Apple iPhone – Market-share vs. Margins
The Peggy Bundy School of Economics
“Look Al … They keep sending me checks! Ah yes, Pookie, but you send them much bigger ones.”
Can Apple have any measurable impact if iPhone captures just 1% of the projected 2008 one (1) billion worldwide mobile handset sales market? This is the question that many pundits, business journalists and Street analysts are pondering when looking at Apple [AAPL]. My response would be ‘relative to the industry’ … not bad, but not much. However in revenue per unit sold and cash to the bottom-line … very big impact!
The next series of ‘skeptical’ questions typically has to do with how Apple will endeavor to compete with gargantuan, established carriers on price, feature-set, market-penetration, etc.. My answer is simply this…. Pick up an iPhone (no manual necessary) and you will soon understand that a paradigm shift is underway in the smart-handset market. Apple iPhone with its gorgeous screen, Safari, OS X and un-paralleled user-interface design, will soon enough grab a large share of the high-end market … where margins are high and carrier profitability (data usage) is maximized. The beauty of it is that Apple need not conquer the world in one year. Apple need only hit their goal of 10 million iPhones in 2008 to drop serious revenues to the bottom line.
Why Margins Matter …
Many of the aforementioned pundits and tech journalists cite the volume of cell phones (units) sold by the major manufacturers as evidence that Apple will have a relatively minor impact on the cellular industry. However, what they fail to recognize is that sheer volume does not necessarily translate to the bottom line. Many large cellular manufacturers are subsisting on “razor” thin margins (pun intended).
Nokia (37%) and Motorola (14.5%) were responsible for half of all mobile handsets sold in worldwide during 2007. Yet the two companies are on divergent paths. Nokia continues to expand share and hold margins while Motorola may be
exiting the handset market entirely. Why is Motorola in such dire straights? The problems at Motorola will not be covered here. Yet one deciding cause may have been Motorola’s mistaken strategy of chasing greater market-share at the expense of margin.
As Mark Sue of RBC Capital put it (January 18, 2007) when noting Razr’s price dropped from an initial high of $800 to the point where some distributors now give it away: “Motorola might want to reconsider its strategy of having yesterday’s hit phones becoming tomorrow’s free phones!”
Look at the margins! Apple wins hands-down on that measurement. According to iSuppli, bill-of-materials (BOM) production for the 8 GB version of iPhone was calculated to be around $265.83 (July 2007). At current iPhone price point of $399, this leaves Apple with $133.17 (or a 33% gross margin). This $133 margin amount is more than the retail price of many handsets. Moreover, this amount is before accounting for any carrier revenue-sharing payments due to Apple (estimated at $192 to $288 over the life of a 2-year contract). To over simplify, Apple need only sell a small percentage of handsets into the estimated 1 billion worldwide market to have a huge impact to Apple’s bottom-line.
So the next time you hear a news anchor, pundit or ‘analyst’ smugly pronounce that Apple will only capture a small share of the mobile handset market, just smile and remember the Peggy Bundy School of Economics (see below)…. Margins Matter! If you sell handsets at break-even, or below cost (Motorola), you’ll rocket to the poorhouse. If you have healthy margins, as Apple does, you have ample room to maneuver on price/biz model (if necessary) and still deliver significant revenue to the bottom-line.
NOTE: The margins story is similar when comparing Apple Macs to PCs.
Peggy Bundy School of Economics
“Yes, ‘we’ indeed. Peg, since you’re now an entrepreneur, I thought it would be a good idea for you to learn something about business.”
Econ 101 – Margins Matter
Remember the Married With Children episode when Peggy gets into the Patty Brite Home Cosmetics biz? … She keep waiving her commission checks in Al’s face …. “Ha, ha Al … look at my commissions.” I’m making more in one day than you do all month at the shoe store” … Then Al finds her client book and gains some insight
AL: How does she do it, Steve? How can she make more money than a man who sells shoes??
STEVE: Al, I made more than you losing a tooth when I was a kid.
AL: [waving a fist at him] Well, how would you like a fortune tonight, Steve!? I can’t believe it. She can’t sell more than me! Her customers must be morons. A list of idiots like that could be really worth a fortune to a good salesman. Damn, I wish I could find that list!
Al throws down a small book he was holding. Steve picks it up again.
STEVE: Well, maybe there’s a clue in this book that says “Peggy’s Customers.”
AL: Give me that Steve! That might be it. Now get a pen and write this down [Steve prepares to write as Al reads the list of names from the book]… Ah, here we go. Peggy Bundy, Peggy Bundy, Peggy Bundy… Ah, here it is. Peggy Bundy, Peggy Bundy…
STEVE: Look, Al, why don’t we skip over her and get to the people who actually bought the cosmetics?
AL: Alrighty… Peggy Bundy, Peggy Bundy, Peggy Bundy. She’s her own customer Steve!!! All this time she’s been buying this stuff herself!
STEVE: Al, your life is pathetic.
Marcy calls out from next door.
MARCY: Steve! The fish sticks are thawing.
Al smiles smugly at Steve.
Al sits on the couch and calls out to Peg.
AL: Oh Peg, could you come here a minute please?
Peggy comes downstairs happily and sits next to Al.
PEGGY: What is it, Al? Did I get another commission check? Did I? Did I? huh, huh?
AL: You did.
AL: Yes, “we” indeed. Peg, since you’re now an entrepreneur, I thought it would be a good idea for you to learn something about business.
PEGGY: From you?
AL: Why not? You’ve taken everything else from me. You see, Pookie, since you’re the only one buying your cosmetics, you’re not making any money.
PEGGY: Oh, yes I am. They send me checks.
AL: Ah yes, but you send them much bigger ones. And that’s what we call in the world of business “sending your husband rocketing to the poor house!” Why didn’t you sell any make-up, Peg?
PEGGY: Well, like I told the girls, it’s not very good.
AL: Then why did you keep buying it?
PEGGY: Because that’s how I make my money!
Al starts crying.
AL: How much do we owe for the cosmetics, Peg??
PEGGY: Minus my commission?
AL: [darkly] Yes.
PEGGY: $623 dollars.
AL: Well, at least you’re not in real estate.