That Competition Thing

Bill, I think the smartphone market has always been competitive. [Only] the names have been changed.

Tim Cook responding to Bill Shope’s question on the competitive landscape, April, 2013.

Indeed, over the years, the companies considered Apple’s primary competitor have been many.

In years gone by in the phone market there were RIM and Nokia and Palm and HTC. In the iPod era there was Creative and Sony and innumerable others long forgotten (not to mention the tyranny of DRM).

Even today we struggle to decide whether Apple competes with Google first or Samsung. Or perhaps with the iPad it’s with Amazon or  Microsoft. Or maybe iTunes is threatened by Netflix or Spotify. The Mac surely competes with HP and Dell and Toshiba. What about iCloud? Clearly it’s Dropbox or Google Drive. iWork? Both Office and Google Docs.

Doing a competitive analysis for Apple is then mostly a struggle of whom to compare it to. So forgive me that I only track the few challengers shown below.

Screen Shot 2013-08-13 at 8-13-2.14.59 PM

Note also that these companies all may compete with Apple to some degree but they may not compete with each other. Competition, it seems, is not transitive.

There isn’t much that I can observe in the data that hasn’t already been observed. Google shows steady but not spectacular growth in revenues with decreasing margins. Microsoft shows even more modest growth in revenues with flat earnings. Apple growth is moderating from near vertical while earnings pause. Samsung has great growth but there is a similar set of doubts about its sustainability and finally, Amazon continues to grow the top line by 20% and  has nothing to show for it.

Operating margins have mostly fallen with the exception of Samsung whose increasing reliance on smartphones has led to a modest increase, though not nearly to the level of the others. (Amazon, lacking in profits, cannot be compared.)

Screen Shot 2013-07-30 at 7-30-10.54.44 PM


In summary there is little change to report.

Except that it’s been reported that in the last quarter Samsung managed to “dethrone” Apple from the phone operating profit crown. This is a matter of estimates and for that we need to understand clearly the assumptions.

I estimate that this is not the case. That indeed Apple remains most profitable phone maker by a wide margin.

To estimate operating margins you need to estimate gross margin and the allocation of operating expenses (SG&A and R&D) to a particular “division” or product line. The problem is that Apple does not operate as a divisional organization so its marketing and R&D budgets (i.e. people) are not assigned permanently. You have to move them around based on whatever is being worked on at any given time.

What’s more, we need to account for the huge SG&A costs associated with iTunes and Retail. They both consume vast resources which cannot be allocated directly to any product. There are 41,000 people working in retail.  Also, some of the expenses for iTunes are overhead and cannot be considered cost of sales. That’s also SG&A. Then there’s corp research and design (Mansfield and Ive), which are not allocated to any particular product. When you slice out these costs, there is very little to apply to iPhone, etc.

So if (and it’s a big, sanctimonious if) you want to cast iPhone out as a separate business unit, it would be wildly profitable. There is a huge gross margin of 46% (this assumes a cost per unit of $316) and only another 5% of sales spent on engineering and marketing leaves a 41% operating margin or $7.4 billion. (Why only 5%? Because there’s only 10.8% to allocate and after taking out iTunes, Retail you’re really only left with 4.49% for SG&A and 3.3% for R&D or 7.79% so 5% is about two thirds of the operating budget).

If you take all of Samsung’s IM division which is PCs, Tablets and phones their operating profit was only $5.6 billion.

You can see the difference in the grey areas of operating profit in the first graph above.

Bear in mind that this is still an artificial comparison. The split of profit between product groups is not only an estimate by the analyst, it would be an estimate for Apple itself since it has only one P/L.

  • crustyjusty

    I think everyone loves to position Apple as going up against Google, because it’s more unpredictable and exciting. At the end of the day, though, Apple would double in size if they continued to encroach on Microsoft’s enterprise business. And since they’re both “product” companies, not advertising companies, I think it makes more sense. The buyer or user pays for the “thing,” it’s not earned through clicks.

    We’ll see what the internal answer is if they focus more on iAd or more on iWork over the next year or two.

    • pk_de_cville

      Why not do both?

      iAd is obviously both profitable and a pain for Google.

      iWork is a ecosystem play and more of a pain to Google Docs then MS Office.

      Google loves to go after everyone. Perhaps there are disadvantages to picking so many fights. I bet Tim and the boys would love to have iAd decimate Google’s mobile ad dollars.

      • Tatil_S

        Google Docs role is being a pain to MS by actually eroding its income. I don’t think Google would care that much if somebody else comes in spending money to become an even more viable competitor for MS. Ecosystem lock-in or consumer tracking qualities of Docs does not seem very high.

        I am not sure iAd is all that competitive. Many advertisers want to be able to track consumers across platforms, but iAd does not let them compile a profile that combines consumer behavior when they are web browsing with whatever Apple knows through the customers’ mobile OS use profile.

    • David Leppik

      Enterprise doesn’t work well with Apple’s style of doing business. Steve Jobs was doing enterprise at NeXT, since that was the only niche he could find.

      Big Businesses like predictability. They want to know what your product plans are for 5-10 years out, so they can build their IT department around them. They also want 5-10 years of support for existing products. Businesses want to be able to buy last year’s products in bulk, since they already have replacement parts from last year’s purchase. They don’t like surprises. Apple lost deals because the salesperson couldn’t admit that Apple was about to release a product with the desired specifications.

      Apple likes to suddenly end-of-life technologies, leaving developers to scramble to rewrite their software. It’s amazing that they sell anything to businesses at all.

      • Walt French

        These are indeed characteristics of businesses in the recent past.

        They’re dysfunctional for markets that are changing dramatically and following the old rule of thumb can lead to terribly dysfunctional results. For example, Microsoft actually has almost zero credibility about any 5–10 year roadmap for Windows Phone, having precipitously EOL’d devices that ran WP7, for example. Given that track record, and the disastrous early reception for “key” strategies such as WindowsRT, who would prefer the “stability” of Microsoft’s mobile device outlook, versus Apple’s track record?

        (For that matter, who has even predicted what Microsoft’s mobile offering will be in 2015, let alone what Microsoft has warranted? Third parties, e.g., Gassèe, have offered a dramatic shake-up of their technical approach as the only way likely to succeed.)

        Times change. Savvy businesses won’t pretend that it’s still 1992. Cook’s claim of 60% share of the Enterprise for mobile (casually cited and curious as it was) shows that if Apple’s M.O. is not respected, its products are at least valued.

    • Chaka10

      Not sure it’s so much Apple looking to compete with Google, as the other way around. Following is an excerpt from a report from Goldman Sachs today (reported on by Tiernan Ray):

      “Google has faced challenging economics with the shift to mobile from desktop given traffic acquisition costs (or TAC) imposed by key smartphone vendors as well as lower monetization levels of mobile CPCs (~50% vs. desktop). Specifically, we estimate Google pays TAC rates on iOS devices that are north of 75% …. We further estimate Google pays Samsung TAC of ~10%…. Accordingly, we believe that Moto X represents Google’s attempt to achieve higher levels of mobile monetization, as it does not have to pay TAC on this device and since a more meaningful presence in smartphones could help elevate Google’s bargaining positioning vs. Samsung and Apple. However, if Moto X fails to garner traction, we believe this creates the potential for Samsung to ask Google to pay a higher TAC rate than it is currently paying, as Samsung looks to increase the revenues associated with after-market sales of its devices.”

      This is from the same Google playbook where revenues from Google web properties have steadily grown faster than revenues from its partner networks (the same playbook that faces complaints and anti-trust inquiries in Europe).

  • obarthelemy

    I’m not sure the question of whether Samsung have overtaken Apple in profits yet is as important as the rapidly falling iPad market share. Because the formula for the iPad is very similar to that of the iPhone (quality/good looking components but lagging features and performance; older models as lower-cost choice) I see it as a sign that subsidies are a key factor of success, and explain why the iPhone keeps going strong even as iPad is having issues. I’m sure there’s a r squared somewhere of %age of customers on a subsidy to iPhone share.
    This may have consequences for Apple’s relationship with carriers. This may also validate the upcoming cheap iPhone.

    • mshipe

      Apparently the coefficient of determination between the facts presented in the article and your comprehension is 0. This implies, though not in a causative fashion, that regardless of what Horace presents you purposely choose not to accept or misrepresent the data to suit your ulterior motive(s). This forum is an excellent resource to discuss the intriguing developments in the telecommunications industry and Horace’s unique insights thereof. I’m certain you can offer additional intelligent insight but instead resort to petty confrontations. In the future, please attempt to do so.

      • def4

        Horace’s diligent culling of obvious trolls has allowed for the emergence of a new breed: the erudite, intelligent sounding concern troll.

      • twilightmoon

        Very astute point, but while this new breed of troll may sport a fancier outfit, the end result is similar.

    • Sacto_Joe

      The fallback in iPad sales last quarter was wholly predictable, as is the iPad’s future continued growth starting at the end of the present quarter. If it’s a sign of anything, it’s a sign of your desperation that you’d lean on such a thin reed to support your arguments, considering how short a time it will be until your opinon is shown to be incorrect.

      • Neil

        I’m concerned about last quarter’s iPad sales. I’ve been telling everyone that the iPad is Microsoft, Intel, and the PC makers all rolled into one device. I also think the iPad mini is the best computer I’ve ever owned. I realize that the year ago quarter had a new iPad but I was still surprised by the drop. Horace sort of addressed this drop above but the answer is unsatisfactory. If traditional computer sales are falling off a cliff and specs are no longer important what happened with the iPad?

      • Matt

        Nothing happened to the iPad. The retina iPad was released in the same quarter as last year and demand was incredible. This quarter, no new iPad was released and it still sold 14 million units. Over 150 million iPads have been sold since it was released a little over 3 years ago. How many do you need Apple to sell to relieve your concerns?

        Microsoft and the PC makers would love to be rolled into the iPad.

      • r.d

        problem is exponential growth.
        in 2010 14 million were sold
        2011 40 million
        2112 65 million

        2013 look like to be 75 million ipads.
        so that is only 15% growth
        when 65/40 = 62% growth.
        and 40/14 = 185% growth.

        Plus Apple hasn’t hit the sweet spot of $199 price
        barrier to kill the competition like ipod.
        So obviously cry babies will come out of woodwork
        with their designated talking points.

      • KirkBurgess

        I presume you are talking about calendar years, whereby Apple sold 65.7 million iPads in 2012. Given that Apple has already sold 34 million in be first half on 2013 (up 6 million on last year, despite no new models) you are predicting apple will only sell another 41 million in the final 6 months (5 million more units than last year) even with new iPad & iPad mini models being released?

        Personally I think your at least 5 million light on your estimate.

        Even if we do come in at your 75 million estimate – how much more is this compared to the next closest vendor? 40 million? 50 million?? 60 million???

      • obarthelemy

        More importantly: how big a share of the total market is it ?

      • market

        Why is that particularly important? And it’s subject to significant argument about what constitutes the market.

      • obarthelemy

        obviously, 15% marketshare, 70% profitshare (which as far as I can tell is the x86 desktop/laptop situation, and the smartphone situation) is a nice place to be. I can’t help thinking that it’s a bit of a fragile position though, especially for markets with strong network effects, which all IT markets arguably are. I think it would help Apple’s share price if they were at 30 / 70 instead af 15 / 70.

      • tz

        As a contented Apple customer for nearly 20 years, to me and my personal experience, Apple’s market share is totally irrelevant.
        I remember being a user of Apple products, and a customer of a company that had about 3% of the market it was competing in (laptops and desktops) and being enthusiastically satisfied with the product and the company.
        In fact I think I was actually somewhat more satisfied than I am now. This stems primarily from the price of Apple becoming so big. Their customer support has gotten far more rigid, structured, and institutionalized, and manned by less than knowledgable front line assistants who then may or may not pass me on to someone who knows their stuff.
        All of this talk of marketshare smacks of so much infantile sports team fanboyism. My team, number one! Rah Rah Rah!
        Or is that blah blah blah?

      • Tatil_S

        If Apple can dominate the profit share in PCs on its minuscule global market share, its tablet market share is more than enough.

      • Space Gorilla

        What you fail to understand is that Apple dominates in specific segments of the market where network effects live, I call it the ‘best customer segment’. Total market share is meaningless, it’s just a talking point, or as someone else said “infantile sports team fanboyism”.

        The other point you’re missing is that consumers are not brand or design oriented, they are experience oriented. It’s a subtle but important difference.

      • obarthelemy

        Saying market/profit share counts in sub-segments, but not in aggregate, doesn’t make sense. Same for calling those the “good” segments (sorry, “best”), I suppose by opposition to the others, the “bad*worst” ones ?

        As for brand vs features vs experience, “experience” is a red herring, the question is whether customers use the brand or the features as a proxy for the experience.

      • Space Gorilla

        That you don’t understand why market segmentation matters really says it all. Experience is not a red herring, it is in fact the actual issue, and you’re missing it.

      • Tatil_S

        It is not surprising that 10” iPad did not sell as many as it did during its year ago launch quarter. However, Apple now sells iPad mini which was not on the market last Spring, so it would not be over optimistic to expect iPad Mini to make up for the shortfall in full size iPad sales. It is possible that iPad Mini is not an item that holds up sales outside of holiday season as well as the big iPad. There may also be many potential customers refusing to pay the iPad premium without a retina screen.

      • handleym

        I think the more interesting question is WHY Apple has apparently allowed so many of its releases to pile up in a single quarter? We expect Fall to bring new iPhones + new iPads + new iPad minis + new iMacs + new Mac minis + new Mac Pro + even(?) new iWatch.

        This seems strange behavior all round. It makes production that much harder, it makes revenue that much more bursty, it makes PR work that much less well, concentrated as the excitement is all over three months, it means bursty hiring of Apple Store employees.

        So why? Is it all just unfortunate 2013 specific timing, a series of unplanned coincidences? Is there something ESSENTIAL in iOS7 which has really meant that a revived iPad mini in Spring, or a new iPad in Summer would have felt incomplete?

        As an outsider, it looks like a mistake, and I would guess (based on nothing but intuition) that Apple will work going forward to try to undo whatever strong coupling (in iOS?, between iOS and OSX?, driven by iCloud?) has caused this, so that looser coupling next year allows for a much smoother release of new HW.

      • obarthelemy

        I’m curious as to why and how it was predictable. The iPhone 5 was introduced at the same time and doesn’t seem to be flagging that much, so “age” is not an issue… what else is there ?

      • Sam

        Not sure what the original poster’s opinion is, but here’s why it didn’t surprise me.

        The iPad 3, the first “retina” iPad, was released in that quarter a year ago. No iPad was released in that quarter this year. (The iPhone 5 was released in the fall, so it’s not comparable in last quarter’s results.) Apple is also in the process of winding down the channel in anticipation of new products in the fall, and there’s often a dip in sales before such products. Usage stats and market share all seem to indicate people aren’t leaving the iPad for any other platform, either, just waiting for the next one. The only “study” to show Android gaining significant market share was one out of Japan which didn’t include Apple Stores in their tally.

      • obarthelemy

        but isn’t the iPhone in exactly the same position ? Year old, update right around the corner…
        As for platform churn, I’m not sure it’s measurable yet: most people I know are on their first tablet (which is getting old though), it at all. I’m assuming brand loyalty should be the same, but discrepancies would be interesting to study.

      • Sebastian Paul

        With the moved release of the iPad 4 (and possibly iPad 5) to the end of the year, we just can’t compare last quarters iPad numbers with anything, because the situation this year is completely different.

        Last year, Q3 had seen the release of a completely new iPad just a few weeks before, with demand going strong for weeks and even months, leading to high sales in Q3.

        This year, there was no similar iPad release, so iPad sales were a sign of the iPad 4 being at the middle/end (there were rumors about Apple releasing the iPad 5 in April, May, June etc…) of its lifecycle.

        And we don’t even have comparable numbers for iPad sales at the end (like 7-9 months after release) of the cycle because in the past, this coincided with Christmas.

        There’s just no valid data to compare to, there was neither a new release just weeks before Q3 nor any important gift-giving event like Christmas, so we can’t even say that the iPad always has fewer sales 9 months after release, because we can’t compare Spring/Summer sales of the iPad 4 to Christmas sales of the iPad 3.

        Data has to be recalibrated with the release of the iPad 5 (November? October?), only then will YoY data become meaningful again.

        For all we know, web usage is still great and much higher than Android.

      • obarthelemy

        There is a launch effect indeed, but looking at the sales graphs at , it doesn’t seem very strong:
        – the dip the following quarter was small. maybe Q3/12 could be adjusted downwards by 3M units (and the next Q up by 3M) to weed out the launch effect and get a traight-ish line to Q1, which is always much bigger due to seasonnality (to iPod chart is funny, hedgehog much ?)
        – this quarter’s dip is in line with the previous quarter’s dip.

        In the mean time, tablet sales in general are on a very upward trend.

      • mshipe

        One contributor could possibly be that the replacement/upgrade rate for an iPhone is shorter/quicker than the iPad. Secondly, the iPad was much more widely distributed at its inception and thereafter versus the iPhone and thus it growth rate in its first 3 years isn’t as readily comparable or predictable.

      • Sam

        No, it’s not. The iPhone 5 was released on September 21, 2012… there was no iPhone released in the year-ago quarter. The iPad 3, on the other hand, WAS released in the year-ago quarter. (Your confusion may stem from the fact that another iPad refresh came 6 months later, near the same time as the iPhone 5.) So the year-over-year results for the iPad are comparing iPhones at the same point in their refresh cycle, but iPads comparing a release quarter versus a pre-release quarter.

      • obarthelemy

        Oh, indeed, I was taking the refresh for a true launch. Thanks.

      • Chaka10

        If you are “assuming brand loyalty should be the same” for the iPad as for the iPhone, why aren’t you equally sanguine that the iPad will “keep going strong”, in your words? I know you’ve consistently cited carrier subsidies as the difference, but surely the experience with the S4 (on which you and I previously had a “we’ll see who walks the talk” exchange) demonstrates the greater relevance of iOS stickiness. The S4 after-all also benefits from carrier subsidies, and recent Kantar data shows the iPhone share is growing faster than Android in US, UK and – yes – even France.

      • obarthelemy

        You’re answering your own question. As for GS4 vs iPhone, it should be “high-end Android” vs iPhone.

        As for marketshare evolution, the only gain I see for Apple is North America ? ( Indded, I’m sure you can find counter-trends if you break down the data sufficiently, but why stop at the country level ? go for cities, streets…

      • Chaka10

        Your link is bad. Check the latest Kantar data.

        Point is, iPhone gained share on the back of loyal replacement demand and iPhone 4/4S demand from first time smartphone buyers. Again, why would you not be sanguine about the iPad in the same way if you assume same loyalty?

    • iObserver

      You post here a lot so I assume you’ve read an article or two. Have you paid no attention to the fact market share % is wildly variable and an estimate at best? And that not many companies (any?) other than Apple report actual sales numbers, so how could anyone really know market share…

  • Sacto_Joe

    What’s interesting to me is to look at the huge boost touchscreen mobile devices have given to operating income for both Apple and Samsung. (It would be fun if that could be broken out for Amazon and Microsoft as well.) Clearly, that’s going to continue driving others to keep competing, in hopes of “joining the club”.

    Also, comparing the revenue and op. inc. charts is an alternative way to show the incredible advantage Apple has over Samsung in flipping cost into profit. Even with recent lower margins, Apple does this twice as well as Samsung. Heaven help Samsung if Apple REALLY decided to undercut them!

    • Walt French

      It *IS* interesting, yes.

      Many entire industries start out with pioneers building out a new capability, only to find themselves saddled with first-gen, obsolete investments that never earned back their cost. Either by out-building the competition or by anti-competitive efforts, they force competition into different approaches that capture the profits without having to bear the exploration & definition of the new business.


      The economist Paul Krugman recently commented on how so much business today is based on companies profiting on owning property, rather than profiting on using capital to build their products, even citing Apple’s intellectual property as an example. His $3 label, rentier, reflects the fact that the 500,000,001st iOS device uses up essentially zero of the investment in intellectual property, unlike the (capital expenditure) machines that depreciate (wear out) as they stamp out the case, glue the glass, etc.

      Showing a chart of feature- vs smart-phone production by brand, Horace tweeted this morning, “who’ll make dumbphones in the future?” and some give & take got us to note that axiomatically, commodity markets don’t have branding—we don’t value brand names enough to even recognize/remember them if the product is really a commodity. (So, “nobody. Anybody. Who cares?”) And Econ101 predicts those markets have a price equal to the marginal cost of the last item sold.

      But rentiers face a cost of acquiring the property, then the second item costs zero. Midway between the two, smartphones have huge, multi-year OS development costs to get in the game, costs that are amortized over an uncertain number of devices and years. This bodes ill for Microsoft, Nokia and BlackBerry as the costs of a competitive OS and ecosystem are real, but need a fairly high share to cover their costs.

      Note that individual Android manufacturers have other, very high fixed design and branding/marketing costs, at least in the developed world. Motorola, which was sinking into quicksand when Google acquired them, was losing the battle despite being the hero device for the Droid brand and having a great name. A developer acquaintance predicts rough times for the Moto X, at least in part because US carriers will fight, as they long have, against being relegated to second fiddle; in his view Motorola will need to pay dearly to re-establish the brand. I’ve not seen that Google rolls that way and in the US Apple and Samsung may be the only two firms that can afford the branding that generate profits for developing anything risky.

      • obarthelemy

        I just read an article on Forbes about Android and iOS users being similarly OS-conscious, but Android users being a fifth as brand-conscious as Apple users. That’s a bit of a touchy distinction to make, since obviously Apple = iOS = iTunes ecosystem. Anyhooo…

        The “other” fixed costs of Android OEMs/Integrators are also borne by Apple and RIM and other OEMs/OS+Ecosystem devs. Maybe even moreso because RIM for example have to market their OS and ecosystem, while Android OEMs only have to market a device.

        As for brand equity, I think it’s the PC all over again: a few customers are brand- (and design-) oriented, most customers are features- and price-oriented. Trying to create brand equity for the sake of brand equity seems a doomed move for most, might as well focus on chain-creating great devices. Android OEMs are especially guilty of trying to create lock-in w/o even creating brand equity, via alternative launchers and proprietary markets. I think it’s counterproductive, even the less tech-aware people around me realize they’re missing out on updates because of a clunky shell, and that they should buy off the PlayStore in case they switch brands later.

        At least, people have stopped saying “ho ! an iPhone !” everytime they see a smartphone :-p

      • DarwinPhish

        “As for brand equity, I think it’s the PC all over again: a few customers
        are brand- (and design-) oriented, most customers are features- and

        Accept that was not likely the case. I would argue most potential buyers are risk averse and brand recognition does a lot to reduce perceived risk. The early PC market would have developed much differently if the #1 computing brand, IBM, had not entered. As the market grew, brands like Dell and HP did well despite offering fewer features for a higher price.

      • obarthelemy

        1- not true for the PC market. Dell in particular was way cheaper than IBM. And… why did IBM exit the market again ? Oh yes, commoditization and their brand not carrying the premium they wanted.

        2- As for brands, some customers do indeed go for The One Right Brand, being Prada, Apple, … that’s mostly the fashion victim market though. Most customers, do use brands as a proxy for… something (value, quality, performance…), but consider several brands which are all rating “OK”. They’re not so much about *which* brand, as about whether it’s branded or not, and with a brand that broadly fits their criteria/values.

        An exemple: my dad just changed cars. he’d never have looked at Tata, Hyundai, Skoda, even Nissan… he did look at Peugeot, Renault, Citroen, which fit his main filter of being European but not German (WWII memories…). Ditto for phones: my Android friends filter a bit: they mostly want 1st-tier, ie Samsung, HTC, Sony… LG and Acer are a harder sell, ZTE and Huawei even more so, and anything else is vetoed right off the bat.

      • DarwinPhish

        Not what I meant. The IBM brand brought a lot of legitimacy to the early PC market, which until they entered consisted of primarily of Commodore, Atari, Apple and Radio Shack/Tandy. By time Dell and HP were established PC brands, they could sell systems with lower specs and/or for a higher price than other makes.
        If you did a little research into consumer behaviour and brand awareness you would learn that brand choice is very often about risk aversion. If you are about to spend $600 on a phone and have neither the time nor skills to do a thorough analysis, you look to brand.

      • obarthelemy

        the IBM brand did bring legitimacy, but not moreso than DEC, NEC,… who had their own PC offerings. What made the Wintel (Dostel ?) PC a success was the open ecosystem. Rings a bell ?
        And in the end, that ecosystem was not so much a success for IBM as for the clones, software and services companies around it.
        I’m not sure what your point is.

      • Kizedek

        When discussing branding and Apple, I love how you lump Apple in with Prada.

      • DesDizzy

        Obarthelemy – I think you raise an interesting point. Brand obviously does have utility and is obviously a proxy for safety/quality/performance etc. I would imagine that the more you are investing in the product and the longer the expected utility of the product the more important brand becomes. However, if the take the user base of the PC for example. The business user/IT department will probably give zero or marginal importance to brand, facilitating low cost substitution, ditto for those on low incomes.

      • Walt French

        @obarthelemy sez, “Trying to create brand equity for the sake of brand equity seems a doomed move for most…”

        And thereby pits his knowledge of what’s in Samsung’s interest against their approach.

        Not to say that Samsung always knows what’s good for them. The disclosure yesterday of doping their performance—polluting the well of information that lets you evaluate performance—would seem likely to cause government sanctions in several jurisdictions around the world. Sleazier than organizing astroturfers in Taiwan, for example, which got them a fairly sharp rap on their knuckles.

        Anyway, since your claim is rather counter to what we see — eg, Google/Motorola is about to “invest” in a major brand-building exercise that we’ll get to watch — perhaps you could explain what principles or data support your belief that smartphones will suddenly become commodities. As far as I can tell, even textbook commodities such as wheat are now branded as non-GMO, organic, purity-certified, fair-trade certified, etc.

      • obarthelemy

        To start with, “non-GMO, organic, purity-certified, fair-trade certified, etc.” is not a brand, it’s a spec. “organic” is a spec, “Gerber Organics” is a brand. Get it ?

        As to brand awareness,
        (second graph)

        You’re welcome.

      • Walt French

        Rather than debate the superiority of “organic” — which after all, makes up most of the foodstuffs we buy each week — let’s consider bottled water.

        You’d have a tough time showing lower contamination, better taste, etc, certainly not enough to cover $1 for a pint. In many cases, the bottled water *IS* drawn from municipal systems, and the convenience of a 5¢ single-use bottle that you needn’t wash, goes against the nuisance of schlepping it from the store.

        In the developed world, safe, pure, healthy and tasty water is the ultimate commodity—widely available for essentially nothing per gallon. Yet Americans spend something near $20 billion per year on the stuff that’s a commodity. Why? They value the assurance of the Evian, Arrowhead, Dasani, whatever water.

        I guess several books have been written on the subject. But none of them seems to have advanced the thesis that branded water was going to disappear anytime soon. If anything, I’d guess the market will continue to grow, as our political processes increasingly emphasize private production and control of goods’ quality, in part by downsizing government agencies that provide extremely low-cost goods.

      • obarthelemy

        You’re the one who brought up organics. But we can move away from it if you now wish.

        I can’t find any data on the marketshare of bottled water vs tap vs other drinks, neither for the US nor for other developed countries where tap water is safe. I can’t even find marketshare of high-end vs store-brand/low end bottled water. Where did you get your data from ?

        Reading around, it seems bottled water is helped by soda/beer substitution and fracking’s “flaming water” incidents and other wildly publicized US safety scares.

        Again, I’m not disputing that brands are used as shortcuts for certain values (luxury, performance, reliability, value for money, safety…). I’m disputing the assertion that this is achieved via advertising more than via actual products, and that being THE top brand is very important compared to being one of the top brands. HTC need a clearer image and more brand recognition, Samsung don’t.

      • Chaka10

        “… what principles or data support your belief that smartphones will suddenly become commodities”… Yes, you put your finger in Obarthalmey’s analytical leap.

  • iObserver

    This is why this website is excellent.

  • Phil

    In the week where Samsung has been found to be cheating regarding benchmark scores on the latest S4, are we sure their financial results aren’t being similarly “tweaked”? For example, what happens when a customer gets a free Galaxy Tab with their washing machine… does the mobile division book the revenue and the appliances division eat the cost? Also, free hardware would be a good way to avoid any embarrassing stock write-downs. Just saying that Samsung is not the most trustworthy company.

    • obarthelemy

      Well; when you’ve got the US president suspending the rule of law to favour your rival, I guess that means all means are fair ?

  • normm

    Horace, your last estimate of Apple’s share of handset profits was 72%. Is this still about right?

  • Chaka10

    Horace, have you considered that data from See attached.

  • Difficult to compare Apple to any company. They’re basically a media company. Or you can compare them to Nike…

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  • Max

    When Apple starts making refrigerators and microwaves I’ll start worrying about margins. Until then I haven’t believed any comparisons by the media mavens because they are mostly inaccurate. Thanks to Horace Dediu for bringing real factual data to the discussion.

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  • TK421

    Fandroids hate facts. Horrace gives you the real facts.

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  • sbono13

    Horace, Apple reported company wide operating income of $9.2B for their fiscal Q3 2013. Your stacked bar graph shows operating income in excess of $11B in Apple’s most recent quarter. Can you explain the discrepancy?

    • Yup. There was an error in the data.

      I fixed the graph.

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