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The iPhone Addressable Market

The iPhone is a severely constrained product. We’re used to thinking that it’s production constrained—and it is, but it’s also distribution constrained. It has a business model that is almost completely dependent on operator subsidy. Few end users pay the $650 average price that Apple obtains and that price point has held for a remarkably long time. This price point is largely invisible to the user.

In this regard it’s very different from all the other products Apple sells. Historically, the company has preferred having its customers to also be its users and maintained a direct relationship with them, strengthening that relationship through its own retail channel for the last decade. Pricing is used by Apple as a signal to clearly illustrate value to the user and pricing is part of the communication about the product that Apple makes very explicit. This has been true for the iPod and Mac and is still true of the iPad. But this is not so for the iPhone. The entire marketing strategy for the iPhone (and hence the entire product concept itself) is “off message”.

Why is this?

Before we get into causes, let’s try to measure the distribution channel for the iPhone. Apple occasionally reports the total number of carriers it has relationships with. The last update was in the summer when Peter Oppenheimer, Apple CFO discussed the quarter ending June:

We added several small regional carriers during the quarter and now have iPhone distribution through over 250 carriers in over 100 countries.…

We added China Telecom as the second [Chinese] carrier in March…

We also don’t expect to add any significant new country or carrier additions in the September quarter…

In addition, Apple publishes the list of operators it sells through on its web site. The last time I counted I got 227 listed operators.

If we contrast this with the total number of global operators (excluding MVNOs) there might be a way to measure distribution penetration. I compiled a list of all such operators based on information available in Wikipedia. You can browse the list here (Google Docs [1]).

This global list includes 802 operators. The list is not current, being mostly based on 2009 data but it’s pretty close. I’ve read that a more recent (non-public) estimate is 816.

By this measure we can say that Apple has distribution through about 30% of the total operators. Consider also that RIM reports that it sells BlackBerry through 565 wireless carriers in over 175 countries. By this metric alone BlackBerry has twice the addressable market of the iPhone.

But we can do better than counting operators. We should account for the fact that some operators have more subscribers than others.

Using the same database, I measured the subscriber count of iPhone distributing carriers vs. overall subscriber count. The ratio was about 50%.

iPhone “addresses” about 2.8 billion connections whereas there are about 5.7 billion available connections. Note that this is not users but subscriptions—essentially SIM cards.

The ratios vary by region:

  • Middle-east/Africa has 29%
  • Asia/Pacific is at 39%
  • Europe 73%
  • The Americas 83%

 

We can take it a step further and identify which countries hold the highest opportunity for iPhone distribution. The top 5 are:

  1. India: 658 million
  2. China: 622 million
  3. Pakistan: 116 million
  4. Russia: 102 million
  5. Nigeria: 89 million

But the opportunity is not only in emerging markets. Japan is a 69 million subs opportunity and even the US has 80 million subs without direct (i.e. subsidized) access to the iPhone.

So we can now return to the question of why the iPhone is sold the way it is.

First I should point out that the addressable market of Samsung or Android in general is larger than that of the iPhone. Samsung has relationships with far more operators, at least on the scale of RIM or Nokia, perhaps even more. It might be safe to assume that Android is completely unconstrained in distribution and therefore its addressable market is the entire subscriber space (meaning that Android has twice the addressable market of the iPhone.) For Apple to compete on the basis of volume or market share it would make sense to broaden this network. So what’s holding it back?

I think the answer is the other constraint mentioned: production. The company is still iterating the product on a yearly basis and needs to ramp production to reach all its carrier partners in a timely fashion. The carriers use the iPhone as differentiation and a way to uplift their core business. Therefore they want the latest version as quickly as possible. To satisfy this, Apple needs to manufacture the latest variant very quickly. But that’s not easy. Peak production is one thing but getting there quickly is another. This is the problem which Apple’s vast capital expenditures is trying to solve.

So far the production capacity has been increasing at nearly 100% per annum. This is an astonishing achievement but it’s still not enough. The product is supply constrained during much of the launch quarter. Therefore, to summarize, the entire business model for the iPhone revolves around this question:

Can enough units be shipped in a sufficiently short time frame to allow a limited (but large) subset of operators to create competitive advantage which sustains a generous up-front subsidy.

At this time the answer seems to be that the model can work for about 30% of operators serving 50% of subscribers. The crucial question for the business is how much higher can these numbers get?

Note that this is not a debate about market share or consumer preference but about delivering a particular value proposition to network operators, (which sustains a premium price point.) The iPhone is built around this business model and to alter it would alter the very essence of what the product is. The addressable market is one piece of the product but it interconnects with the price, margin, design, production and breadth of offering. You cannot change one without changing the others. It’s a product whose distribution model is part and parcel of its design.

I believe that the particular way this product translates into a business is very rigid, which is why it has not changed much during the life of the product. This is in contrast to Apple’s other products which exhibit more market flexibility. Inter-dependency is not a new concept for Apple products (e.g. iPod/iTunes, Mac/MacOS) but the iPhone shows a level of inter-dependency with distribution and production the likes of which has never been seen.

This topic will be further discussed at Asymconf in January as the fourth quarter data will then be available and there will be an opportunity to debate it live with an august audience.

Notes:

  1. The database is neither current nor complete. If you would like to help maintain the data based on local (public) information, please get in touch and I can grant access to edit it.

Comments

125 Comments so far. Leave a comment below.
  1. ArthurDentGT,

    Your analysis gives color to the highly debated question of how much innovation is required for each new generation. The typical conversation revolves around whether Apple innovates enough to keep up with the competition; you introduce the idea that Apple must balance that with production capacity. This balance definitively answers the question about whether we will see a 5s (absolutely–improvement with little or no production constraint cost) and largely answers the question about future road map (physical form is likely set for years to come with only material substitutions and further software improvements as Apple focuses on addressing the rest of the market.

    • Agreed. The switch from glass & steel to the aluminum unibody seems to have signaled that they’re done with hardware changes – for the time being, at least.

      Assuming that happens, I’m very curious to see how competitors and customers react. I’d predict Apple taking a lot of heat from customers wanting ‘new’, and smart competitors will take full advantage of that.

      But weathering that storm might be the winning strategy, if it means Apple can steadily ramp up production capacity while maintaing margins.

      Really provocative post today!

      • “The switch from glass & steel to the aluminum unibody seems to have signaled that they’re done with hardware changes – for the time being, at least.”

        As nice as the iPhone 5 is, hardware wise, I hope this is not true. The competition is coming out with very compelling hardware designs (HTC 8X, Lumia 920, Nexus 4) all supported by very competitive and robust ecosystems. In some respects they have surpassed iOS / iPhone. The last thing Apple needs to do is stand still.

        Just as Apple has expanded the iPad line with a big version and a small version, doing the same for the iPhone line would be a smart move as there is a strong market for big-screen (4.5″+) phones.

      • Kizedek,

        If these other products are “compelling” then it sure sounds like their slick marketing and emotional hype has worked.

        Sure, they come out with new products every six months. They have in order to maintain some differentiation between all the other Androids and continue to sell phones (the margins for which are atrocious, because they sell relatively few of each new model). Why must they do this… Because the actual user experience, the thing that counts, is *not* compelling, and there is high turnover of customers.

        I find it so ironic that Apple is accused of slick marketing and hype and RDF in order to sell phones, when the obvious answer is that the phone, in its entirety, UX, ecosystem and all, is SO compelling it’s beyond question! There can be no question in the minds of anyone on that score.

        So what is “compelling”? A new color? A new finish? A new shape? Gimme a break. I just covered up my brand new, iconic, beautiful, work of art iPhone with a non-description rubber case because I KNOW I am going to use it 24/7 for the next 3 years! It is THAT compelling and helpful to the furtherance of my business and activities. It’s an investment that I invested in, precisely because it is FAR more compelling than the competition.

        Apple just updated everything, and the internals are updated with each new model, including ‘S’s. It just got new camera elements including sapphire lens, also new microphone, new speakers…. Who cares f the case and color are boring and don’t seem “compelling” to a fickle teeny-bopper who doesn’t realize they are really tired of the same old Android experience when they could just stick a new case on their iPhone.

        “Compelling”, just as “design” has to be more than surface deep, it has to be about how the product functions, performs and delivers!

      • This is exactly my point.

        “Design” that is surface deep isn’t design at all. It’s cosmetics.

        Surface appeal is part of design, but not the whole thing.

        Design is how it works.

      • GeorgeS,

        “HTC 8X, Lumia 920, Nexus 4) all supported by very competitive and robust ecosystems. ”

        You must be kidding. The Lumia 920’s “ecosystem” is tiny.

      • Can you explain why the designs of the phones you mentioned are compelling?

        I haven’t used an of them so I don’t have a good basis for comparison.

      • obarthelemy,

        As an Android user, I can tell you what bugs me when messing around with an iPhone:
        – no back button, or a random back button hidden somewhere at the app writer’s whim. Android has a fixed (on-screen or hardware) back button.
        – ditto for the menus. The apps’ interfaces are very inconsistent.
        – no easy way to get data/media onto and off it, either your PC must have iTunes, or your phone must have a paid app. And you need a special cable. Android can do SD sneakernet, BT, and USB out of the box.
        – small screen. Darn good, but too small for my waning eyesight, and the extra pixels are mostly wasted on me ^^
        – feels fragile (especially the glass ones) or looks ugly with a bog-standard protector. The naked phone is actually frightening to handle (my sister in law broke 2 simply dropping them with the help of her toddler), while my plastic Note has taken a few tumbles w/o being worse for wear, and I don’t cringe too much when loaning it to my nephew.
        – also, iPhones users seems to use apps for everything. I don’t know if it’s a platform thing or a personal thing, but I go for the Web version by default, and get the app only if it really really improves functionality/experience. I don’t have an app for each website or forum I use; many iPhone users have lots of those.

        So, respectively, those points must be strong points of Android phones ^^

        The innards are very similar, NFC is not a biggie just yet, SD slot is nice (and cheap), wireless charging will be standard in a couple of years, probably with NFC synching. I actually think we need Apple to make wireless charging “magical” for customers to wake up and realize how nice it is, which says lots about other OEMs’ ineptitude at marketing innovations. And at combining Wireless charging and NFC synching.

        The designs are mainly irrelevant, rectangular slab is a rectangular slab (though it seems the roundedness of the corners is very differentiating ^^), especially since most people tuck them in a sleeve.

        An issue that never gets discussed is reliability. I’ve had issues with a lot of early smartphones, in pre-Android days, both with the physical design (unreliable plugs…) and the software (crashes, no synch…). Including on well-reviewed phones (my Motorola E395 was especially bad). All the lastest Android phones I’ve seen have been rock solid, as are iPhones, but I’m sure there are bad apples (sorry) in there somewhere.

        Oh well.. wall of text…

  2. Ittiam,

    So basically Apple is a subsidy bubble…. Luckily the bubble is not gonna burst anytime soon

    • The subsidy is a bubble as much as that which it sustains is a bubble, namely the differentiation of operator service and the transition from basic to data services. As I’ve said before, the iPhone is a broadband salesman who gets a significant commission. It gets paid well because it does its job very well. If there is no need for the job or if someone else can do it as well for less then it will not get paid as well. However, it’s been getting its bonus every year for six years now.

      • I agree with what you say.

        But I’m curious as to how long that will last. Take for example the Nokia Lumia 920. In every region it’s selling, it’s either in the top 3, in terms of sales, of all smartphones that are selling, or they’re sold out or on serious back-order. It’s proving to be a popular product.

      • rattyuk,

        Let’s see how Nokia’s next quarter results look before breaking open the champagne…

  3. mohsin ahmad,

    You mention these 5 countries that have a total 1.6 billion people. How many people in these countries actually could afford an iphone? I know that low end android phones are huge in these markets. Also, I believe 3G coverage would be limited in these markets.

    • I don’t know the answer but you can be sure that if the phone is not available the answer is zero.

    • FalKirk,

      “How many people in these countries actually could afford an iphone?” – mohsin ahmad

      In my experience, that question is a red herring used to distract one from meaningful analysis.

      First, the number of people who have money in poorer countries is always underestimated. Their middle classes may be small but when you have such huge populations, a small percentage is still a lot of people.

      Second, people buy cars and homes which are much more expensive than phones and somehow they manage to pay for them. It’s not a question of how much money the item is. It’s a question of how much the item is valued. If the item is highly valued, the money can usually be found.

      • Time to mention, once again, my experiences in Indonesia.
        (a) Yes 3G was available, at perfectly adequate speeds, comparable to the effective speeds I get in LA.

        (b) People were well aware of the value of smartphones. Our guide, for example, ran his business off his Blackberry. A better smartphone, offering him better maps and better web browsing, for example, would have been a sound business investment.

        (c) There are geeks in these countries, just like everywhere, who love technology and what it can do. My brother and I wandered around the lowest floor of a mall in Jakarta which was nothing but cellphone and smartphone vendors of various sorts, with all the usual things you’d expect, like nerdy teenagers hanging around, drooling over the latest models, and arguing with each other about specs and capabilities.

      • Cashewer100,

        Totally agree with both of your about value.
        On top of that, many “poor” people buy status phones like iPhone. A vibrant second hand channel is important to ensure good sell through of the latest and greatest models. That piece makes up a very useful link in the distribution cycle of phones. A user with a 2-year post paid contract will often break the contract and pay the pro-rated penalty. He recovers a big portion of that penalty by reselling his ‘old’ iPhone, most of them are kept in sterling condition. He wears the ‘loss’ as a price of enjoying new toys.
        .. SengHee

      • tunwang,

        agreed it is true and is a status symbol.

      • What status does the iPhone confer?

  4. KitFR,

    Apple usually finds itself production-constrained in the first quarter of a new launch, but it would be a mistake to think that Apple could not bring more capacity online if it chose to. Factories cost a great deal of money and the trick is to meet global supply over a full year without keeping factories needlessly idling.

  5. So long as they target the iPhone at US consumers, it’s difficult to target the rest of the world and if they target the rest of the world, their profitability and image falls apart in their primary market.

    Subsidies are Apple’s heroine. It feels great while you’re on it, but it’s a horrible addiction and it’s going to be extremely painful for them to kick it.

    • Accent_Sweden,

      The US subsidy model does have another effect. It encourages iPhone users in the US and similar markets to upgrade every two years since their monthly cost doesn’t change even after they’ve paid off the phone for their carrier. So why not upgrade for just 100 dollars if you aren’t going to save anything by keeping the old phone.

      • Yeah, I did the math on this before upgrading to the 5, and as much as I wanted to buy an unlocked phone, it just didn’t make sense considering my monthly bills would be exactly the same.

      • From what I can tell, owning an iPhone is nearly equivalent to owning an inexpensive unsubsidized phone. The resale value on a used iPhone almost always exceeds the early termination fee significantly. Also, strangely the early termination fee plus purchase price is less than the price of an unlocked phone. Verizon phones are unlocked to start with.

      • FalKirk,

        “The resale value on a used iPhone almost always exceeds the early termination fee significantly…” – Dennis Baker

        Agreed. But I doubt many iPhones, percentage-wise, are being re-sold. I’m guessing that the vast majority and being passed on and passed down.

      • This is changing. Especially with StraightTalk, there is now a reasonable alternative which is essentially the cost of equivalent services from ATT, but with the subsidy stripped out. The same thing will exist soon in the form of T-Mobile, once they finish their frequency switchover.

        I don’t think it has been a big deal so far simply because the phone improvements every two years have been large enough that people have wanted to switch, they have needed no encouragement. It’s possible that this will slow down, that the iPhone 5 is close enough to meeting people’s desires that when iPhone 6 comes out in 2014 they will migrate to Straight Talk at the end of their contract rather than upgrade; but I don’t think you can blame it as a significant factor so far.

      • Accent_Sweden,

        Yes, I use Straighttalk with my unlocked iPhone when in the US. It makes life very easy. I just pay for the month I need it and same coverage as ATT. The only thing lacking is that there is no personal hotspot available with Straighttalk.

  6. I think France is an interesting market to watch because it recently switched from a very subzidied formula to very inexpensive sim-only contracts.

    Personaly I’m surprised at how much I’m not willing to directly pay 600€ for a new Phone even if my phone contract wen’t from 1200€/year to 240€…

    It’s always the same, with 600€ I could for exemple go a full week in holidays… What achieves to stop me is the extra 100€ for 16 gig of memory…

    • I have a cousin in Vietnam who bought a 4S last year for $800 and buys/sells/swaps SIM cards as needed.

      Just emailed him for some more details, but from what he’s told me that’s the norm there and sims are dirt cheap – at first he didn’t understand why I would even ask. Like an inquiry over the price of a stick of chewing gum.

      He works for Cisco, so I’m curious to see what he tells me about the dynamics between cellular networks and wifi in a country that has such a rpidly changing and evolving infrastructure.

  7. obarthelemy,

    What percentage of the total market is on non-subsidized schemes, either pay-as-you-go or the newer contracts with no phones subsidies ?

    If, as you state, most Apple customers don’t pay full retail price, doesn’t Apple lock itself out of that part of the market ? And isn’t that non-subsidized market biggest in the countries where you say Apple has more room for progression… but instead, Apple just can’t get a foot in because those markets do have price transparency… so it’s not room for progression, it’s just inadequacy ?

    • I think there are two possible answers to this:

      1) Apple could, in theory, loan customers the money to buy the phones. There are probably a lot of reasons why they don’t want to get into this, though they have supported time payments for Macs for years. While this doesn’t make the device cheaper overall, it does soften the up-front “bite”, which might be enough.

      2) Fairly soon, if not already with the iPhone 5, there won’t be a lot of significant technical hardware improvements to make in what the phone can do (except perhaps for hard-core 3D gamers). Apple should then see costs drop on components, and be able to push into lower price-point markets, though I doubt they’ll compete against the “just-barely-a-smartphone-in-name-only” Chinese white-box devices. Apple’s differentiator should move from cutting edge hardware to cutting edge software, which is both where their strength is, and the weakness lies in the Android ecosystem.

      Strategy 2) is a bit foreign to Apple, they prefer to improve hardware to justify maintaining their price points. But they’ve also shown some flexibility in that respect in some product lines, notably the Macbook Air. Whether they’d be willing to move to a lower-margin low-end iPhone at some point is an interesting question, but they certainly will have that option.

      • obarthelemy,

        and 640 KB should be enough for everyone ^^

        I think there’s a whole lot of features yet to come to phones, which should keep the current planned obsolescence working for the foreseeable future, especially with the way Apple are managing that:
        – wireless charging
        – NFC
        – worldwide 4G
        – multiple user accounts, esp. kid’s mode
        – docking to a full desktop computer, laptop, or tablet
        – better sound outputs
        – and niche stuff such as pen input, integrated projector, integrated keyboard, hardware anti-jigger for the camera…

        That’s all stuff already available on the Android side.

        Note that those are mainly hardware features, there’s no telling what software features can be introduced and artificially restricted from previous models.

        In the longer term, I’m sure other things will pop up, especially sunlight-readable screens (Nokia has a nice-ish tech),

      • Clearly you can add a lot of check-off features, my question is whether these are things that actually add corresponding value to the user.

        For example, wireless charging right now isn’t all that attractive. You’re still tethered to the charger, except you don’t actually have to line the plug up. If someone comes up with a charger that works at a range of a few feet, even, rather than a few millimeters, that would be a worthy hardware advance (and yes, people are working on things like that, but they don’t seem to have gotten to a practical stage yet.)

        I think the issue is to focus not on technology check-off features, but look at what the jobs are that users have that aren’t been filled, or filled poorly. NFC, for example, isn’t a job, it’s a possible solution to the “mobile payment” job, and far from the only possible one. I agree that’s a job that phones could and probably should take on (and Apple hasn’t yet moved strongly into this area, where Google has made an attempt). But just having “NFC” on the box doesn’t solve the mobile payment problem. And there are perfectly reasonable ways to solve that problem without adding hardware to the phone. It’s more of a system infrastructure and protocol issue than it is necessarily just a hardware feature.

        All-frequency LTE and sunlight-readable screens would be useful advances. I’m frankly dubious that Android phones have actually fully achieved universal LTE support, since there are technical costs to running on multiple different frequencies, and it doesn’t necessarily make sense to cover everything in a single design — you have to put in too many components that aren’t used most of the time. I suppose someone could have made a “kitchen sink” radio design with one of everything in it, though.

      • obarthelemy,

        I had Wireless charging on a Touchpad: it’s surpringly convenient. Of more value than 2-3mm more thin, for example. I think you’ve got to have it and lose it to miss it though, value is not immediately obvious.

      • rattyuk,

        And Greenpeace would then jump on Apple for such an inefficient and wasteful method of charging… Notice they haven’t done that to any of the companies that have the feature? Because they aren’t Apple.

      • obarthelemy,

        It’s not inefficient at all. Do your homework before sniping.

      • jawbroken,

        It’s around 70 or 80% efficient, maximum, but it’s such a small amount of energy to begin with that it isn’t a big deal.

      • rattyuk,

        I fear if Apple were doing it Greenpeace would blow it up out of proportion. As they do.

      • Ian Ollmann,

        We are talking about some serious power being irradiated out into the space where people are. A typical cell phone radio might be 500 mW (http://en.wikipedia.org/wiki/DBm). A typical cell phone charger might be 5 W. 10x as much. People are already somewhat concerned rationally or irrationally about cell phone radiation from using it a few minutes a day near your head and short bursts every few minutes to touch base with the tower. Imagine if your living space was permeated by a field an order of magnitude larger 24/7. Power transmission means power. This is not some dinky signal just meant to transmit information.

        Whether it is actually dangerous or not, I’m a little skeptical that long range wireless charging will ever be accepted. It wasn’t accepted in Tesla’s day. I don’t see what has changed since then.

  8. obarthelemy,

    And finally, don’t those subsidies create a huge disincentive for operators to push the more expensive iPhones ? A few years back in my country, there were special “iPhone” contracts, more expensive, presumably to let operators make up the iPhone’s extra cost. Nowadays contracts cost the same whatever the phone, so aren’t operators incentized to push cheaper phones, especially when even the top-end Android ones cost around 30% less ?

    • It does 100%. But the more expensive phones also correlate with higher data usage. iPhones particularly so, especially the iPhone 5.

      Speaking for myself, I’m spending $30 more a month just to be on Verizon’s LTE instead of Sprint’s dog-slow 3G. I’m looking at a $110-150 monthly bill depending on the data limits I choose.

      And really, my upgrade to the 5 is a perfect example of what Horace is talking about – I jumped ship from sprint, broke contract and went to Verizon to get the new phone. Sprint was fine for the 4S, but geography came into play. No Sprint 4G coverage in Ohio, and no plans anytime soon.

      For me, that was enough.

      • obarthelemy,

        Oh my. I’m spending $20 a month for unlimited everything, including calls to most international landlines, and some international mobiles. Not 4G though, it’s not available yet in France, we only get HSDPA+.France has been taken by storm by no-subisidies contracts, which turn out about half as expensive over 2 years (1000 euros including 500 for the phone, vs 1,800-2,100)

        Even subsidized contracts have moved mainly to the $70 neighbourhood, (excluding international roaming)

      • Well, I should add that Verizon’s 4G network is drastically better than the copetition in terms of coverage and speed. At home, LTE is about 2-3x faster than my top-tier cable modem, and I’m at the outer edge of the local cell’s reach.

        And it’s really, really great. But yeah, I’m paying the early adopter tax in a big way.

        Sprint (the smallest of the 3national networks) has an $80/mo unlimited subsidized plan, and a $30 unsubsudized. So, we’re moving toward some parity there. They’re LTE network is still nascent, so we’ll see how it goes.

      • obarthelemy,

        Also, In my country, there isn’t much tiered data anymore. $20-$30 plans have unlimited data, throttled after a 3GB “fair use”, but not billed extra (though you can pay to have un-throttled overage, I’m sure)

        So the situation is the reverse: data-hungry iPhones cost more to the network operator than data-miserly Androids (though I’m sure high-end Android phones eat up as much as iPhones ?), but don’t generate more billing.

      • Hmm. I’m curious – what kind of speeds do you usually see? Is confession or network coverage an issue?

        I think a lot of the disparity in pricing, and value perceptions comes down to infrastructure. LTE is being rolled out nationwide only a few years after 3G was considered a big deal, and still it’s far ubiquitous.

        As much as I like Sprints’ customer friendly pricing, I found their network to be nearly unusable much of the time – and at its best it was only quick enough for web browsing and streaming audio.

        For me, unlimited meant I’d only be able to pull down a couple gigs a month, be constantly frustrated by basic tasks, and have no option to pay more for emergencies or because I wanted too.

        It was like an-all-you-can-eat buffet, except you’ve got to stand in line for an hour for each helping.

      • obarthelemy,

        it’s 1AM right now, so a test would be invalid.

        I’m not doing video OTA, but for basic stuff (browsing, email, rss, GPS), it’s OK, fast enough and reliable. I’m sure once you’ve tasted 4G, you can’t get back though ^^

      • Haha no problem. Your explanation is much better than a spot check anyway. Sounds like the network is good enough for you.

        LTE is like Retina – once you use it, you notice it’s absence. By far the best feature isn’t the ability to download huge files fast, it’s that small syncs, emails, etc are instantaneous. Like SSD it reduces friction.

        But beyond that, it hasn’t changed the way I use the phone very much.

    • From the operator point of view, I think you’re quite correct. But operator experience in the US seems to show that operators that don’t have the iPhone available will rapidly lose customers to those that do. And iPhone customers are strongly loyal to the iPhone, so while the carrier can try to push new customers into some other device, they’re stuck with the iPhone subsidy.

      And pushing people into other devices hasn’t been notably successful, as far as I can tell, with the possible exception of the Samsung Galaxy line. And that may be more customer pull, like with the iPhone. But as near as I can tell from a quick web search, the S III unsubsidized price is pretty close to the iPhone’s, so it’s no great deal for the carriers there.

      • obarthelemy,

        In France:
        – iPhone 5 32 GB lists for 680 euros. Never any discounts.
        – GS3 16 GB lists for 559, minus 50 coupon, plus 10 for 16GB SD = 520 euros. Samsung pretty much has perma-coupons, they have one on the Note 2 that puts it on par with GS3. But I won’t bite ^^

        (680-520)/520=30% more.

      • jawbroken,

        Kind of manipulating the data when you could have compared with a 16GB iPhone. Why not go all the way and compare it to a 64GB, and bump the sd card a little? Would help stretch your argument even further.

      • obarthelemy,

        Actually, I made a mistake, thanks for making me realize that. I used the price for the 16 GB iPhone.

        new calculations for iPhone and GS3 16GB+micro SD to bump storage up to iPhone’s level:

        @16 GB: (680-510)/510 = 33% <- iPhone 33% more expensive
        @32 GB: (790-520)/520 = 52% <- iPhone 52% more expensive
        @64 GB: (900-560)/560 = 60% <- iPhone 60% more expensive (and 16GB less Flash)

      • While the S3 is cheaper, it’s certainly still in the “seriously expensive without a subsidy” category. We also don’t know if the carrier pricing on the iPhone and S3 match their unlocked market prices, though I would not be surprised if the S3 were still cheaper. Still, the difference in subsidy isn’t all that enormous, especially if the customer retention rate are higher on the iPhone. It may still work out in the carrier’s interest. In any case, it’s not like the carriers have a choice — lose the iPhone, lose customers, it’s that simple, at least in the US market.

        It would be interesting to see if the S3 has the same effect, but as far as I know, they’re on pretty much all the carriers, so that experiment isn’t being run anywhere.

      • rattyuk,

        “While the S3 is cheaper”
        Buying market share. Samsung just want the biggest slice of the pie. They know when Apple released product and basically shift new releases when the iPhone sales are on the wane. Going to be an interesting second quarter next year if after a years worth of planning the Galaxy S4 suddenly finds itself up against he iPhone 5s.

      • obarthelemy,

        I’m not sure that’s it. A lot of companies are happy with 20% margins. It’s more like Apple is milking their market, IMHO.

      • rattyuk,

        All well and good but apart from Apple and Samsung no one is making any money in this space. That means that they are being kind and won’t be around to release next generation products.

      • Is Google milking the market if their margins are higher than 20%? Is Microsoft or Samsung or (when it happened) Nokia? Is Amazon generous, kind and thoughtful (or whatever is the antonym of milking) for losing money?

      • obarthelemy,

        You seem to take the matter at heart, and to have chosen sides.

        I would say the antonym of milking is low-balling. Note that “low-balling” does not have the biased undertones you’re trying to put into my post, which itself was an answer to a post about how any company not reaching Apple’s margins should exit the business.

        They shouldn’t. Anything above 20% is perfectly fine ROI.

        As to what constitutes milking, I personally think that any company that sells its wares at 50+% above *comparable* (we can argue what constitutes comparable) competitors’ stuff is milking. I’ve made a post somewhere (which the commenting system won’t show me anymore) that calculated, IIRC, that the iPhone 5 is more expensive than a GS3 by 33, 50 and 60% at 16, 32 and 64GB resp.

      • And what should a company that has no comparable competitors sell its stuff at? You’re making an implicit judgement on value as if all products are commodities which are interchangeable and hence there is a “fair” profit level. There is no concept of “fairness” in business. There is nothing inherently fair or unfair. Rather, value is either created or it’s destroyed and there is a proportional reward system called profit. A disproportionate profit is almost always coupled with disproportionate value creation. If it seems inexplicable then you haven’t looked hard enough for a cause.

      • Simon,

        Obarthelemy. You are being ridiculous and trolling. One cannot compare a phone of different capacity against microsd cards. In fact Samsung themselves sell the higher capacity galaxy s3 at much higher price than the microsd. Isn’t Samsung milking their customers then?

        Moreover, you can pick an LG, ZTE,Pantech, or any other cheap Android phone to show that Samsung is milking their customers especially given that those phones use the same OS unlike Apple.

        I ve seen your postings at other sites such as arstechnica where you likewise always write something negative about Apple. Either contribute something valuable to this site or go alway play at a tech forum instead of trolling here.

        Again, go and take a look at what Samsung is charging for their 32g phones and what they are charging in comprison to other cheap Android makers. That does not mean Samsung is “milking” it is simply consumers decided Samsung has more to offer than others or they trust Samsung more. If you can accept that for Samsung against other android makers, that means you have to accept that for apple as well.

        I pity Horace for having to deal with extreme anti apple trolls like you.

      • obarthelemy,

        Why can one not compare Flash RAM to Flash RAM ? Is it true for PCs too, is RAM soldered on the motherboard more intrinsically valuable than DIMM sticks ?

        Furthermore, since Flash is Flash, nobody buys the expensive version anyway, everybody uses a SD. Samsung is not even really trying to sell models other than the 16 GB, the biggest operator (http://mobile-shop.orange.fr/telephones-portables/1/Samsung/6/android) and the fastest-growing one (http://mobile.free.fr/mobiles.html) both don’t carry them, I checked my 4 favorite web shops, only one had a 32GB on sale. (sorry, links would be very spammy, fnac.com, materiel.net, rueducommerce.com and cdiscount.com, all in the top 10 sites in France, not sure how high in there).

        And I’m refraining from arguing that removable/exchangeable Flash has more utility than fixed Flash, though it does.

        I could have picked another brand, but I figured I should stick the the most well-known/successful one. I’m sure I would have been accused of comparing 1st tier to 2nd/3rd tier otherwise. And also, I don’t know the others’ products that well. Last time I looked for a friend, we ended up settling on a GS2 , so I’m not sure there’s that huge a gap between Samsung and others once you match specs.

        I think I’m contributing something valuable, though it seems disagreeing about how wonderful Apple is does not fit in this site groupthink and leads to ad hominems. And I do recommend iDevices occasionally, around 20% of times. It just seems that some people are allergic to facts such as “Flash is Flash”, and “a 32GB iPhone is 50% more expensive than a 32GB GS3″.

        The price of the 32GB GS3 does mean that Samsung is happy to milk the customers who don’t know better and who don’t get a 16GD SD like everyone does, or who need must have the absolute maximum of Flash possible. Since Samsung also makes micro-SDs, I don’t understand your trust argument, worried customers can get a Samsung SD.

        Do you think disagreeing with you is trolling ?

      • Simon,

        Sorry obarthermy, you ignored my question. Is Samsung ripping off people with their 32g version? Saying it doesn’t seem to be widely available isn’t answering.

        Also you haven’t answered the other question either. There are other android makers with cheaters models of comparable specs such as ZTE, LG, Pantech, etc, sometimes even using the same Exynos chop. Samsung’s phones are considerably more expensive than those brands. Is Samsung milking the customers given that they don’t even make their own OS? Not to mention some of them even use higher quality material than Samsung does?

        You’re trolling because you cannot admit Samsung does the exact same thing that accuse of Apple of doing, which is charging premium for desired products over competition.

        Beside I don’t think you get the point of this site. It’s a site that wonders how businesses can be successful, you know by “milking” the consumers. If you have a problem with how business make profits, you’re in the wrong site and you should never buy an expensive Samsung smartphone.

      • obarthelemy,

        “The price of the 32GB GS3 does mean that Samsung is happy to milk the customers who don’t know better ” Sorry, lots of other words in my post. Highlighted the relevant ones for you.

        Also

        “I could have picked another brand, but I figured I should stick the the most well-known/successful one. I’m sure I would have been accused of comparing 1st tier to 2nd/3rd tier otherwise. And also, I don’t know the others’ products that well. Last time I looked for a friend, we ended up settling on a GS2 , so I’m not sure there’s that huge a gap between Samsung and others once you match specs”. I don’t see how where the OS comes from works into the value proposition. Is a multi-vendor + open source OS safer, thus more valuable ? But it’s the same for all Android competitors so …. ?

        1- Can you give an example of comparable phones’ prices ? You assert a price differential, show me the money ?
        2- “better materials” is a judgment call. Glass was supposed to be a “better material” until people realized that glass breaks, and that glass wrapped in ugly silicon wrapper looks like ugly silicone. Now it’s scratchy/cold Aluminium (which is a move in the right direction, we could have ended up with crystal ^^). One word: plastics. :-p
        3- I’m sure Samsung is happy to milk wherever it can. Thing is, they can’t, not much, not yet. And Apple ability to milk is diminishing.

        Anyhooo, the subject of the article was not Samsung, but Apple, and how to assess their adressable market. My argument is that you can’t just take Apple’s US market share and plunk it down on all countries assuming Apple will reach US share if/when they reach US-like availability levels. Price, subsidies, and sensitivity to various criteria (ease of use and design/social value for Apple; specs, price, keyboard, size… for others) work differently in other markets. And explain why Apple still hasn’t gone big in some markets. May it can’t ?

        You seem to assume I buy phones on philosophy. I buy them on specs, mainly screen size (and OK sound + good camera). I was happy to pay 500 euros for a Galaxy Note, and I’m sure Samsung made a tidy profit. I’d be glad to switch to a phone with a bigger screen if you can point me to one ? I’m actually contemplating using a Samsung Tab 7.7 as a phone, it’s one of the few 7″ tabs I could find that do work as a phone. Getting long in the tooth, but at 430 euros ($560) it’s cheap. ish.

        And finally, businesses can be successful by providing value, not just by milking. I give little credit to fake claims (iOS is no longer easier to use than Android), and consider some other pie-in-the-sky (“holistic design”…). there’s room for those, but I think specs and capabilities are more important. The argument was pretty much the same in the Detroit vs Japan heydays. How did that turn out ?

      • obarthelemy,

        Also, you ignored my question about why soldered Flash (and SDRAM ?) is better than removable, since you want to go that way.

      • Guys, calm down, and reread the last part of Horace’s post:

        Note that this is not a debate about market share or consumer preference but about delivering a particular value proposition to network operators, (which sustains a premium price point.) The iPhone is built around this business model and to alter it would alter the very essence of what the product is. The addressable market is one piece of the product but it interconnects with the price, margin, design, production and breadth of offering. You cannot change one without changing the others. It’s a product whose distribution model is part and parcel of its design.

      • Simon,

        Benjamin Alexander

        Sorry about being contentious Benjamin. However I have seen obarthelemy in other sites doing the same thing. If he was here as a contrarian or a devil’s advocate of sort, then I have no problem with him. However he’s everywhere basically doing nothing but complaining about Apple.

        I don’t mind having a person who’ll question Horace’s and others’ assumptions and claims, we need such poster, but obathelemy, from what I’ve seen him over time on this and other sites, has just become a more sophisticated anti-Apple troll.

      • Simon,

        obarthelemy

        “Also, you ignored my question about why soldered Flash (and SDRAM ?) is better than removable, since you want to go that way”

        That has nothing to do with the previous discussions but other than the obvious business reason, there are technical reasons:

        1) OS doesn’t have to worry about the SD card getting rejected.

        2) Ensuring the best performance: Many microSD perform bad or sometimes even defective. With my Android I’ve personally had cheap microSD card bringing down the whole phone to crawl.

        3) Easier and better for the design without that one extra slot.

        If you have noticed, none of latest Android Nexus devices has a SD slot. Is Google trying to milking us too? They already have very high margin. ;-)

      • obarthelemy,

        1- do you mean ejected ? The “removable media” issue has been solved since floppy disk days though ? Apps on the internal flash, media on the external… no issues.

        2- Cheap SD is cheap, good SD is good. It’s even made official via “classes” of SD, get a brand-name class 10 next time, they’re not even that much more expensive.

        3- Indeed. a µSD slot is not huge though, there are a least 3 phones thinner than the iP5, at least 2 of them managed to make room for that huge µSD slot, not sure about the ZTE Athena. I’m fairly sure customers don’t value a toenail extra volume at $80, too.

        Indeed, Google is doing the very common “1 discount-price to get them in, 1 regular- (or worse) price item they’ll actually buy” switcheroo with the Nexuses. I think it’s also a way to leave some features to their partners, an SD slot is an important feature. That has held me back from getting a Nexus until now, though I’ll probably get a 10 soon, because darn that thing is good and cheap, and I can probably live with a USB key hanging off its USB port while I transfer a movie over.

      • Simon,

        The OS still has to worry about it. I didn’t word it correctly but I’m surprised you don’t know this. Android has had a lot of problems with mixed media partitions and different file systems which led to different partitions running out separately and users being required to manage the partitions and the system performance not being optimized (no, class 10 still is much slower than the internal storage)

        In fact an Android engineer at Google has mentioned this and said that’s why the new Nexus device doesn’t have the slot. Please feel free to say the Android engineer is paid by Google to lie.

        If you haven’t noticed, all thinner phones have far more total volumes than iPhone 5 which is how they make room for it. Not to mention that it’s an extra hole in the casing which as we know Apple abhors.

      • obarthelemy,

        In the early days, internal Flash was severely lacking, so some people moved apps and some system files to the SD, which indeed put lots of strain on it. Nowadays, internal Flash seems to be no lower than 16GB, which is big enough for all apps, relegating the SD to media storage, which only requires that the SD be able to handle delivering of saving HD video, at worst.

        So while technically true, what the Android engineer said is irrelevant. I’m sure there is an Android Partnership Manager somewhere also crying that Nexuses are making his partners unhappy and is life a nightmare, and that getting rid of the SD slot is the minimum minimorum Google can do for him, and a Marketing Manager saying he quite likes switching customers from a $400 Nexus 10 (at 10% margin) to a $500 Nexus 10 (at 25% margin), but for some reason Google chose not to publicize their opinions ^^

        And finally, volume-wise, at least one of those phones is indeed, 0.003% bigger, which I guess is a dealbreaker for the same people who’d find an extra cache a dealbreaker. You don’t seem to realize that, but SD slots are covered with a cache, they are not “holes” (sic).

      • Simon,

        Sure, you can put that as a conspiracy theory that Google decided to let other devices to live on and internal memory has no benefit whatsoever, believe what you will. I’m sure HTC has gotten rid of that in their One X to just let Samsung live too. ;-)

        To have a SD card, you either need to have an open-able back cover or a hole to have a place for SD card insertion. I’m not sure what you’re trying to say here. Can you put a SD card without going through a hole or opening up the phone??

        But all these are mostly useless bickerings that doesn’t really do anything for this site.None of the discussions you and I had over the past few hours contributed any single thing for the readers of this site, just another loud nit-picking over details.

        Think about it. You’ve first accused Horace of picking a side and Apple is “milking the market” which is downright trolling comment if I’ve ever seen one and now we’re arguing over rather mundane technical details that end up in conspiracy theory. I can’t help but to call out as an anti-apple troll whether you realize it or not. If you haven’t realized it, do know that you’ve become one.

      • obarthelemy,

        You do realize I stated the advantages of internal flash, and how they don’t apply ? You do realize a cache covers a hole ?

        I agree with you on the pointlessness of our discussion, but you keep misrepresenting and twisting what I say, and bickering yourself (is 0.003% bigger relevant ? reaaalllyyy ?)

        Stating a company is milking the market is trolling only if it’s untrue, and even then, only if it’s not supported by evidence. You take any disagreement as trolling, which is actually a bit sad. “Milking the market” is as standard and valid a strategy as “lowballing”.

        I do think Horace’s comment, especially his tentative to twist my words by pretending I was saying losing money was nice, are unfair to me and show bias in his views, and I called him out on that.

        As for irrelevant engineering concerns being the only reason for the lack of an SD slot, yes, sure. Do you only believe companies’ PR ? Don’t you know there is a “get into their shortlist, then trade them up” sales technique ? I think that’s what HTC is trying too, we’ll see with their next product revision and sales figures if it worked, I guess.

      • Simon,

        Sorry I still don’t understand your point about the hole and here I’m “Do you only believe companies’ PR ?holding an Android phone with SD card slot. Does a SD card require a hole there or not? It does correct? They want to avoid that in the first place.

        Also you who claimed this hypothetical Google “Partnership Manager” has a hand on the Nexus not having the SD card slot. Somehow…LG made a phone with no SD card slot that’s very much alike the Nexus 4. Is LG looking out for others too just like HTC? That’s just a nonsensical conspiracy theory. Do you have any evidence instead of “Do you only believe companies’ PR ?” line? Do you believe 911?

        Let’s not forget, it’s you who began comparing the price of Apple phones against Galaxy S3 PLUS a SD card when the Galaxy S3 has a 32G version. That’s either a trolling or an extreme dishonest to make Apple look bad.

        It’s not a disagreement. You’ve insulted the site and questioned the integrity of the writer. Since I’ve seen you going against Apple in other places, I can only say that you just cannot accept Apple being put in a good light.

      • Simon,

        My last comment was mess from cutting & pasting, let me clean that up a bit.

        1) hole in SD – are you saying a casing of the phone doesn’t need a hole ? Yes or no? If it requires an extra opening, that’s what they want to avoid.

        2) Google’s “Partnership Manager” having a hand on lack of SD card in Nexus. Again, LG’s sister phone of Nexus 4, Optimus G also doesn’t have one. Ditto for HTC phones. We also have Google engineer’s comments. Do you actually have any evidence for your assertion other than a conspiracy theory?

        3) Please note that it all began when you made a wacky claim about Apple “milking” the market by charging 50% more than Samsung when you use a SD card with Galaxy S3. Galaxy S3 has a 32GB model but you didn’t compare that because that’d been too logical and you’re trolling. You can’t make up facts just to suit your argument

        4) I see you all the time saying something negative about Apple here and others. I don’t see you as much in disagreement as much as that you simply don’t like the company and its success.

      • obarthelemy,

        We’re going in circles.

        1- a cache hides and shuts off a hole, that’s what cache actually means in French. So a cached hole is no longer a hole. Think of it as the lid on a garbage bin. Is there a hole on a closed garbage can ?

        2- I stand by Google willingly cutting some features to leave some differentiating/improvement room for partners, amongst which SD. And by my other statement on the same subject, which you conveniently forget again and again and again, about bait and switch.

        3- The wacky thing is to pay $100 for 16GB of Flash when you can have it for $20. Which is why everybody is logical and buys 16+16, which is why I compared those prices. Should we forget SD slots exist and all customers use that because Apple don’t offer it ? I don’t see stating facts grounded in reality as trolling. Maybe you find that trolling when it results in displeasing comparisons ? A 32GB iP5 is 50% more expensive than a 32GB GS3. Sorry.

        4- I also sometimes make nice comments about iDevices. About 15% of the time I guess, which puts me in line with the market ^^ They have a very good camera, are very small, and I’m pushing my brother to get one, so that we can get better pics and vids of the nephews, he’s not using his phone for much anyway (he’s currently on some flaky WinPhone 7 piece that went through the washer once…). He’s balking at the price though, and his wife breaking 2 iP4 in a year puts a damper on things. They’ve already got an iMac, an iPad, an iPod and an iPhone, so I’m sure he’ll see the light eventually. I tried advising him to get a bigger phone, and ditch his separate and flaky GPS, but he’s all set on a small phone, and the iP5 is the best small phone. So iPhone it is, in my opinion.

      • Simon,

        obathermy, Just in case you don’t understand this site, let me explain it further for you.

        If you want to make an argument against Apple, you should tell Horace why Apple will not be able to grow in the future in terms of profit, instead of saying making profit is bad.

        Unless you get that point, you’re just an anti-Apple troll in a business site that you have no understanding of whatsoever.

        I understand that you cannot stand Apple and can’t want to see the company fail if you haven’t noticed, Apple has been extremely successful and that’s why Horace finds them fascinating. That success part is a simple fact, not a “groupthink”. So far the reality has been good for Apple.

      • obarthelemy,

        I’m not saying making profits is bad. I’m saying Apple are in a miking position, where they trade profits for market share.

        Apple have indeed been admirably successful. They are still very successful at making profits, not so much a keeping market share, let alone gaining it.

        Instead of looking back, assuming Apple can do no wrong, and projecting best case scenario into the future, I think it more reasonable to look at the current reality (15% smartphone share, 50% tablet share down from 80+% last year)

      • JaneDoe12,

        You can read all your comments under the “Activity” tab.

        http://disqus.com/obarthelemy/

      • I’m currently going through the web pages of the carriers from China, India, Nigeria, Russia and Pakistan and pulling their basic financials as well as any basic subscriber & subsidy info I can find.

        I’ve got a hunch, but we definitely need to set up the experiment with data.

    • GeorgeS,

      It seems to in the US. In looking at phones at a large store, the salesperson kept pushing Android phones–he didn’t even show me an iPhone until I insisted. My guess is that his commission was higher for the Android phone because it was cheaper for the carrier.

  9. The way you’re using “addressable” is slightly misleading. Just because a carrier currently has a certain number of subscribers obviously doesn’t mean that those subscribers will always stay with that carrier. AT&T here in the US is an obvious example of the way in which iPhone exclusivity to a carrier can actually move subscribers over. Your analysis doesn’t seem to consider that many of the subscribers currently deemed “unaddressable” are actually perfectly addressable – if they want the iPhone, they can switch to the carrier that sells it. The most important unaddressable subscribers are the ones in countries where the iPhone isn’t sold at all.

    • Alex,

      On another note, there are many regional carriers that provide better reception than the large carriers, which prevent people from switching. One that I personally know of is C-Spire wireless, which only recently began to carry the iPhone. Prior to that, very few people (including my mother in law, and sister in law) would not switch to AT&T or Verizon, because in their rural town, neither of those carriers had good reception, whereas C-Spire had full reception. If you are wondering, they have now both switched from Android to the iPhone, but would not do it previously, even though they could have gone with AT&T or Verizon.

  10. One problem with this analysis is that it’s looking at things from a “Western” perspective. Here in Thailand, it’s illegal to sell mobile phones with a subsidy, and as a result the carriers are seen as just that – carriers. A service to which one subscribes. As a result, carrier subscriptions are flexible and competitive, and mobile phone prices are high. All phones are sold SIM-free (“unlocked”), with no ‘lock-in’ of any kind.

    Despite an iPhone costing the equivalent of 6-8 weeks of the national average salary, they are extremely popular, especially in Bangkok where salaries are higher. When a new iPhone is released, they are extremely difficult to source as the supply is low – and there is a thriving grey-market, selling phones imported usually from Singapore or Hong Kong.

    Another commenter notes that 3G coverage might not be so good, but Thailand now has nationwide coverage, as do poorer neighbours Laos and Cambodia.

  11. johnambani,

    horace, what do u think of this joker’s (henry blodget) article from today? this guy has been negative on apple for as long as i can remember.

    http://www.businessinsider.com/china-smartphone-market-low-price-phones-2012-11

  12. johnambani,

    horace, what do you think of this joker’s (henry blodget) theory? link is below.

    http://www.businessinsider.com/china-smartphone-market-low-price-phones-2012-11

    • Lies from a convicted fraudster really aren’t relevant in the world of actual analysis. He can make up whatever numbers he wants, but there’s a reason he’s legally barred from working on wall street now.

      • Shameless trolling. Even throws out the “g” word!

        And Apple is still being extraordinarily greedy when it comes to taking distribution fees–demanding a 30% cut of everything it sells.

    • FalKirk,

      If I may, I’ll take a crack at Henry’s theories.

      First, it’s a mistake to think that market share is the be all an end all. There is much more costume jewelry in the world that actual jewelry but I’m sure it doesn’t worry Tiffany’s at all. And there are many more kiddie pools sold than in-ground pools, but I doubt anyone seriously thinks that they are competing with one another.

      Second, Henry is always talking about platform, but he doesn’t understand it. No one who is selling a smartphone today feels threatened by dumb phones or feature phones because they do not contribute to the network effect of a competing platform. Similarly, instead of simply counting the raw number of phones sold, one needs to look at whether they are contributing to the network effect (paying money to developers, advertisers and content providers). All the studies show that most of the phones being sold in China are not part of a network at all.

      Remember, developers, advertisers and content providers do not follow the users or the number of units sold. They follow the money.

      • There is much more costume jewelry in the world that actual jewelry but I’m sure it doesn’t worry Tiffany’s at all.

        That’s a great line.

      • Lee penick,

        I think Henry would sell his mom for a click. I’ve followed his site for several years. Horace got the integrity, Henry the sensationalism. I appreciate Horace.

      • Henry is a character, that’s for sure. I follow him on twitter, and he’s actually pretty friendly & willing to engage in intelligent discussion.

        I’d say more but this is an interesting conversation, and doubt Horace would appreciate going further in his comments.

      • Dave Small,

        Fallkirk – You should be writing your own blog rather than commenting on others. You have great understanding and valuable insights.

      • FalKirk,

        You are too kind, but the sentiment is greatly appreciated. Thanks.

      • rattyuk,

        He is a regular contributor to Techpinions. His articles on Android “winning” are full of interesting insights, as you would expect.

    • Sander van der Wal,

      Business Insider talks about platforms, and then forgets to include sales for other, non-smartphone devices running the platform. So there are no iPad and iPod sales for Apple, and no tables sales for Android. And what about the forked Androids?

  13. This is clearly where Google tries to attack with the Nexus 4. By bringing down the cost of top end hardware as far as possible they work against the carrier subsidy model and hence the very pricing structure which sustains the iPhone business. The Nexus 4 has more powerful hardware than the iPhone 5 on every measure (even if it’s nowhere near as pretty) yet is half the cost.

    I don’t believe carrier subsidies at the current average levels around the world will persist for many more years. The interesting thing will be what Apple does then – they can take a massive hit to margins and still be very profitable. It’s not clear that they can reduce costs much without reducing quality. I assume that’s when they introduce a lower cost model and attempt to make up for their reduced margin with greater volume.

    • Nexus 4 does not have LTE and has less storage so not every measure. It also has worst distribution than the iPhone doesn’t it?

      • I don’t really think google wants a big success for Nexus 4 or Nexus 7. They sell them at cost, with a razor blades business model, but they are not sure if the content sales will pay the tablets giveaway.
        They don’t know if their customer will be the type that spend using the devices and they have not the monopoly in content, so they don’t know if a spending customer will use their store or others.
        The distribution is limited and the total number of devices on sale is limited because for now it is a probe they are launching not a definitive solution.

      • What razor blade model? They make more mobile ad
        money on iOS and we know from apple that the App Store is run at cost. We also don’t know how many were sold so far. Sold out is not a measurement.

      • If they really sale at cost, they don’t earn from the device, they will have to earn from the blades, sell of content and advertising, sell of their services. Even if they make money in other environments, iOS for instance, they should have a viable model for making money in every sector, nexus included.

        We don’t know how many they did, but being sold out means that they sold more than what they thought they would. They are not delaying shipments like apple does when supply constrained, they sold out their intended production.

        Will they produce more? How many more? It will depend on the blades’ sale, I don’t think that selling a lot of nexus will be good for them.

      • Emilio – just reread what you said: if apple says something sold out due to their use of JIT techniques then they are making it up but when google does it they mean it even though they don’t report how many they sold out of. That makes no sense unless you have something to support it. Also if they make money from their iOS ad business that doesn’t make their nexus business viable; it makes it subsidised

      • News are that nexus 7 has being sold out and google does not take further orders. They are not delaying shipment due to high demand, they do not take orders anymore. That is what I am saying, they sold what they wanted to sell they are not in the business of making as much as they can and sell them because they don’t have a monopoly on the blades and they don’t know if money will come back.

        Second point: why the iOS business should subsidized the android’s one? If they want to make a business at loss they can do it (more or less, I think it is not legal if you don’t have a viable forecast of future income) but the loss will be closed by all others google’s incomes.
        Furthermore if the nexus business succeed (in this case at a loss) it will mine the ios business given that fewer ios devices will be sold, so decreasing google income from iOS, so a loss made to decrease incomes? That can not be, not in a public company, investors have their rights.
        They have to get incomes from nexus business alone, so they have to sell blades without having a monopoly on blades (they can not fix a price at will, they have to compete in an aggressive market) and without having the most spending customers. In this conditions it is a risk to sell a big number of nexus, in fact their distribution is very limited, they are not going for share.

      • They aren’t taking orders ever again? There is no substantial razor blade model on android for google. Can you show how much google makes from android? They don’t report it.

      • So what do you see as Google’s motivation in selling the Nexus 7?

        It seems to me that it sets Android customer expectations to relatively high quality at low cost (and no profit), which I’d think would undermine the vendors trying to sell the tablets at a profit. Which I’d then expect would result in those vendors making a hasty exit from the market, similar to what happened in netbooks (though indeed other factors were at play there, but there’s no point to staying in a market where there’s no profit or likelihood of one).

      • Walt French,

        So they managed to establish the idea that a 7″ Android tablet should cost $199 but they can’t actually sell them at that price. Meanwhile, none of the OHA partners can produce a decent tablet at that price, either. This might hurt Apple, if customers hold off from buying the iPad, but it has to absolutely KILL the Android business.

        Anybody who can explain this to me, please, please! do so.

      • It just occurred to me that this can be an in android war. They are aiming at apple, but at samsung.
        They can not sustain the kind of success needed to compete with apple and furthermore such a success will lower the considerable income google gets from ios devices without providing another source of income.
        But samsung is making more money from android than the whole google income, samsung could buy google and it is now in a position to dictate condition to google for the survival of android.
        Establishing the idea of low cost android devices, without really having to sell a great lot of them, could mine samsung profitabilities forcing them to lower price point.
        They are fixing the relative value of an android device with respect to ios devices, higher price point than google’s risk to be not compared favorably with iOS and the same google price is not sustainable.
        They risk to kill the android business, yes, but this king of android business where samsung wins it all could not appeal google.

    • Walt French,

      You couldn’t define “limited distribution” better than by citing Google’s early Nexus phones. Even the 4 is extremely constrained; in that sense they’re closer to Apple’s original offering than to the network that Horace describes.

      I’m completely unable to discern ANYTHING remotely sensible about Google’s strategy in offering the Nexus 4. Limited availability. Reportedly, an unused(!) LTE chip signaling it was rushed to market. No profit margin to build the type of capacity for successors. No apparent dovetailing with other flagship Androids from the OHA partnership.

      If anything, this resembles the relationship that big US carriers had with the hardware manufacturers before Apple burst on the scene: the carriers strategically featured a half dozen different manufacturers, with carrier-specified features. No manufacturer was allowed to get enough share that they could gain pricing power or enough profits to undercut the carrier’s ownership of the customer. “Barefoot and pregnant,” as they say.

      I wonder how the Samsung issue will develop.

    • Snake Oil Seller,

      The carriers don’t care about the price of the phone or the subsidy except as cashflow. What they care about is the profit generated from the phone. If the iPhone generates more profit than the Nexus then they will prefere the iPhone.

  14. “BlackBerry through 565 wireless carriers in over 175 countries. By this metric alone BlackBerry has twice the addressable market of the iPhone.”

    Isn’t that assuming all carriers have about the same reach?

    RIM sure has twice the relationships.

  15. The production question is important, as demand often outstrips supply. We’ve been discussing whether Apple would take equity stakes in its suppliers over at: http://www.thegadgetmasters.com/2012/11/13/5-reasons-why-it-is-better-to-buy-rim-than-apple-shares/

    One way or another, getting more involved with its suppliers would be a way to increase production.

    • obarthelemy,

      but lower margins

      • simon,

        Not necessarily. If they can achieve an advantage in production or differentiation, the margin can still be kept the same due to the economies of scale. Apple has already been getting more involved with production with their purchase of manufacturing equipments.

        But I’ve read enough of your postings now to know anything Apple does is a negative sign that eventually predicts Apple’s doom ;-)

  16. newtonrj,

    As other handsets come up in price parallel with iPhone will that re-enforce the subsidy model or strip it away?

    In a new market, Apple wanted subsidy to compete with low-feature/priced competitors. As new higher value handsets penetrate, they too are seeking subsidy models that the carriers are currently reinforcing.

    I’ve always believed the handset tech is a limited joy to the experience the ecosystem offers. If users are committed to the Android-way, no iPhone will suffice. If the iOS, app store, iTunes, iCloud, iMessage scheme satisfies, then choices become clear as well. Only the switcher or uncommitted handset buyer is swayed.

    It matters little to me that iPhones are a premium handset as much as the delta between them remains similar to other tech markets. 30-50% premium for an elegant or ecosystem or cool factor is agreeable. I’m concurring with Horace’s previous observation that these are handheld computers that also make phone calls.

    iPhone’s addressable market is not as important. Competition is not as important. Differentiation is paramount. Market constraint is a plus as opposed to saturation which has often worked against iPhone’s sales interests.

    -RJ

    • obarthelemy,

      I’m fairly sure a good proportion of phones will always be significantly cheaper than the iPhone. The GS3 is 30% cheaper were I live. From where I stand, the subsidy model is fading, not being reinforced.

      Also, I’m still buying phones on hardware and price mainly, and most people around me do too. The assumption is that Android and iOS have reached parity in terms of OS ergonomics/capabilites and software available. For me, screen size is paramount, my eyes are not getting any better ^^. And from what I’ve seen, very few people use more than a handful of apps, plus a handful of games. Those (mail, browser, ereader, chat,…) are available for pretty much any platform.

  17. Cashewer100,

    Hi Horace,
    Only the carriers with a useful percentage of post paid users, will sell iPhones. Steve mentioned before that Apple was not smart enough to do the feature phones like Nokia. Maybe one day the long rumored iPhone Nano will be needed.
    SengHee Tan
    Singapore

  18. Dave Small,

    In some ways, the carriers are Apple’s customers and business partners. In other ways, they are the enemy and the central problem.

    Apple could start selling unlocked iPhones on an installment plan. Perhaps $100 down payment and $25 per month for two years would work for a high-end iPhone. They certainly have the cash reserves and could easily afford to do that.

    Problem is, the carriers wouldn’t agree to drop their two year contracts and to offer lower monthly rates that don’t include the subsidies.

    I’m pretty sure Apple hates the carriers. I know customers hate the carriers.

    • This is the US situation, but it is very different in other parts of the world. In many places the cell service is a commodity, and people churn between different carriers based on price (and coverage of course).

      I think the barriers to Apple selling phones on the installment plan in those countries isn’t the carriers, but more likely the legalities and logistics of doing so, especially in many different countries. It is much easier for them to let the local carriers do the heavy lifting on that. At some point it may make sense if they see potential users being turned away by the up-front price of an unlocked phone. I suspect this may happen as the subsidized markets saturate.

      Apple also seems to have been pushing some of the carriers in pre-paid markets to support a subsidy model, especially in China. It’s not clear how well this is working, though. And the iPhone has appeared with a partial subsidy model on at least one pre-paid carrier in the US (Cricket).

      It’s hard to say how this will play out, other than the likelihood that the US carriers won’t let go of their subsidy-justified lock-in model without a lot of external force. I’m hoping Softbank’s takeover of Sprint may shake things up a bit, but we’ll see…

  19. If apple wants to address emerging markets and underdeveloped markets then they need to spend some of their cash to send books and provide minimum education in such countires. You can’t even use a dumb phone if you don’t know how to read and write, let alone smartphones. Countries where about 10-50% population has not seen the doors of school (current generation) doesn’t even know what an “iPhone” is. Even if they knew, there are better places to spend $650 than an iPhone (e.g., food, place to live, cosmetic products, and booz with friends to enjoy life).

    Now production capacity of a brand new product. They can produce billion iPhones if they wanted to but then it is not a “sure thing” that it will retain premium status and sell like hot cake. Blackberry did that overproduction in its peak time and fashion changed and they had to write down billions of dollar worth inventories. Definitely there are production ramp up issues when a new product is launched but its risky at the same time to produce in huge quantities. No one is talking about fashion change, it occurs all the time after every few years and one should not deny that iPhones are fashion items. Otherwise one can spend 1/3 the price of the iphone on another smartphone with similar capabilities, smart buyers see that easily and buying things what’s useful for them (smartphones from samsung, nokia, blackberry, htc, and lg easily provide those capabilities) than buying a product because of peer pressure or to look good.

    • Kizedek,

      You sure have a poor opinion of most people in underdeveloped countries. Most know exactly what they are buying and why. Their financial circumstances are such that they can’t afford to make a mistake when they invest that kind of cash, and they better make the right choice the first time and live with it.

      They are hiring the iPhone for a certain job — to be their primary computer and to further their business opportunities.

      So, yes, we deny that iPhones are fashion items. I would say that Blackberries and others are much more so. Please don’t make assumptions about the values of those in underdeveloped countries, they would be choosing the iPhone for valid and very practical reasons that give them an edge.

      Now, you may be confused by the motivations of scalpers who stand in line and buy up iPhones to sell into grey markets where the iPhone is not officially available. They may have no idea what the iPhone is and why people hire it for certain jobs. But again, this isn’t due to fashion — their motivation is clear: to make a quick buck. They KNOW they can sell it on, because it is highly sought after, even when people apparently have little money for anything else.

      As Horace said, if the perceived value is there, people will find a way to purchase it. Obviously, the perceived value IS there, and it goes beyond fashion, thank you very much.

  20. Interesting argument. You must also note that in some markets such as India, Apple sells phones in an unlocked state and therefore it is independent of any operator. Now, if India has 600 million mobile phones, does that mean the entire chunk is addressable by Apple? Not really, because many of these users cannot afford a smartphone such an iPhone.

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