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In which I continue to seek part time employment as the ruler of the world.

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Wednesday November 11 2009

Incoming email from Michael J, entitled “An interesting fact”:

Apple makes about 2.5% of the mobile phones sold in the world. With that 2.5% market share, its mobile phone division makes around 35% of the total profits made by all of the mobile phone manufacturers in the world. In particular, it makes more profit from mobile phones than does Nokia, which has a 40% market share.

So there.

So what does it mean - that Apple’s phones are terribly overpriced? That Nokia’s profits are eaten up by draconian local taxes and fees, unlike Apple’s? Why’s the difference?

Posted by Tatyana on 12 November 2009

I suspect the comparison between, say, Apple and Dell in the PC market would not be radically different.

Nokia (and with it presumably the entire Finnish economy) is in big, big trouble. They have, in the space of a year or two, completely lost their position and credibility in the high end phones market. They are also a very important maker of telecommunications network equipment - mobile phone radio towers and all the very complex, very reliable and very expensive stuff that sits behind them. There too they are massively losing ground, mainly to Chinese manufacturers whose kit is cheaper and, as far as I can tell on limited experience so far, not inferior.

Posted by Alan Little on 12 November 2009

Tatyana: Neither. It means that they’re in different markets.

Nokia makes lots of cheap low-margin phones (as well as some high-end ones).

Apple makes only high-margin phones for a smaller market - the people who’d buy a “free” Nokia bottom-end handset ("free" meaning “the telco pays Nokia for it out of customer fees") aren’t buying a $299 iPhone 3GS and a $70/mo data plan. (They’re unlikely to even buy a $99 last-generation iPhone with the same data plan.)

(Much like the PC market - Apple doesn’t compete in the bottom-end low-margin area; only in the high-end.

Less market share, much more profit share. $299 box PCs are razor-thin on margin, no matter who makes them. $1200 all-in-ones make you more profit. People who would only buy the former aren’t the customers Apple wants.)

Posted by Sigivald on 13 November 2009

Thank you, Sigivald. It’s like dime-stores (which is now dollar stores) vs. hi-end boutiques. Profit per unit @dime stores is minuscule, but their volume makes it worthwhile.

OK. But now, per Brian’s post above, hi-end/low volume market brings more profit than low-end/big volume market. What will happen now - the mass-market manufacturers will fold their relatively unprofitable business to shift in the hi-end sector?

Posted by Tatyana on 13 November 2009

Research in Motion (RIM), which makes the Blackberry, is in a similar position to Apple. They also have about 2.5% market share by volume and they make about 25 percent of the total profits. The smartphone market, which is by far the most profitable segment of the market, is thus dominated by two companies that do not play in the mass market. From this, we can probably conclude that being a mass market player has turned out to be a significant disadvantage in establishing a smartphone business.

Why is this? I think some of it is company specific: Nokia and Ericsson have tried to build a smartphone business using an outdated operating system (Symbian) that is difficult to write software for. And it may be that PC expertise is more valuable that mobile phone expertise when you are selling phones that are essentially little computers and which run similar applications (browsers, facebook, internet messaging) that run on PCs.

More specifically, though, I think the way the mobile phone business traditionally operates is the problem. The mobile networks themselves (Orange, Vodafone, O2 etc) buy handsets in large volumes from manufacturers like Nokia. The customer then (mostly for low end handsets) buys the phone from the operator for significantly less than the operator paid Nokia or (for higher end handsets) gives it to the customer for nothing up front in return for the customer agreeing to a lengthy contract. Operators get to decide (mostly) what handsets will be sold and used on their networks.

Operators have done two counterproductive things. Firstly, they have tried to get a cut of all revenues from all applications running on their phones. This means that they have tried to restrict applications running on phones to ones that they think they can make money from. Operators have been terrible at figuring out what customers actually want to do on their phones. Secondly, operators have been incredibly reluctant to allow or encourage anything that will undermine existing revenues. This has meant bans on things like instant messaging programs, VOIP programs like Skype, etc etc. As a consequence, it was common for people like Nokia to provide phones with lots of cool new features, and the networks responded by refusing to buy the phones unless Nokia removed most of the cool features first.

This has lead to a general situation where Nokia and Ericsson’s smart phones are not as well distinguished from their feature phones (ie mid market models).

RIM managed to establish its Blackberry product by appealing to the corporate world, which didn’t generally mind paying for a phone up front and paying hefty data charges as much as consumers do. Once the product was clearly defined and established, the Blackberry became a consumer product as well and operators started paying handset subsidies. However, that is key. Once there is a clear market for a product that exists, it can be sold to the operators on a take it or leave it basis. Nokia and Ericsson have never been able to do this. The fact that they also sell hundreds of millions of simpler phones to the operators, and the operators could easily take this business somewhere else, has meant that they have no leverage on their smartphones.

Apple on the other hand decided to do without handset subsidies and only sell the iPhone on a very limited number of operators initially, working on the (correct) assumption that it was so cool that enough people would buy it even paying outrageous costs that it would be a success. They were right, and again, once the product was established. A year later they switched to a subsidy model and sold the phone to more networks, but by then the product was so successful that the “Take it or leave it approach” worked. Operators now beg Apple to let them sell the iPhone. Operators have not traditionally worked like this, and they hate it.

This makes amusing reading.

At the same time that Nokia faces this problem at the top end of the market, it is losing share of the featurephone market mostly to the Koreans, and it is losing share of the simple phone market mostly to the Chinese. To compete, it has had to cut prices, so it is getting squeezed everywhere.

Posted by Michael Jennings on 13 November 2009

Michael, it’s fascinating; better than detective stories. Seriously.

Posted by Tatyana on 13 November 2009
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