Ceding the Crown

So Phil Schiller gave a second eve-of-Galaxy-S4-launch interview, this one to Reuters reporter Poornima Gupta. The headline (“Apple’s Schiller Blasts Android, Samsung on Galaxy’s Eve”) is spot-on, but here’s the second paragraph:

The marketing chief’s rare attack on a rival, on the eve of the Galaxy S4’s global premier in New York, underscores the extent of the pressure piled upon a company that once stood the undisputed leader of the smartphone arena, but ceded its crown to Samsung in 2012.

Before I got to that final clause, I thought Gupta was on the cusp of making a salient point with regard to what’s going on with Apple and the news media today. Like most first-generation Apple products, the original iPhone was greeted by much skepticism. Needs a keyboard. Needs a removable battery. Costs too much. Only on AT&T. Then, after a few years, it became obvious that the iPhone was in fact the way all modern smartphones should work — a touchscreen with very few hardware buttons and an app-based system, more computer-with-phone-features than phone-with-computer-features. And Apple had no serious competition. None. This is the period, from 2009–2011 or so, where Apple’s stock rose coincident with its profits, at a steady consistent pace. But as time goes on, I’m ever more convinced that many observers — including investors and reporters (especially those in the business press) — developed three bad assumptions:

  1. Apple’s lack of serious competition would, or at least might, result in an overwhelming market share advantage for the iPhone.

  2. Apple’s market success was primarily because the iPhone had no serious competition.

  3. If the time ever came that the iPhone did have serious competition, the iPhone (and thus Apple, given the importance of the iPhone to the company) would be in trouble, because Apple’s magic is in making something so far ahead that no one can compete with it, not in actually competing.

Assumption #1 is bad because the iPhone never had a market share lead, or even close to one, whether you count only “smartphones” (where the iPhone sits around 20 percent worldwide) or all phone handsets (where the iPhone, as a premium product being compared to $20 candybar dumb phones, has never had more than single-digit market share). When Steve Jobs announced the iPhone in 2007, his publicly-stated goal was a humble 1 percent of the total phone market. Yesterday I linked to this chart at Wikipedia, showing that there has always been a market-share dominant smartphone OS — originally Symbian, and today Android — that the iPhone ran far behind in terms of sheer units.

An overwhelming majority market share has never been Apple’s plan for the iPhone. A hope, perhaps. But not the plan. (Subscribers to misconception #1 — those who think the iPhone should have or perhaps even needs a majority share of the phones sold worldwide — are those clamoring for Apple to create a “low-cost iPhone”. See also my “Church of Market Share” piece from last year.)

Assumption #2 in and of itself is not overly problematic, although it is wrong. The iPhone would have done just fine, albeit probably not as well as it actually did, even if then-market-leaders such as BlackBerry and Nokia had not faltered so badly. And it’s certainly the case that Apple would sell some number more of iPhones today if Samsung were doing a worse job designing, manufacturing, and (especially) marketing its phones. But “iPhone would do better with no serious competition”, which is true, is very different from “iPhone would falter if it had any serious competition”, which is false.

But it’s when combined with #3 — and the obvious fact that in Samsung Apple does now have a serious competitor — that these Apple pessimists lose sight of reality. Apple is a great competitor. In the PC industry they’ve fought back from the brink of bankruptcy to become the most profitable and fastest-growing PC maker in the world. They came in and stole the music player market, and have dominated it for over a decade.

But for some, the fact that Apple and the iPhone now face at least one serious (and successful) competitor somehow means that the iPhone is already losing. This is insane.

By market share alone, one can argue that Samsung is winning, but as I’ve stated above (and repeatedly recently), the iPhone has never been close to a market share leader. By market share alone, the iPhone is far behind even Nokia.

By profit share, on the other hand, according to Canaccord Genuity analyst T. Michael Walkley, last year Apple took 69 percent of the handset industry’s profits; Samsung took 34. For just the last quarter, the numbers were 72 percent for Apple, 29 for Samsung. You will note that both the annual and quarterly numbers total more than 100 percent; that is because all other handset makers, combined, are losing money. This is rather astounding — Apple and Samsung have together destroyed the rest of the mobile handset industry.

But this brings us back to Gupta’s report for Reuters, which I repeat below, this time with emphasis added:

The marketing chief’s rare attack on a rival, on the eve of the Galaxy S4’s global premier in New York, underscores the extent of the pressure piled upon a company that once stood the undisputed leader of the smartphone arena, but ceded its crown to Samsung in 2012.

That’s a statement of fact, in a Reuters news (not opinion) story, about a company with 70 percent (and judging by last quarter, growing) of the industry’s profits. The same company that runs the best and most popular app store (including the most successful handheld gaming platform), and whose media entertainment ecosystem has, by far, the best reach worldwide. The same company whose platform disproportionately dominates usage statistics.

Samsung has had a remarkable run over the last few years. They make more money — profit, not merely revenue — from selling mobile phones than Google makes for all of its businesses combined. But by any measurable means other than market share what they’ve achieved is the number two spot, behind Apple. You can reasonably make the argument that they’re on their way to unseating Apple, that the momentum lead belongs to Samsung. (I would disagree, but cede that it’s possible.) But no facts today suggest that it has already happened.

But that’s how news reporters increasingly are treating the state of the industry. The desire for the “Oh, how the mighty Apple has fallen” narrative is so strong that the narrative is simply being stated as fact, evidence to the contrary be damned. It’s reported as true simply because they want it to be true. They’re declaring “The King is dead; long live the King” not because the king has actually died or abdicated the throne, but because they’re bored with the king and want to write a new coronation story.

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