit to bring the iPhone to consumers. What is stopping the other 250 from jumping on the bandwagon- being as all their competators are? Also, what would happen to the iEcosystem if more of China and just a portion of the other 250 carriers start selling the iPhone? Have you ever run those models?
- allaneq
  
  That isn’t collusion.
- http://www.asymco.com Horace Dediu
  
  The expansion of the iPhone carrier channel may have to do with the initial hurdles. It’s not just the subsidies but the need to pre-order a large batch of phones which ties up a lot of cash or credit. Some operators might find the hurdle too high.
  - http://twitter.com/regjo Jorge Santos
    
    Some operators simply cannot carry the iPhone because it operates on different frequencies from their networks’. That is the case with several low-cost carriers in Canada.
- melgross
  
  Colluded? I hate to mention this to you, but in the US, and in many other countries, carriers have been subsidizing phones for years before Apple’s phone came along. Many customers prefer this as they don’t have to pay the full price of the phone up front. It’s more like a lay-away plan. They would rather pay a bit more each month for two years then spend $650-$850 all at once.
http://www.facebook.com/karl.d.thomas Karl Thomas

You said that 250 carriers decided to subsidize the iPhone versus 250 who have not. Does that mean that the other 250 don’t carry the iPhone or 250 don’t subsidize it or a combination of both? It was my understanding that subsidizing the phone wasn’t as prevalent in most of the world as it is in the U.S,
- http://www.asymco.com Horace Dediu
  
  These are rough numbers. Apple cites about 250 operators are ranging the phone. They don’t state they they are all subsidizing but a vast majority are. I used a rough estimate of 500 total addressable operator market to get the 250 that don’t. Subsidization is more rare outside the US but the iPhone has compelled some operators to do more of it even if they usually don’t.
  - KirkBurgess
    
    The average amount of subsidy on the iphone likely varies widely across countries also.
    
    I presume part of apples carrier negotiations in the US was the final cost to the user, seeing as there does not appear to be any variation across all 3 major carriers?
- http://twitter.com/handleym99 Maynard Handley
  
  Remember iPhone still appears to be, after all these years, supply constrained. Which means that it doesn’t make sense for Apple to even bother negotiating with telcos who cannot deliver highly profitable customers. Apple has only just made a big effort in China, and as far as I know they have yet to make a similar big effort in India.
  
  So that’s part of it.
  The other part of it is that, at least in the US, your MetroPCS, your Republic, your Cricket are targeted at very low-end customers — once again not the customers Apple is interested in serving. At some point Apple may get there (and at some point second-hand iPhones may get there via some alternative scheme that involves people dicking around with whatever locking schemes these carriers use) but in a supply-constrained world, these carriers are clearly low-priority targets.
http://www.sequence-omega.net Anthony

The problem with the transfer of profits from the carriers to Apple is that it leaves the carriers ill-suited to upgrade their networks in the manner needed for the explosive smartphone growth without resorting to raising prices. AT&T did this earlier this year, adding $5/mo to their data plans. If companies like AT&T and Verizon are sending their entire data plan fee to Apple as subsidy ($25/mo * 18 months is $450) voice and SMS fees are all thats left to pay for network upgrades.
- TheEternalEmperor
  
  It seems to be that built into the statement ”
  The problem with the transfer of profits from the carriers to Apple is that it leaves the carriers ill-suited to upgrade their networks in the manner needed for the explosive smartphone growth without resorting to raising prices. ” is that, in the absence of this “transfer”, the carriers would voluntarily upgrade and/or not raise prices.
  
  I don’t buy it. Prior to the iPhone, what incentive did they have to upgrade their networks? Very little, for the need wasn’t there. And with 3 carriers holding 80% of the US market, those carriers had little incentive to do anything BUT raise prices. Did the global carriers treat do it different? Not judging by the LTE rollout, it seems.
  
  All you have to do is look at SMS. Sending 140 characters of data tucked in the free space of packets of data amounted to billions of dollars. This was a de facto price hike because it costs virtually nothing to send, but customers were charged thousands of times that.
  
  So I don’t find the implication that they would NOT raise prices but for this “transfer of profits” a compelling one.
- http://www.asymco.com Horace Dediu
  
  The reason carriers are subsidizing the iPhone is because it makes more money than not having the iPhone at all. The transfer of profit is a loss of profit for the carrier in the short term in exchange for a boost over the life of the contract. It’s essentially paying $400 up front for $2000 paid back over two years. The $400 up front does hurt margins in the near term however.
  - Rob Scott
    
    I do pricing (both Prepaid and Postpaid) for a carrier. Its very rare that we actually lose money on hardware/devices. The “subsidy” is typically recovered in 4 – 8 months. If there is a subsidy cost to carriers, it is opportunity cost, that is, how much money we would have made if the $450 was sitting in the bank. Not much.
    In short, the iPhone is a gravy train. Low churn, high ARPU, high ASPU and highest contribution margin…
  - Simon Cohen
    
    And yet I’d read that at least in the U.S., mobile operators are not seeing the increase in ARPU from the iPhone that they had hoped. People are being careful with their data consumption. So can this trend continue?
  - http://www.asymco.com Horace Dediu
    
    I’d love to see the data. The iPhone in the US is sold with pretty clear pricing plans. If users are using less data that would imply they are less of a burden on the network while paying the same amount.
  - http://www.asymco.com Horace Dediu
    
    Overall data consumption is showing in a graph linked here: https://twitter.com/asymco/status/198321408328220672
- http://wmilliken.livejournal.com/ Walter Milliken
  
  AT&T and VZ data plans are now $30/mo for the typical plan (3 or 2GB/mo), and the contract is 24 months, so your calculation should be $30/mo*24 mo=$720, of which Apple is getting around $450 for the 4S and 4. So the carriers are getting about $270 off just the data plan if the iPhone user upgrades every two years, or about $135/year.
  
  AT&T had about 41M postpaid smartphone subscribers last quarter, so they would be clearing $5.5B/year off of just data plan revenue if *everyone* bought iPhones. AT&T’s capital expenditures appear to be about $20B/year, so this would be about 25% of their capex. However, you also have to include the (required) voice plan in AT&T’s income, another $30/month, giving them another $360/year per smartphone user, or another $14.8B/year from *just* the smartphone users. (Don’t forget the LTE buildout has a lot to do with more efficient voice service as well as data, since it uses VoIP converged voice. So I think it’s legitimate to include the voice revenues here.)
  
  In other words, even *after* Apple’s cut, and assuming *every* AT&T smartphone cost $450 in subsidy every two years, AT&T could fund their entire capex budget from just their prepaid smartphone plan income, without add-ons like messaging plans ($20/mo in pure profit), unlimited voice calling (close to pure profit), and semi-bogus “government-mandated fees”.
  
  Of course, there are other costs besides capex, but there are also 60+M other AT&T wireless customers we haven’t even discussed yet, plus other business lines (some of which also contribute to capex spending), and presumably they contribute to covering expenses as well.
  
  Ultimately, I think the obvious answer is that iPhones are clearly more profitable for carriers than other phones, or otherwise they wouldn’t be lining up to pay the larger subsidies. The US telcos in particular are very loathe to give vendors *any* profit margin unless they absolutely have to. The fact that Verizon, in particular, caved to Apple’s way to doing things is *very* telling.
  
  Would the carriers like to keep all that extra profit for themselves? Sure. They’d also like to go back to being a monopoly and controlling prices and charging for every little extra service they allow your phone to provide. That doesn’t mean they should get it…
  - ftaok
    
    “AT&T and VZ data plans are now $30/mo for the typical plan (3 or 2GB/mo), and the contract is 24 months, so your calculation should be $30/mo*24 mo=$720, of which Apple is getting around $450 for the 4S and 4. So the carriers are getting about $270 off just the data plan if the iPhone user upgrades every two years, or about $135/year.”A solution to this problem for the carriers is to mandate 3 year contracts. It wasn’t long ago that cell phone contracts were typically one year. Then somewhere along the line, the typical was two years. If all the carriers started with 3 years, then they’d get an additional $360 per phone per year.Of course, if they colluded together, that may draw the attention of the DOJ.
  - Darwinphish
    
    3 year contract are the norm in Canada. For an iPhone you are looking at a minimum of $50/month plan (voice & data) to get a $500 subsidy from one of the 3 major carriers.
  - http://wmilliken.livejournal.com/ Walter Milliken
    
    The US plan prices are about $70 on the low end, so the total contract price is close to your 3-year number. ($70*24=1680, $50*36=$1800).
    
    I could personally live with a 3-year contract, though obviously I prefer two just for flexibility. I kept my iPhone 3G for three years anyway, handing AT&T an extra $200 or so in pure profit.
    
    I also note that the US carriers charge an “upgrade fee”, $36 for my 4S on AT&T. Since that’s entirely a trivial computer database operation that costs almost nothing, that’s pure up-front profit they can apply to the subsidy. (Granted, there are some potential customer support issues that might arise during the switch and actually require an expensive human intervention, but I didn’t have any with my iPhone, and I suspect they’re not common.)
  - Darwinphish
    
    This illustrates one of the market distortions caused by the subsidy system. There is no financial incentive to the end user to stick with the device at the end of the contract. How long would user keep using their devices if their monthly fee dropped by $20 after 2 years?
  - LTMP
    
    I’m with Rogers in Canada and I’ve been on a two year free upgrade cycle for my iPhone (free if I go with the base model).
    
    My contract used to be three years when I was with Telus. I switched to Rogers to get the iPhone 3G, so its possible that I got a special deal.
  - Darwinphish
    
    The subsidy on the 3GS is only $375, so carriers have more flexibility with contracts and pricing. Also, its not uncommon for people on 3 year contracts to get a hardware upgrade before the 3 years is up.
  - LTMP
    
    I upgraded to the iPhone 4 after two years with my 3G. If I’d gone with the 8GB model, it would have been free.
    
    I’m due to upgrade again after the next iPhone release. I really hope the free upgrade won’t be to the 4S.
- melgross
  
  You’re not getting it. All the profits from the carriers are not going to Apple. There’s a lot of confusion over this. The carriers have explained this several times over the years. Apple buyers have much less churn. That’s expensive for the carriers. Apple buyers get more expensive contracts, giving the carriers more profits over the two years of the contract.
  
  It was pointed out recently that the cost of the subsidy of the iPhone is made back by the carrier in 8 months. The rest of the two years is left with them sucking in the higher profits.
  
  Don’t feel sorry for them.
- kevin
  
  It would even be worse if the carriers sunk a lot of money into upgrading their networks but then couldn’t get customers to pay anything to use it. That’s where AT&T and Verizon were in 2006-2007 with 3G. AT&T took Apple’s offer to entice customers into paying $20/mo for a data plan. Verizon didn’t and was left scrambling the following year, first with BBs and then with Android; in each case, willing to provide better subsidies and huge marketing spends.
JohnDoey

There is no smartphone market. It is an iPhone market. If Apple were on all the same carriers as Samsung, then Samsung would have made no profits either. Samsung is surviving just by making house brand iPhones for carriers who don’t have real ones. Everybody else is already dead.
- TheEternalEmperor
  
  Great point! So far in head to head competitions, iPhone is laying waste to all comers. Imagine the carnage of it was on the same carriers as Samsung.
  
  These guys are all selling phones and losing money. Not sustainable.
- http://wmilliken.livejournal.com/ Walter Milliken
  
  I wouldn’t go nearly that far — in the US, the recent carrier sales data suggests Apple is selling a little over 50% of the smartphones, on carriers where both iPhones and Android phones are available. Samsung appears to be getting a lot of the Android sales now, judging by the top-ranked devices. So they’re fairly competitive to Apple where the footing is equal, and I don’t see much reason for that to change.
  
  There is, however, a legitimate question about how much extra market, and profit, Samsung is currently getting due to wider distribution than Apple.
  - capnbob67
    
    It seems that it is 63% of smartphones on carriers that have both… which may or may not amount to about 50% of all US smartphones (depending on the share of the market held by the big 3 carriers).
    
    http://www.businessinsider.com/apples-us-smartphone-marketshare-versus-android-for-q1-2012-5
    
    I also call shenanigans on the made up Samsung unit numbers. The estimates (which are all that exists) range from 32M to 44M. Regardless, it is obviously at least a comparable number to Apple. With a profit share of about 35% of Apple’s, it certainly points to the significant mix of low end phones in the Samsung units. This talks well to how Samsung IS converting its Dumbphone users to smartphones, but it also comments on the scale of the positive results of the low-end disruption – that if you convert the low-end, you make low-end money.
  - melgross
    
    The average percentage in the US where iPhones are sold is actually 62%. If we include T-Mobile, that drops to the mid 50’s. But there are still, according to t-Mobile, over a million iPhones on their network, despite their only being able to use EDGE.
    
    And of course, the only carrier in the US to carry the GSM only 3GS, is AT&T. There, the most popular phones are, in order: the 4S, the 4, and then the 3GS. How much higher would the percentage be if all carriers had all models of the phone? Certainly higher than the mid 50’s.
- Walt French
  
  Part of the iPhone experience is that Apple spends time with its carriers, hammering out effective retail, service, technical details. If Apple tried to double the number of carriers it worked with, inevitably it wouldn’t be doing as well on these very important points.
  
  When carriers become dumb pipes, Apple will have to take over all the retail functions. Nobody is better suited. But for now, Apple has focused its talents on big relationships and wide-ranging technical innovations.
  
  For various reasons, the smaller and regional carriers attract customers who don’t want to work with one of the big 3 in the US. In China, it’s the biggest carrier that doesn’t carry the iPhone. Yes, I believe that if people bought their smartphones separately from voice/data plans, iPhones would be the obvious market leader. But there would also be some lower-cost devices. Many people do NOT need the iPhone’s particular mix of features and cost. Android advocates overstate this argument, but it cannot be false.
  
  We’ve seen Horace write a bit about integrated-v-modular; maybe his insights also extend to why some markets coalesce around one or two brands, while others have a large number. My guess is that as long as Apple can keep disrupting faster than others, it’ll make competing too unprofitable. That seems to be Samsung’s view, too, as they tossed a bunch of (to me, oddball) features into their latest Galaxy III S. I’m expecting Siri to carry a bunch of that burden, but whatever happened to the voice-oriented innovations such as visual voicemail? Why no ability to build “Busy; I’ll call back” or “Say ‘hold on’ ” or custom voicemail buttons on screen for incoming calls?
  
  Yeah, I guess I’m impatient. But it’s not like Apple is the only source of smartphone goodness in the world. Sammy is trying/pivoting/learning.
- Pk22901
  
  Horace,
  
  “If Apple were on all the same carriers as Samsung, then Samsung would have made no profits either.”
  
  Do your stats back this up? Can you post an analysis?
  - http://www.asymco.com Horace Dediu
    
    Samsung doesn’t have to worry about Apple. They should worry about ZTE and Huawei.
- poke
  
  I’ve been wondering myself if Samsung’s current position isn’t just a result of being the last man standing in the race between the incumbents and Apple. If their recent Galaxy S III presentation is a reflection of what’s going on inside the mobile division, it’s not exactly inspiring.
  - Gozinta Gozowta
    
    “The last man standing”? HTC and others are making Android phones competitive with Samsung’s phones, so there’s more to it than that. Sammy’s vertical integration must yield better margins. Samsung is outselling everyone, and apparently it actually sells at a profit.
- Apple scum
  
  Are you fucking dense? Yes, yes you are.
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http://www.facebook.com/dan.knight58 Dan Knight

I have always been amazed at people who have no idea what brand their non-Apple phones are. They have a Verizon, AT&T, Sprint, T-Mobile, etc. phone, not a Motorola or Samsung or LG or Nokia. That’s why 44% of “dumb” phones are “other” instead of a better known brand. They are commodities that just work, much like white box PCs or microwave ovens. Features matter more than brands in that market.
- http://www.noisetech-software.com/Home.html Steven Noyes
  
  Or how many Sprint Android users think they have a “Droid” phone.
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http://twitter.com/cdelrosso christian del rosso

Apple and Samsung get most of the profits in the industry, and are using a very different approach to mobile platforms. One is vertically integrated, the other uses the modular approach. So both approaches seem to work, somehow.

However, I am curios to know what Samsung is doing so differently than the other Android manufacturers as the others are really struggling to even make profits. Any insights or comments on that?
- ftaok
  
  I think a lot of Samsung’s success comes from their other businesses. For instance, they are a major producer of Flash memory, LCD screens, CPUs, etc. They have access to better components at better prices than anyone else. So they can beat any other manufacturer on specs and still hit the same price points. Well, at least for as long as their other component manufacturing divisions stay on top of their game.
  - melgross
    
    Be very careful about assuming that a vertical manufacturer can get cheaper pricing from an internal division than can external customers. In many countries, that’s illegal. One division must get pricing that equivalent to at least the lowest pricing an external customer buying the same number of parts must pay.
    
    In addition, that division might not even want to sell the parts any more cheaply. They may not have to even where allowed by law. It’s a complex issue. The parts division may make a greater percentage of profit than a device division does. Then it’s a question of where the profits should go.
    
    One advantage a vertically aligned company may have is in making custom parts for itself that it doesn’t sell outside. Though usually, after doing so, it will offer the part for sales externally after some time.
  - http://wmilliken.livejournal.com/ Walter Milliken
    
    One advantage to vertical integration is that the parts profit isn’t going to someone else, so it’s still adding to the bottom line in a way that isn’t happening for someone buying parts on the open market, even if the parts prices are the same as for external buyers, and the profit isn’t showing up in the handset business line. (In fact Samsung’s parts business hasn’t been doing all that well, so pushing profit in that direction might be desirable at the corporate level.)
    
    Vertical integration also gives them less supply-chain uncertainty, and they can gain some synergies by making exactly what they need, even if those parts aren’t entirely for internal use. They also gain visibility into the component R&D side that could put them ahead of the competition (though Apple seems to do this with outside suppliers effectively enough). The downside is that they might not be as good as a 3rd-party vendor at making some of the parts, though that doesn’t seem to be a problem in Samsung’s case.
  - http://www.asymco.com Horace Dediu
    
    As every other component business, the component division of Samsung has very thin margins. If the transfer pricing to another division were made “at cost” then the buyer (i.e. phone division) would not gain a significant boost in margins.
- http://wmilliken.livejournal.com/ Walter Milliken
  
  Besides the flip answer “copying Apple better”, I think there are two significant advantages Samsung has: it has considerable vertical integration on the hardware side, producing crucial high-cost components itself (notably screens, CPUs, and flash memory), and it also seems to be very agile in exploiting any openings in the market that its shotgun design approach happens to hit.
- http://www.noisetech-software.com/Home.html Steven Noyes
  
  I think you missing something very important.
  
  The ONLY (and I mean only in a big way) vendors making any real profit and growing their business are highly vertically integrated.
  
  Sammy doesx their processors, displays and other HW. They don’t do the SW.
  
  Apple does the HW design, processor design and all the software.
  
  The two vertically integrated companies are pounding the industry.
  - twilightmoon
    
    Well said.
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bbcbbm

Horace: This is my first post ever on this site. Thank you for your excellent work on the mobile market. Also, thank you for the two interviews recently. I listened to both interviews: 1) you giving your person background, and 2) your interview of Clayton Christensen. Now I understand why the quality of work on this website is so high.

Earlier someone made the comment that the iPhone is beating all Samsung smartphones by a long mile in markets where operators offer both phones. Can you put together some data and show this phenomenon visually market-by-market? For example, in the USA I think in Q1 63% (9m of the 14.3m) of activations from AT&T+VZ+S were from iPhones. I am not sure what the figure was for Samsung-smartphones in Q1 in the USA.

Would be great if you could show this by each market, so we could compare apple-to-apple (i.e. iPhone vs. Samsung-smartphone vs. HTC, etc., by each market: USA, Canada, South America, EU, China, Korea, etc.)

Then we would have deeper understanding how the iPhone is doing against Samsung.
- http://www.asymco.com Horace Dediu
  
  The data on Samsung sales in the US is not freely available. I believe at least one firm offers those estimates (Canalys) but their reports are not free and cannot be cited.
  - bbcbbm
    
    You don’t need Samsung’s data to do this. There is another way …
    
    For example, in the USA in CY12 Q1 you can use operator’s data to get at desired information:
    
    T, iPhone is 4.3m, 78% of its activation
    VZ, iPhone is 3.2m, 51% of its activation
    S, iPhone is 1.5m, 60% of its activation,
    
    From this, we add them up, and get:
    
    Total, iPhone is 9.0m, or 63%, or 14.3m total activation in the USA in Q1 by these three operators (about 80 to 90% of entire USA operators).
    
    This says a lot about the iPhone vs. rest of smartphones (including Samsung).
lrd555

I think your article should be titled:
2012 and before- the tale of the innovator & the copist with no taste.
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http://twitter.com/Alishsayd Alisher

I like the Feature Phone bit that you present above. I assume you know about QCOM’s reference design program – is that a sign that smartphones are very close to reaching that point of being “good enough”?
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http://pulse.yahoo.com/_KHQWXGJWGQJ6SNSUWP64GMA3Z4 Alex H

I’m in midst of a 10-day stay in Seoul, Korea – part of a 3-week trip that will include China. Obviously, the SIII announcement is getting a lot of press but I don’t see that the people are all that excited. There seems to be an upgrade fatigue building. I mean, how long ago was it that Samsung introduced the Galaxy Note? Or the last Galaxy II? What about the Nexus? Who can stay on top of all this stuff?

I’ve been moving about a lot in Seoul over the past several days and have made the effort to observe the mobile devices in use in the subway trains, coffee houses, bars & restaurants, on crowded streets, etc. There’s no doubt Samsung dominates in the sheer number of devices used but, at the same time, the only other noticeable brand here in Seoul besides Samsung is definitely Apple.

From my general observations, it seems Samsung devices are at around 80% but that also includes the dumb feature phones used by the older folks who don’t want to mess with touch screens. Also, the Samsung-Apple mix changes depending on the neighborhood around Seoul. Basically, the swankier the neighborhood the more iPhones you see. If the neighborhood (and that includes certain subway lines) isn’t high income, you don’t see as many iPhones.

Demographically speaking, iPhones are certainly more popular amongst the younger crowd (20’s to early-30’s) and especially the women. I’d say at least 60% of the iPhones I’ve seen were being used by women and they tended to be on the more attractive side than the women using Samsung phones. Subjective statement, I know, but that’s how I saw it. From what I’ve been able to gather, the iPhone is definitely for the younger and hipper crowd.

As far as tablets, a tablet the size of the iPad isn’t that common in subway cars. But when I did see a 10″-size tablet, around 70% was the iPad. I saw a decent number of Samsung’s 7~8″ tablets but even that was less than half of the iPads I saw in use. So this pretty much confirms how dominant the iPad is even in Samsung’s home turf. The Android tablet definitely is having a hard time getting any traction anywhere.

What was interesting is that most people using Samsung smartphones don’t seem to have any problems using 4.3″-and-up screens. Even women typically had those large screen phones and it didn’t seem to bother them at all. I also saw a decent number of men using those funny looking 5″ Galaxy Notes. I’d say around 1 out of every 10 Samsung smartphones in use were that variety. It really does look goofy when you see them use it as a phone held against their faces but I guess they don’t care.

Anyway, that’s what I’m seeing here in Seoul and it is one technological marvel of a city. This country is completely wired with the fastest Internet speeds and it seems that 4G LTE covers every nook and cranny of the nation as well. There are large display screens virtually everywhere you turn – bus stops, subway stations, elevators inside an apartment building, stores, restaurants, etc. with schedules, news feeds, menus, etc. Pretty amazing… I’ve traveled to a lot of places around the world and even Japan looks like it’s at least a decade behind South Korea from this perspective.

But it seems that high-tech is so pervasive here that people now take it for granted. It isn’t all that exciting to people. It’s just a tool or a utility like electricity or water. Again, this is where Samsung doesn’t match up with Apple. Samsung just isn’t sexy when they also make microwave ovens, washers/dryers, dumb TVs, etc. as well as selling life insurance, building apartment complexes and treating patients at their own-branded hospitals. Sorry to say, Samsung is just an outright boring company…
- Leukotriene
  
  Hey you should create a blog about your observations while you’re in Seoul (no sarcasm). Korea is an important market and I find your observations to be interesting. Especially the bit about 5″ Notes being popular. What about kids (<20 years old)? Are they on Ninendo DS's? iPhones? Samsung smartphones?
- Leukotriene
  
  Hey you should create a blog about your observations while you’re in Seoul (no sarcasm). Korea is an important market and I find your observations to be interesting. Especially the bit about 5″ Notes being popular. What about kids (<20 years old)? Are they on Ninendo DS's? iPhones? Samsung smartphones?
  - http://pulse.yahoo.com/_KHQWXGJWGQJ6SNSUWP64GMA3Z4 Alex H
    
    I thought a lot about the popularity of these unwieldy 4~5″ phones here in Korea. Koreans are diligent information sponges. They love to read and absorb all sorts of info during all times of the day. Most of them also have to commute a lot on foot: typically 30~60 minutes one way on a subway train and another 10~15 minutes walking. This means they’re going to average at least 2~3 hours glued to the screens on their smartphones.
    
    I live in LA and I don’t use my iPhone for media consumption. It’s primarily a communications device for phone calls, messaging, very short emails, GPS use for driving, music listening during workouts, using phone-centric apps for quickly retrieving info, etc. I don’t use the iPhone for reading and watching videos or even browsing the web unless I have nothing else around. I use the iPad for media consumption.
    
    But in Seoul, I can see why the large screen phones are so popular. It’s the main device for the people here short of using a full-blown laptop or desktop PC. The 10″-size tablets are simply too big for commuters who have to do a lot of walking around. I made an excursion to downtown Seoul for some sightseeing that included 45-minute subway train riders one-way.
    
    The iPad is great for reading if you’re sitting down but that’s not guaranteed most of the time. The trains tend to be full with most of the people standing. When I was walking around downtown Seoul I really wished that I didn’t have the iPad with me. I wanted to take a lot of photos with the iPhone and I always had to be aware of where I’m putting down the iPad while I took the photos. It became a distraction. When you’re walking around for an hour or two you want to be hands-free with the phone in your pocket or the belt clip.
    
    To most Koreans, the smartphone is much more than a phone or a communications device. They also use it for the majority of the media consumption in tight spaces while on the move. The tablet (even the 7~8″ variety) is simply too big for everyday commuting on foot but the iPhone’s 3.5″ screen is too constricting for reading books/newspapers and watching videos for 2~3 hours per day.
    
    If I lived here in Seoul (which I easily could do), I’d want a larger screen phone as well. But I live in LA so I don’t see the need for a large screen phone at all. In LA and most American suburbs people are all driving, not sitting or standing as passengers in a subway train, bus or a taxi. We Americans also don’t walk a whole lot except for commuters using public transport in cities such as New York or Chicago, etc. The phone is mainly… a phone. So that’s where I see the big difference and why the dense city dwellers would want a large screen device, even the 5″ Galaxy Note.
    
    As for the <20 kids, they all seem to be using the lower-end Samsung and LG smartphones. I didn't see school kids carrying around the iPhone. Even with the low post-paid plans, I'm sure the iPhone would be significantly more expensive than the smaller screen smartphones from Samsung and LG. I did see a few little kids messing around with dedicated game players at the local parks and playgrounds but I'm pretty sure those weren't Nintendo or Sony. I'd imagine that Samsung has that market in Korea locked up as well.
  - PaulClieu
    
    I am in Seoul at the moment. On the subway you hardly see iPhones, iPads or any 7 and 10 inch tablets. The Samsung Note and Note 2 are really popular. Quite often 100% of the people sitting in your section of the subway car are using Samsung smartphones. The use of headphones is very common for music and phone calls.
    
    I find the Note 2 far more useful on the the go compared to my iPad. I am begining to consider a 10 inch tablet a dinosaur, rather like a laptop. Portability is the key and the Note 2 wins in spades. Some web sites are harder to use or read on a 5 inch tablet, but as phablets become more common, this issue will swiftly decline as website owners wake up to reality and adjust their sites.
- bbcbbm
  
  AlexH: thank you for your comments above regarding Korea. That was good info.
  Questions:
  a) how is Samsung smartphone’s ecosystem in Korea? How does it compare to the iPhone? (that is, in Korea, Samsung smartphone apps vs. iPhone apps in Korea)
  
  b) Is Korea mostly pre-paid or post-paid? How much does iPhone 4S cost in Korea? How much are the data plans in US$?
  
  We can all see this for sure: In the USA, in the past 6 months, the iPhone is winning against Samsung and all other smartphones for sure. More and more people are simply going with the iPhone on AT&T, Verizon, Sprint.
  - Wesley HC
    
    I think I’m qualified to answer that question. I’m a Korean native that works in Seoul and has been using smartphones for a decade. I’ve been observing the smartphone market for quite some time as a result.
    
    Samsung traditionally takes about 50 to 60 percent of the entire mobile handset market in SK. LG, about 30. Then the rest of the players like Pantech and KTFT takes the rest.
    
    But formal introduction of iPhone (3GS) on November 2009 created a so-called iPhone Shock in South Korea. It broke all the smartphone sales record at the time, and Samsung’s attempt to counter it with hastily prepared WM6-based Omnia handsets was only partially successful – it never surpassed in popularity. But then Samsung’s “fast follower” tactics shined in the following months – the Galaxy S that came out about half a year later was able to surpass iPhone in sales and it stayed that way since.
    
    Currently, Apple takes about 10 to 15 percent of the Korean smartphone market. Samsung takes 50. LG and Pantech are neck-and-neck at around 15, but recent stats show LG actually falling behind Pantech. Non-Apple foreign vendors do have presence, but are extremely minor. Handsets from Sony, Motorola, and HTC make up less than 5 percent combined.
    
    In other words, there’s a steady 85:15 ratio of Android : iOS in the smartphone market, with Android part dominated by Samsung. Out of about 30 million smartphone users (there are 50 million people in SK) about 15 million are Samsung users. iPhone users amount to about 4.5 million.
    
    Alex’s observation about the Samsung / Apple user demographic is generally accurate and is actually backed up by surveys (except the “cute girls prefer iPhone” part).
    
    As for tablets, latest stats estimate iPad took about 70 percent of the market, with sales in excess of 1 million. Samsung Galaxy Tab is the distant 2nd place runner.. Samsung has shifted from marketing Tabs to Notes right now and it’s worked out well. Galaxy Note, that 5.3″ phone+tablet! is said to have shipped 2 million units in the Korean market alone.
    
    Finally, almost all cellphones in SK are under post-paid. There’s been quite a bit of inconvenience and stigma for using pre-paid phones here, which hampered adoption considerably.
  - http://pulse.yahoo.com/_KHQWXGJWGQJ6SNSUWP64GMA3Z4 Alex H
    
    Thanks for your addendum and providing more detailed info.
    
    The “girls with iPhones are cuter” comment was said in jest with a winking smiley face elsewhere but this Disqus system doesn’t allow emoticons to be posted.
    
    I’m sure I counted some LG and other branded phones as Samsung as it’s difficult to discern the brands when I’m looking at someone across a subway train using a phone. I’m surprised that *anyone* in Korea would actually buy an HTC, Motorola or Sony. Sony, for one, is now a totally dead brand in Korea.
    
    I think an interesting thing to note is that the iPhone is still very distinctive and I can easily pick it out unless they have it covered with bunny ear cases or something like that. The bottom of the iPhone is one very noticeable look with its dock connector in the middle and the speaker and mic on each side.
  - bbcbbm
    
    That’s excellent on-the-ground info Wesley and AlexH. Thank you. Further followup: How is the Mac doing in Korea? As you all know, the Mac is doing really well in the USA vs. Windows. For example, this is most visible in the best schools in America. I would not be surprised if well over 50% of Harvard’s freshmen class is Mac. How about Korea?
  - bbcbbm
    
    Wesley and AlexH: Please tell us about NFC (near field) as well. That is, doing payments using smartphones. Who are the dominate smartphone payment players in Korea? How wide spread is usage? What’s the trend? Do you see that happening in other parts of Asia? In the USA, we are beginning to see a tiny bit of that.
  - http://pulse.yahoo.com/_KHQWXGJWGQJ6SNSUWP64GMA3Z4 Alex H
    
    Thanks, bbcbbm. Well, answering your questions would require some research here but I’m assuming that it’s similar to that of the US with the higher-end phones subsidized over 2-year contracts. I do know that there are all kinds of plans but I’m not even that familiar with all the plans that exist in the US where I live.
    
    As far as the ecosystem matter, Korea is its own world and I’m certain Samsung is much stronger here than it’d be in the US. For one thing, the iTunes market in Korea is pretty much limited to iOS apps. The iTunes media content market doesn’t exist here, which I find quite stifling as a dedicated Apple user.
    
    I guess Apple just hasn’t been able to work out the licensing deals with the music companies and government agencies of Korea. I think this puts Apple at a severe disadvantage in competing with Samsung and LG, etc. in the Korean market. In the US, the Apple ecosystem is quite the differentiating factor but not here.
    
    I just talked to my parents as I was replying to you about their phone plans as they both own the iPhone 4. They got the phone “free” with a 2-year contract with unlimited data plan for around $50 per month. That’s dirt cheap compared to the typical plans in the US.
    
    And the coverage in Korea, as expected, is awesome when you consider SK is around 1/6th the size of California. SK’s telecom companies don’t have the overhead of the US telcos that have to try to cover 3 million square miles. As mentioned earlier, the entire country is now blanketed with 4G coverage as well.
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http://twitter.com/disruptivedean Dean Bubley

Horace

One of the things that’s worth looking at is the current debate about changing FASB/IASB accounting standards around revenue recognition. In particular, there is an attempt to force bundled HW+Service bundles to be split out, which would have big impacts on mobile contracts with subsidised “free” phones. There’s also discussion about how to account for the cost of handset subsidy, eg upfront vs across life of contract. That’s likely to play into this discussion in future.

Those operators that have lots of contract/post-paid customers are generally screaming blue murder about this, ostensibly because of the IT hassles involved in switch, partly because its makes analysts’ job of cashflow forecasting harder, but also because it makes them look like a big chunk of their revenue is essentially as iPhone/Samsung resellers. AT&T shipped 4m+ iPhones last quarter, which at $600ASP is 8-9% of total revenues, and presumably an even bigger % of their non-employee costs.

Second thing to consider here is prepay. Something like 75% of the mobile users on the planet are pay-as-you-go prepay users who buy their handsets separate to their SIM card. The idea that carriers sell most phones is a bit of a weird & niche curiosity stemming from N America, Japan & bits of Europe. At the moment, iPhones are too expensive for many of this group, but not everywhere. In many parts of Asia, E Europe, Russia etc people buy high-end phones from separate channels. That has two implications – either Apple needs to have lower-end devices to target the next slice of the pyramid, or it makes a decision to cede that to Android, BB & maybe WP. It also means that any profit-shifts between carriers & Apple will be *indirect* in those markets, going via the customers overall bucket of “discretionary spending” power & also substituting for holidays, consumer electronics etc.

The discussion sometimes gets skewed by US-centric observers who think that it’s typical for carriers to sell/subsidise phones, when in fact that’s a minority sport.

Dean Bubley
@disruptivedean:twitter / @DApremium:twitter
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http://wmilliken.livejournal.com/ Walter Milliken

Interesting data about the Chinese smartphone market from Canalys: http://www.canalys.com/newsroom/china-overtakes-us-largest-smart-phone-market

High points: Samsung 22% share, Apple 19% share, most of the rest is local Chinese manufacturers.

Interesting that Samsung’s share is actually that small, given that it’s in the huge China Mobile market and Apple is not. That suggests either that most of that share is coming from China Mobile (where there’s limited iPhone competition) or that China Mobile’s smartphone uptake is unusually low (possibly due to lack of iPhone halo?).

What’s not clear from the report is whether gray-market iPhones are being counted. Since they’re talking about “shipments”, I suspect not.
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joeYYY1

Horace, you may like to know that your analysis (which is very good) was picked up by Ynet, the leading news portal in Israel.
http://www.ynet.co.il/articles/0,7340,L-4225311,00.html (here’s the translation to English via google: http://translate.google.com/translate?twu=1?sl=iw&tl=en&u=http%3A//www.ynet.co.il/articles/0%2C7340%2CL-4225311%2C00.html)
For the most part they rash to pickup every analysis that focus on the Android market share, but this is the first time that they picked up an analysis that focuses on other more important factors such as profit and revenue.

Great job
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frank909

I see that you can now put a sim card from a prepaid operator like Tracfone in an unlocked I phone and it works fine. It will not be long before I phone knockoffs with prepaid sim cards dominate the market. In this market all things are temporary, as is the temporary domination of Apple.
- http://www.asymco.com Horace Dediu
  
  This has been true since 2008 when the first iPhones were sold unlocked (and earlier if one was willing to Jailbreak and unlock an iPhone).
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