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Comment by guelo | Hacker News Reader

With that unbelievable 40% margin it seems like they could wipe out all competition by lowering their prices. I wonder if they worry that that would get them into monopoly territory and bring heavier regulation.

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Apple earns 92% of all smartphone profits. There is no competition to wipe out.

http://www.wsj.com/articles/apples-share-of-smartphone-indus...

Profit-share is STILL a stupid, vanity metric. This is the metric that says, "If a well-funded competitor steals your market-share at the cost of running a loss, that is actually good for you."

Edit to add: This is the metric that says that life is awesome for taxi companies because Uber runs enormous losses. Profit is a useful metric (and Apple has awesome profits). Market share is a useful metric (and Apple has a small minority of the smartphone market share). Profit-share is something that somebody made up to make Apple's market share not seem as small.

You assert that iPhone market share is the important metric, but never actually demonstrate why. Care to put some reasoning behind it?

Your taxi analogy is unsatisfying for a number of reasons, not the least of which is the utterly unrelated market conditions between that and the mature consumer electronics industry, but feel free to expand if you think it will go somewhere.

edit: clarity

The only reasonable answer to you is: No, of course I won't try to justify why market share is a meaningful metric, and I particularly won't try to justify why this utterly standard metric is meaningful in the context of someone coming up with a ridiculous vanity metric and asserting that it has some value utterly divorced from any argumentation.

But what the hell, I'm feeling unreasonable today:

Market share is meaningful because it demonstrates the size of the market that Apple could potentially reach.

Market share is meaningful because if Apple's market share falls below a critical percentage, people will not target the iPhone for app development (as happened with the Mac and is currently happening with, say, Windows Phone).

In the case of app development targeting, I'd agree that Apple's market share is probably more important than Apple's profit share. However, the most relevant metric is probably iOS share of wallet vs. other mobile OSs. $MOBILE_OS can have an arbitrarily large market share but if people don't pay for apps on it, it's not going to be very interesting to app developers.

That said, market share is, of course, at least one of the relevant metrics but the market needs to be defined. Companies don't typically target the largest theoretically possible market for their products. They target a subset for a variety of reasons.

I think that's a slightly dated view. I don't think that the app market is mainly defined by "I'll pay $1 for an app" anymore. In a few fields, perhaps. But the most important apps are at this point free ones, and their users are monetized in other ways.

In-app payments and other forms of monetization are still monetization that require users to pay money. That said, I agree there's a balancing act. If a hypothetical "luxury smartphone" had a tiny market share, it wouldn't be an attractive development target in general even if its buyers spent a lot of money on certain types of apps.

But the iPhone isn't really in that position. Certainly, it seems to have no trouble attracting developers and companies creating apps to target travel, subscription, and other services.

There are plenty of forms of monetization that don't require users to pay money (ad supported being the obvious one), and there are even more forms of monetization that require the users to pay money, but not pay money for an app (think Uber or Grubhub), and while it does seem to be the case that Android users are less likely to pay money for an app than iPhone users, I'm not aware of any sign that they are less likely to pay for a physical good or physical service through an app.

But clearly iPhone is not in that position, I agree!

and while it does seem to be the case that Android users are less likely to pay money for an app than iPhone users, I'm not aware of any sign that they are less likely to pay for a physical good or physical service through an app.

You mean like last year's holiday shopping numbers? From "Apple's iOS Has Once Again Decimated Android When It Comes To Data That Matters": http://www.businessinsider.com/ios-android-shopping-data-201...

>Adobe, which is tracking online shopping, reports the following: "iOS users drove four times as much mobile sales revenue as Android users, 79 and 21 percent respectively."

I think parent's point was about free apps that are just access points to a physical world service like airlines, hotels, Uber, Yelp, OpenTable, etc. I do suspect iPhone users spend more per capita generally because they're probably a wealthier demographic than Android. But I also suspect that overall marketshare is more relevant to the companies developing the apps in this case. (It's also somewhat beside the point though because everyone in this position is going to have an iOS and an Android app at a minumum.)

Except the data says differently. From the transcript of the conference call:

>The App Store set new all-time quarterly records for both the number of transacting customers and overall revenue. The strong performance of the App Store helped fuel 1.5 billion dollars in services revenue, also an all-time record.

The relevant market would seem to be the handset market. Hasn't Apple's share of that been growing? It sure hasn't dropped much, if at all, while they've ramped production faster and higher than any product in history.

Just so we are clear, you mainly reasserted your opinions and gave a hypothetical about a market erosion that Apple clearly isn't in, given the fact that their absolute sales have risen.

I remain unconvinced.

It means that if Apple where to lower their prices then they'd only be hurting their own profits. Apple (and all scrupulous companies) are trying to maximize profits, not wipe out the competition.

"It" doesn't mean that, no. I mean, that may or may not be true, but profit share has no explanatory power here.

Profit share means that when you total up all the money that's been made as profits for the industry, 92% of that money went to Apple and 8% went to "other." If Apple where to wipe out the competition as you suggest, then they would gain that final 8% of profits[1]. But if they had to, say, lower their prices by 20% to achieve that, then they wouldn't come out ahead. And that's ignoring the anti-trust issues that would spring up. Thus, that's why I'm saying they are doing the right thing and pursuing a "scorched Earth" policy would be ill advised.

[1] Unless people won't buy from Apple even if they're the only game in town. But I doubt there's enough of those people to make a difference.

edit: formatting.

As a point of order, I didn't suggest that Apple wipe out anything.

But, no, you're wrong, and the way you're wrong is doing an excellent job of demonstrating the problems with profit share.

There's not an amount of "profit" out there. There is sort of an amount of "revenue" out there. But Apple takes in a small minority of the revenue associated with smart phones, as demonstrated by their market share, which is something on the general order of 14%. The fact that other vendors are inefficient at turning their revenue into profits is neither here nor there.

Of course, the actual analysis is far more complicated than that, since the market isn't in fact a static thing. If Apple turned say half of their unit profits into price reductions, it would have enormous, chaotic effects on the smartphone market. I don't have the ability to predict what the end result would be, and neither does anyone here. But profit share doesn't tell us that Apple has no opportunity, and in fact it is a metric crafted to draw attention from the fact that Apple has a low market share, which does a better (though certainly imperfect) job of showing the opportunity.

Except that's exactly how their competitors think, yet their competitors haven't wiped out the market by lowering their prices.

A large part of the success of the iPhone is the 40% margin for many reasons.

Well, the market has been wiped out. The iPhone in Europe is down to 14% market share, from 17% 2 years ago.

Market share is not really the number that matters to Apple, although it definitely seems to matter to people who want Apple to fail.

I don't think market share is the best metric for measuring iPhone success, or even necessarily one that Apple cares about (save for when it breaks in their favor). As with the Mac, they seem content to let their competitors fight over the high volume strata while staying in the upper tiers and banking the lion's share of the profits.

As abtinf pointed out, market share != profit share.

What percentage of smartphone profits does the iPhone garner in Europe?

That data, sadly, is not available anywhere – they don’t seem to disclose this. I only get results about SAMSUNG falling back in profits internationally, because in the US the premium market is focusing more on Apple. But no information about what the profits look like in Germany.

Consumers don't always choose based on price. There would be many consumers that would choose Android equipment even if Apple lowered their pricing. Then Apple would be competing, but without the war chest that allows them to, say, buy some chip companies and start designing their own chips or being able to pay in advance for parts and get a steep discount. Plus, as you note, if they achieved 92% marketshare, they'd fall under heavy regulation. This way, they're able to get 92% of the profit, but there's still significant competition to the point where Apple isn't even the largest by number of devices. It means that Apple doesn't have the market power to dictate terms - most people don't buy Apple equipment. It must continue innovating and producing great things. But it also means a lack of anti-trust attention since consumers have highly viable alternatives - alternatives that the majority of consumers worldwide use.

Similarly, there are certain industries that seem to be "cool" and people will try and compete in them regardless of profit. Smartphones seems like such a market. In a market where Apple and Samsung are the only two profitable makers and there's little innovative new features coming out, people still want in. I mean, Apple joined the smartphone market with a completely different design in the iPhone - no keyboard, capacitive multi-touch screen that dominated the phone, etc. Today, it's mostly polishing that formula introduced in 2007. Why would you want to enter an industry where you'd just be taking a display, a chip from Qualcomm or MediaTek, and a pretty standard body and camera, pair that with Android, and ship what everyone else is shipping? Are you doing anything better? Unlikely. And yet people want in even in the face of zero profits. So, even if Apple wiped out the current competition, it's likely that people would want in. And companies like OnePlus have shown that it's not terribly hard to join in the party.

Lowering margins probably wouldn't help Apple over the long run. Companies have shown a willingness to enter unprofitably and anti-trust attention on Apple could break their ability to continue profiting.

Apple is a premium* brand. They don't make commodity products.

I think there are better articles out there than this one [0], but it was the first search result.

Thinking about their behaviors through that lens is interesting and, to me, clarifies a lot of the strategy behind some of their actions. Fun stuff.

[0]:http://www.cnbc.com/2013/10/15/apple-is-a-luxury-brand-not-a... AUTO PLAY NON-MUTED VIDEO WARNING

Hell of a non-commodity product that takes the size of share the iPhone takes. In the car market, marketshare numbers comparable to the iPhone's numbers do not accrue to luxury automobiles (which have far lower shares).

Apple is in general a premium brand, not a luxury brand. The Apple Watch Edition is their first foray into luxury brand territory,

See: http://sethgodin.typepad.com/seths_blog/2009/05/luxury-vs-pr...

I agree. That's a great little writeup - thanks for posting it.

That's gross margin over production costs for their current products. Much of that margin goes towards massive R&D investments towards their future products. One of the keys to Apple's continued success is the huge investments they make in new materials and processes with a very long term view.

What competition to wipe out? In the flagship phone category Apple beats all. It is why they take all the profits since flagship phones is where profits are made.

I'd like to see Apple drop its margin requirements a bit and really work to get its product in more hands.

I think ultimately getting your product in more hands is a more worthy objective than "just" making the best products.

Greed is a hell of a drug

would greed be wiping out their competitors or keeping their large margins...?

That greed made a vastly superior phone (back then) to anything on the market as it was mocked and ridiculed. Companies like (Sony) Ericsson were ridiculing it.

First phone with a decent development environment, SDK and App Store.

The two can be mutually exclusive.

Good phone... still greedy.

Yeah, but how would they fund the development of their self-driving electric car that will only turn left?

(because, you know, it's going to be opinionated. I can just see the the Jony Ive ad now: "We rethought everything, took everything away that absolutely didn't need to be there. What we were left with was just that: left")

On top of how silly your statement is, if they were to do something like that, the car would only turn right, due to fuel concerns and not having to wait for lights.

Hell, a lot of fleet management software for companies like UPS already tries to minimize the amount of left turns for this very reason.

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