There is a fascinating article in the Wall Street Journal written by Shira Ovide and Daisuke Wakabayashi which reports that Apple makes 92% of the profits in the smartphone industry. The report is based on numbers from Canaccord Genuity, an investment banking and financial services company. I myself don't know if all of the data and conclusions of Canaccord Genuity are 100% valid, nor do I know the margin of error, but based on the commentary that I have seen elsewhere since this report was released, there seems to be a good chance that the 92% figure is roughly accurate.
The 92% figure on its own is pretty striking. There is no question that Apple is making a lot of money from the iPhone because every quarter Apple reports record profits, but I never realized that Apple was taking so much of the profit in the industry.
Moreover, the 92% number is even more remarkable when placed in proper context.
First, it is amazing that Apple is so profitable when so few smartphone manufacturers make money at all. The report says that Apple makes 92% and Samsung makes 15% of the profit in the smartphone industry. You might question how it can be that those two numbers add up to more than 100%, but it is because everyone else loses money in the industry. In other words, Apple and Samsung make more money on smartphones than the industry does as a whole. The article reports that there are around 1,000 companies making smartphones, but all of them except for Apple and Samsung either break even or lose money. Apple, and to a lesser degree Samsung, make all of the profit in the smartphone market.
Second, the 92% number is fascinating in light of the previous estmates. Only one year ago, Canaccord Genuity estimated that Apple received 65% of smartphone profits. And in 2012, Apple and Sumsung each had about 50% of the profits.
Why the meteoric rise in the past year? Rene Ritchie, an astute Apple observer from the iMore website, believes that the difference is that last year, folks who wanted a larger phone had to choose between the 4 inch screen of the iPhone 5/5s/5c and larger phones sold by Samsung and other companies, and many of them opted for a non-Apple smartphone to get that larger size. But since the Fall of 2015, Apple now sells the 4.7 inch iPhone 6 and the 5.5 inch iPhone 6 Plus, along with other (older) models with smaller screens. I myself am not a fan of the super-large screens on some iPhones. I still sometimes find my iPhone 6 a little big and I cannot imagine using an iPhone 6 Plus. But I know many folks who feel differently and prefer to use a larger phone. Whether the credit goes to the larger iPhones, improvements in iOS 8, or other unique advantages, Apple is clearly selling more iPhones than ever before, and apparently it is making good money doing so.
By the way, here is a chart showing the increase in iPhone and iPad sales over the years. This chart is based on quarterly data that Apple releases, and at this point the most recent data is from April of 2015. We'll get new numbers next week when Apple has its fiscal second quarter conference call on July 21, 2015.
Third, the 92% figure is surprising because the iPhone does not have 92% of the smartphone market. Far from it, in fact. The Wall Street Journal article says that Apple sells less than 20% of all smartphones worldwide. The article also says that Apple is able to demand higher prices than its competitors, and there is some truth in that because Apple doesn't sell new smartphones than are cheap (although Apple does sell older models of the iPhone at lower prices). But there are lots of other smartphones that sell for the same price as an iPhone, so that's not the full story. I believe that Apple's profits also stem from the company doing an excellent job in manufacturing and predicting demand.
Thus, if the 92% figure is even close to accurate, it is truly remarkable on so many different levels.
An interesting counter-example to Apple's recent success with the iPhone is the news last week about Microsoft's smartphone business. Back in 2007 when the iPhone was introduced, Nokia was making about two-thirds of the profits in the smartphone industry. In August of 2013, Microsoft announced that it would pay $7.2 billion to acquire Nokia's smartphone business. Microsoft announced that the deal closed in April of 2014, so for just over a year now, Microsoft has been making and selling smartphones that had previously been sold under the Nokia brand name. But just last week, it was reported by Robert Cyran in the New York Times and others that Microsoft is now writing off most of what it paid for Nokia in 2014. So during the past year, while Apple's share of the smartphone industry profits soared, Microsoft essentially threw away $7 billion in the smartphone industry.
Apple's strategy has never been to sell the most of any product, but instead to sell the best of any product, with the expectation that profits will follow regardless of market share. In the smartphone arena, it appears that this strategy has paid of in a big way.