Apple's Basic Strategic Problem: Market Share Or Profit...

Apple's Basic Strategic Problem: Market Share Or Profit Margin?

An interesting little piece of data that highlights Apple‘s basic business conundrum. Should they be going for market share or should they instead be looking at maintaining profit margins? Obviously, either strategy would be aimed at maximising long term shareholder value. But what actually is the right answer to the question? Why it’s important is here:

In a research note released today, Nielsen examines the potential for smartphone growth in the BRIC region (Brazil, Russia, India, China), where, in many cases, feature phones still dominate. According to the firm’s findings, only in China are smartphones predominant, where they’re now owned by two-thirds of mobile subscribers, as of the first half of 2012. However, in India, Russia and Brazil, users are only beginning to transition away from feature phones to newer, app-capable devices.

So we’ve two to three billion people about to go through the transition from feature phones to smartphones. Sorry, deduct the number that already have them: some very large number of people. This transition is pretty much what we’ve all gone through over the past 5 years or so here in the richer countries.

When we did it, certainly until recently, there was no great price difference between Apple products and the others. Not at a similar level of operational ability etc. A price premium for Apple, yes, but not some vast gulf. Apple did indeed carve out a large and very profitable part of the rich world markets. Excellent, I’m sure we’re all happy for Apple shareholders.

However, this next surge towards smartphones is coming in countries that are much poorer. $700 for a phone is something that a much, much, smaller portion of the market can afford. And we’ve also got much more competition in smartphones these days. Yes, certainly, Apple phones are great. But you can get a Chinese Android cheapo for $100 or less these days. And even if not quite as lovely and gorgeous as an iPhone there are certainly entirely capable Android phones out there at $200 to $300.

And there’s more too: much of the world does not operate handset subsidies as is common in the US and Europe. You don’t get to buy the hradware “cheap”, paying it off through the monthly payments over two years and the like. You want a piece of hardware then you pay for it, all of it, on day one. Such a pricing system obviously makes price differences a great deal more visible.

Which is what brings us to Apple’s stragic problem. The decision they’ve got to make. Everything else being equal they would obviously love to have people, when they convert to a smartphone, converting to an Apple one. Get hooked on iOS, buy up apps that run on it, get the peripherals, your next phone in two years, your one in four or six, is likely to be an Apple too. Expanding market share is, those other things being equal, going to improve long term profits. And this requires a cheaper handset from Apple to achieve.

However, other things aren’t equal. For releasing a cheaper handset would cut into those famous profit margins. So there would be some decline in current

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