iPhone the question; buy the Galaxy comes the answer

Citation

Curwen, P. (2013), "iPhone the question; buy the Galaxy comes the answer", info, Vol. 15 No. 4. https://doi.org/10.1108/info.2013.27215daa.001

iPhone the question; buy the Galaxy comes the answer

Article Type: Rearview From: info, Volume 15, Issue 4

A regular column on the information industries

Is it possible to be too successful? This is not simply a philosophical question. Consider, for example, a company with a product that is a technological breakthrough when first released and which appeals both to those who love new technology and to those who must be seen with the latest gadget. The product sells in such large numbers that there seems to be no great pressure to keep producing new, innovative models as against somewhat improved versions of what already exists. Eventually, however, competition rises sharply and a product that was “cool” when only relatively small numbers owned it becomes “un-cool” when every kid on the block owns one.

Thus it is for Apple in early 2013 – or, at least, that is how it is perceived to be. In the latter respect, merely consider the share price – yes, Apple has other products but it is the iPhone (and to a lesser extent the iPad) that primarily determines how Apple is regarded in the financial markets. Surprisingly perhaps, to those with short memories, the Apple share price had merely meandered along until January 2009, at which point it began a remarkably steady upward climb – boosted by the launch of the of the iPhone 3GS and the iPhone Mac OS 3.0 beta release in March 2009 – crossing $250 in early 2010 and reaching $450 in early 2012. It then took off with a vengeance, peaking at $702 on 19 September and as a consequence Apple, at $658 billion, became the most valuable company in the world. On 25 January 2013, the share price opened at $450, having lost 10 per cent of its value when Apple announced its results for 2012Q4. Altogether, an astonishing $250 billion had been wiped off its market value in four months – astonishing because the whole of Microsoft is worth less than that.

So, obviously, it follows that the results must have been disastrous. Well, not exactly: the figures for 2012Q4 were a bit below expectations as was “future guidance”. The Apple CEO was keen to point out that it had achieved its highest-ever quarterly sales at $54.5 billion and that it was undergoing one of its most prolific periods of innovation, but too few fund managers were listening. Interestingly, the same thing exactly had happened in January 2008 and the share price had bounced right back, but not this time. In part, this clearly reflected the fact that expectations had not been met for three consecutive quarters, but at heart several factors were simultaneously at work.

These need to be considered in relation to current market data. During 2012, the overall market for mobile handsets was stagnant at roughly 1,700 million units, of which 545 million (32 per cent) were smartphones. However, by 2012Q4 this had grown to 45.5 per cent so it is quite clear that the smartphone market is undergoing a period of very rapid growth. This suggests that opportunities exist both for an established market leader such as Apple as well as rivals such as Samsung, Huawei and ZTE. But consider the following: In 2011, Apple had a 23 per cent market share while its main rival, Samsung, had a 22.5 per cent market share. By the end of 2012, Apple’s market share had slipped slightly to 21.8 per cent despite having increased its shipments by a commendable 29 per cent. Meanwhile, Samsung’s market share had shot up to 29 per cent, having increased its shipments by 76 per cent – a figure which nevertheless trailed the 90 per cent growth shown by the admittedly much smaller Huawei. In other words, Apple was seemingly doing well – nearly 50 million units shipped in one quarter does not superficially look like a company in serious difficulties – but it had ceded market leadership to Samsung and was under increasing attack from previous market minnows such as Huawei.

In particular, it is claimed that Apple is losing out on the screen-size front. The iPhone has a smaller screen than the likes of HTC, Nokia and Samsung which are offering 5 inch screens, although the iPhone 5 is slightly bigger than previous models. Given that Samsung is a major component supplier to Apple it is a little surprising that Apple has not adjusted its screen size to a greater extent, although it has launched a mini iPad with a 7.9 inch screen. In addition, it is argued that Apple is beginning to lag in other aspects of industrial design as well as in the field of innovative applications and user experiences where Apple was previously dominant. The huge uptake of devices based on Android is a major factor in this, especially for Samsung which has a broad and deep line-up of Android smartphones, and in particular the Galaxy range which includes the best-selling Galaxy S III and Galaxy Note II. In comparison, Apple remains reliant for now on the success of the iPhone 4, which may be viewed as either a negative factor or as presaging a likely improvement during 2013 as the iPhone 5 is taken up in much greater numbers. For its part, Huawei is able to boast (for now) the world’s thinnest smartphone (at 6.7 mm) – the Ascend P1 – as well as the impending Ascend Mate which will have a 6.1 inch display.

The downside of all of this apparent progress is that competition in the smartphone market is constantly ramping up as new and/or improved products, many with the LTE connectivity that is demanded by customers seeking handset upgrades, and this will inevitably exert downwards pressure on prices. This makes it ever more important that retail outlets promote your products, in which respect it is of interest that a recent study in the UK revealed that sales assistants were far more likely to recommend the Galaxy and Note than the iPhone – and it should be borne in mind that while these are aging models in this most dynamic of all markets, Samsung is shortly to launch its new flagship smartphone, the Galaxy S IV.

Given the previous emphasis upon handsets, it is worth mentioning that the latest generation iPad remains the clear leader in the tablet market. But this has come at a price, namely a 20 per cent reduction in average revenue per unit between end-2011 and end-2012, which is not exactly what fund managers want to hear – and incidentally, the iPad is eating into sales of high-margin Macintosh computers. Furthermore, given that the market for top-end handsets such as the iPhone 5 is necessarily limited mainly to developed markets, at least for now, Apple’s need to expand into higher-growth markets such as China is incompatible with reliance on devices as expensive as the iPhone 5.

In effect, therefore, while Apple retains its position for now as the company that sets the competitive standard, its position is becoming increasingly vulnerable, and this is where the opening comments prove apposite. The market for top-end devices is very fickle and it is essential to keep churning out innovative models. It is claimed in many quarters that the loss of key personnel such as Steve Jobs – arguably a “genius” who was the primary driving force behind Apple – and Scott Forstall (head of the team responsible for iPhone software) has caused a hiatus at the top of the company. If so, Apple’s rivals will take advantage. Furthermore, it is claimed that iPhone fatigue is setting in. In South Korea, Hong Kong and Singapore, which are the key places to look if one wants to discover how the prestige handset market will evolve, higher-powered, larger-screened Android devices are viewed as better suited to the typical user’s evolving habits. Given a reluctance to be seen holding a device which can be, and has been, acquired by just about everyone, a much improved selection of Android apps and falling costs associated with switching devices, the iPhone is no longer viewed as “cool”.

It takes a brave man to bet against Apple, given its past history. On the other hand, that is exactly what was being said about Nokia not so long ago. What is abundantly clear is that whereas Apple can in principle trundle along quite happily, pocketing billions of profits in the process, it is in increasingly severe need of a new device that will attract a new generation of users and re-inspire the users who are increasingly deserting it for the joys of a Galaxy. Apple recently announced the launch of iOS 6.1 which includes Siri and supports LTE, and this is being referred to by Apple as the world’s most advanced OS and as possibly the most popular new version of an OS in history. Whether this will have the world of Android quivering in its boots, given that Android sat at the heart of nearly four times as many smartphones as iOS in 2012, is a different matter.

Peter CurwenVisiting Professor of Telecommunications at the Department of Management Science, Strathclyde University, Glasgow, UK.