“Worldwide mobile phone sales have crossed 1.15 billion units, with Nokia and Motorola holding more than 50% of the market.”
That was the state of the market in 2007, the year iPhone was launched. Today, Nokia has been broken up into several different parts, Motorola has been through several marriages and divorces, and Apple and Samsung stand tall as the new mobile phone industry’s dominant duo.
Smartphone sales reached 1.5 billion units in 2016, with Samsung and Apple accounting for nearly 30% of the market. The type of mobiles phones which we used in 2007 are now called feature phones, and have already become a footnote, selling 396 million units in 2016.
The fall from the top was really hard on feature phones, and nobody will be surprised if they vanish from the market all together in the future, finding their final resting place on a Wikipedia page.
Meanwhile, Apple’s iPhone disrupted the mobile world, and smartphone sales have zoomed from zero to 1.5 billion in a span of ten years. Apple, the disrupter-in-chief, enjoyed a never-before-seen type of success that catapulted the company to becoming the world’s largest in terms of market capitalization – something that stands to this day.
Apple sold 211 million iPhones in 2016, compare that to the 1.3 million units Apple sold in 2007. Growth has been furious because Apple’s products revolutionized the market and spurred the industry towards smart devices, in the process forcing feature phone users to move to smartphones. A new market was created, and Apple rode the market to success.
But it also became prey to its own success, because there aren’t as many hands today in the world to push a smartphone into, compared to the number of hands that were available in 2007.
To pull on that thread a little harder, global population touched 7.3 billion in 2016. But we cannot sell smartphones to everyone in the world. If we remove children under the age of 16 from the pool, the population shrinks to 5.3 billion. The 16 to 65 age group, the category that the bulk of smartphone buyers fall into, is only 4.7 billion. This is as close as we can get to the potential smartphone market pool.
If you add further criteria, such as internet penetration, earning power and so on, the market will shrink even further. But at least there is potential for increase in some of those areas.
Source: SMS Global
Smartphone penetration in developed countries is obviously much higher compared to other parts of the world. The United States and Canada are already above the 65% penetration level, while China is a tad above 50%, and India at a lowly 22%. It’s crystal clear where future smartphone growth is going to come from: developing countries.
People in these regions are going to slowly move into the smartphone pool, but how many of them will be able to afford a premium smartphone that costs upwards of $600? Assuming that’s a reasonable argument, can’t Apple reduce its pricing to add more users in those countries?
They can, but the only problem is, that’s a way to increase unit sales, not profitability. Apple’s premium positioning and the exclusivity it brings with it has served the company well because it is profitable. The most profitable smartphone company in the world, in fact.
Let’s explore that a little.
“According to a new report from IHS Markit, which found the materials cost around $219.80, plus an additional $5 to assemble. That makes the consumer price (of a 32GB iPhone 7) about three times greater than Apple’s production cost, and $36.89 more than the 6S model,” reported Forbes.
That market positioning Apple’s iPhones enjoy is what allows the company to charge such a huge premium on the actual cost of making the product.
But the moment you move down from that position, things start to get ugly. Competition keeps intensifying as the product’s price point keeps moving lower, and margins go down along with it.
If you think that’s only hypothetical, take a look at this:
“Third-quarter smartphone operating profit reached $9 billion globally of which Apple took 91 percent of the share, Strategy Analytics said in a note on Tuesday. This amounts to $8.19 billion for the U.S. technology giant.” – CNBC
Now the question is, if you are Apple, will you move your average product price lower by adding more iPhones at a cheaper price point to capture a larger slice of the developing market?
Clearly, the lower the price of a smartphone, the lower the profits. And, in reality, there are literally no profits to be made. So Apple has no reason to keep adding more and more smartphones at lower price points because of two things:
- There’s no money to be made, and
- It will erode the exclusivity that iPhone enjoys in the market
But it’s not as black and white as that may sound. Apple does have some pricing bandwidth to play with. As we just saw, it costs a little more than $200 to make an iPhone that is subsequently sold for more than $600. As such, Apple would be willing to let go of some margin to increase its reach in developing markets. But at no point will it go drastically low, because it just doesn’t make sense.
They’ll try to go lower as they curb their BOM (Bill of Materials), assembly, import duties and other costs by better procurement and domestic manufacturing and assembly the way they do in China, and have very recently started to do in India.
The way it stands now, iPhone sales may have already peaked, but that’s because of Apple’s decision to remain a profitable and premium brand, and not because of competition or any other reason, as others might have you believe.
It is also true that Apple is struggling to maintain its iPhone sales numbers as a result of this decision, which is why it is pursuing domestic manufacturing, new iPhone SE models, the reviving of iPhone 6 and so on.