Price Competitive

MG Siegler, writing for TechCrunch:

Apple now controls over 66 percent of all the profits amongst the major players in the mobile space. HTC, RIM, LG, Sony-Ericsson, Samsung Motorola, and Nokia combined for the other 33 or so percent of profits in the space (with a few of them: Nokia, Motorola, LG, and Sony actually losing money).

Apple, the company “losing” the great mobile race to Android, is destroying all the Android manufacturers combined when it comes to profits.

The point about Apple actually winning this great smartphone/mobile platform war because they’re the ones with all the profits is easy and obvious. All of these companies, Google included, have to make a profit or they will eventually go under. They’re not like Twitter or Groupon in that they can just knock on investor’s doors and get a couple hundred million dollars to keep operations going.

Google is in relatively safe waters, by providing a software OS only (no manufacturing costs) and having most of its revenues come from elsewhere—for now. But Nokia, HTC, Samsung, LG and SonyEricsson? These companies would stop making phones altogether if they run out of money, and most or all of their revenues come from smartphones.

Obviously, the Android ecosystem will keep itself alive, but chances are it’ll stay alive with only one or two hardware manufacturers. So let’s imagine that (against current odds), Android gets to about 70% market share worldwide and the iPhone drops to 30%. It’s like a reverse iPod-vs-the-world if you will. Maybe RIM will still be around for this, taking 5% out of either side to have a snug 10% with its Blackberries.

In this scenario, Google will make a good profit off of search and advertising revenues on the Android platform alongside its Web properties. The Android manufacturer(s)—let’s say HTC and Samsung, as they’re the only ones currently running a profit from their business besides Apple and RIM—now reap in massive profits compared to before, but in the grand scheme of things they still only barely match Apple’s profits combined.

Here’s where it becomes interesting: in this hypothetical (and in my mind, unlikely) scenario, Apple has room to reduce prices: they make far more profit per phone than any of their competitors. Their competitors do not, because they are already operating at comparatively low margins.

Now what do you think will happen when brand new iPhones debut at $99, and drop to $49 after a few months? Apple would still be profitable at these prices, but they’re already price competitive enough—they’re selling iPhones like hot cakes despite the higher sticker price. And all of that is pure profit that Apple is accumulating steadily right now.

The Android manufacturers could try giving their phones away to maintain market dominance, but they’re more likely to go the Dell route: minimal margins, enough to remain profitable—if only just. And there is no way that the Android manufacturers will be able to take serious competitive advantage of their market share dominance, because Apple’s ecosystem is so strong and tightly coupled between its various devices and stores (Music, Movies, TV and three App stores) that consumers will stick to it simply because it works better for them, and the pain of leaving the ecosystem is too great.

Jeff Atwood tweeted this the other day: (thanks to Paul Ward for finding it)

“I have to admit, starting with iPad, Apple got deadly serious about competitive pricing. [link]

A better observation would be to say that Apple has been extremely price competitive with the iPhone too; they’ve just been playing a longer, smarter game.

Apple has lots of room to fail whilst competing with everyone else; none of them have much room to fail whilst competing with Apple.

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