Apple Estimated to Account for 20% of Cellphone Industry Profit

[MacRumors]

The Wall Street Journal reports (subscription required) on research from Deutsche Bank analyst Brian Modoff showing that Apple and Research in Motion together accounted for approximately 38% of the cellphone industry's total operating profit in 2008 while only representing 3% of total unit sales. Apple's share of industry profits clocked in at approximately 20% while holding only just over 1% of the unit market share.

The two companies' outsize share of profits underlines the shift in the wireless industry toward feature-rich devices accenting easy-to-use software and away from an emphasis on hardware. Smart phones account for only about 13% of total cellphone sales globally, but the segment is growing, despite a drop in the broader cellphone market. Apple and RIM had about 32% of the smart-phone market between them in the first quarter, estimates IDC.

Moreover, Modoff estimates that Apple and Research in Motion will reach a combined 5% of unit sales for 2009, raking in roughly 58% of the total industry profit between them.

The report notes that wireless carrier subsidies provide the driving force behind such large profits for leading smartphones such as Apple's iPhone and Research in Motion's BlackBerry lines. Apple reportedly receives about $400 in carrier subsidy for each iPhone, while BlackBerry sees about $200 and the typical basic cellphone about $100. Among manufacturers dominating the basic cellphone market, only market leader Nokia is able to leverage its economies of scale to pull in a greater share of industry profits (55%) than its corresponding unit market share (46%). But even Nokia has seen its unit market share and profits slip as customers increasingly adopt more sophisticated smartphone models from smaller competitors.

Article Link: Apple Estimated to Account for 20% of Cellphone Industry Profit

[thegoldenmackid]

Can someone say "App Store"

[AngryApple]

Cool. Way to go Apple.

[rtdunham]

"QUOTE: The two companies' outsize share of profits underlines the shift in the wireless industry toward feature-rich devices accenting easy-to-use software and away from an emphasis on hardware. "


Can someone clarify the above statement for me? Don't "feature rich devices" necessitate "hardware" advances? The post seems to put the iPhone in the "feature rich devices" category. But it has advanced hardware including the accelerometer, touch-screen, GPS, etc., etc. How, exactly, is the distinction between these two categories made? Is it even a logical distinction? Maybe now there are three categories: simple phones; advanced hardware; and advanced hardware with software. But advanced hardware without software to exploit it makes no more sense than an advanced monitor connected to a computer lacking even a rudimentary graphics card.

[Mjmar]

That's crazy... Why can't Apple ask for less from AT&T as far as subsidies and more in terms of actual service.

[RonWayne]

For me no subscription is required... Is it because i live outside the U.S? Anyhow you ca easily circumvent this by searching the article on google and then click on the link. Subscription is not required for google referrals...

[crackpip]

Originally Posted by rtdunham

"QUOTE: The two companies' outsize share of profits underlines the shift in the wireless industry toward feature-rich devices accenting easy-to-use software and away from an emphasis on hardware. "


Can someone clarify the above statement for me?

The point is that Apple and RIM are causing the focus to shift to the interface rather than the hardware itself. Yes, they both use advanced hardware, but they don't advertise it. For example, they don't advertise the amount of RAM nor the chips being used. It's just storage size and, oh hey, look at all the cool software.

crackpip

[andiwm2003]

very interesting that consumers shift from basic phones to smartphones.

maybe that could mean that in the future consumers will shift from basic netbooks to more sophisticates mac tablets?

[diamond.g]

Is this in reference to the data plan for AT&T or are they solely talking about the device costs?

[kas23]

Originally Posted by andiwm2003

very interesting that consumers shift from basic phones to smartphones.

Although I can never see smartphones replacing laptops, I still wonder about how much they are going to erode the future profitability of making laptops or netbooks. If smartphones features keep on improving at the present rate, will they become the next personal computer? Remember, the average customer only use their computers for internet surfing, minor word processing, iTunes, and Facebook. This is evident in the popularity of netbooks.

[talkingfuture]

Its quite a big chunk, but it will go up a lot more I reckon.

[kas23]

Originally Posted by diamond.g

Is this in reference to the data plan for AT&T or are they solely talking about the device costs?

It seems to me that they are only talking about device costs, but it is not super clear. Additionally, I wonder if App Store purchases are included in this number.

[diamond.g]

Originally Posted by kas23

It seems to me that they are only talking about device costs, but it is not super clear. Additionally, I wonder if App Store purchases are included in this number.

Ah, now it is making sense... I didn't understand it initially. Apple is costing cellphone industry (AT&T and other carriers) 20% of the money they would be otherwise putting in their pockets (the $400 subsidy). Good for Apple bad for cellphone industry (generally speaking). What surprises me is there isn't any attempt to jack up prices even more to make up for the loss.

[kamiboy]

Ha ha ha, in your face haters. I knew that Apple would turn the industry upside down upon entering it in January of 2007, when steve Jobs took the floor and blew my mind in that keynote. There were few believer then, but I knew they would all eat crow and the handset manufacturers would rue the day Jobs rode into their stagnant industry.

[Electrolytic]

Now come to T-Mobile U.S. so I can add to that profit...

[LagunaSol]

I wonder when the Nokias and Dells of the world will realize that it's better to sell 10 things at $10 profit each than 100 things at $1 profit each.

(Numbers simplified to make the point.)

[QCassidy352]

Originally Posted by kas23

Although I can never see smartphones replacing laptops, I still wonder about how much they are going to erode the future profitability of making laptops or netbooks. If smartphones features keep on improving at the present rate, will they become the next personal computer? Remember, the average customer only use their computers for internet surfing, minor word processing, iTunes, and Facebook. This is evident in the popularity of netbooks.

Smartphones are a big reason I can't understand the current netbook craze. Seems to me they fill a pretty small gap between smartphones and regular laptops. as you said, smartphones can handle surfing, email, music, facebook, etc., and netbooks can't handle serious gaming or photo/video editing. I see the big functionality jump from smartphone to netbook as serious word processing, but that doesn't strike me as a big enough niche to account for their popularity.

[diamond.g]

Originally Posted by LagunaSol

I wonder when the Nokias and Dells of the world will realize that it's better to sell 10 things at $10 profit each than 100 things at $1 profit each.

(Numbers simplified to make the point.)

Originally Posted by Electrolytic

Now come to T-Mobile U.S. so I can add to that profit...

I think there is a misunderstanding of the article... Sigh, it seems like Apple is the source of 20% of either profit for the industry, or 20% of the profit from the industry. I am still unclear on which one...

[mkrishnan]

Originally Posted by diamond.g

Ah, now it is making sense... I didn't understand it initially. Apple is costing cellphone industry (AT&T and other carriers) 20% of the money they would be otherwise putting in their pockets (the $400 subsidy). Good for Apple bad for cellphone industry (generally speaking). What surprises me is there isn't any attempt to jack up prices even more to make up for the loss.

No, I don't think this is quite right (although I don't have a WSJ subscription to read the full article).

I think what is meant is that most profits by cell service providers are made from the high-price service add-ons -- unlimited texting, cellular data services, BIS/BES service, tethering, etc. For this reason, devices that are designed from the ground up to need / work with these services are so much more profitable than standard telephones that most of the profit being made is being made through contracts with customers that have BBs or iPhones.

Does AT&T have a cut of App Store revenues (from within Apple's cut, that is)? If not, I would guess that this number purely reflects the portion of profits at the cell service provider (AT&T, Verizon, etc) that is due to iPhone and BB owners vs. owners of all other phones, not including revenue directly to Apple such as increased iTunes sales revenue, App Store revenue, or Apple's hardware profit margin.

An example of what this means / how it would work using arbitrary numbers would be...

Suppose that a carrier has 100 contract customers, two of whom have a BB or iPhone. Now suppose that the monthly profits from the average non-BB/iPhone customer is $0.50, and the monthly profit from the iPhone/BB customer is $10.00. The total monthly profit is $69.00. 28% of the profits come from the two customers with smartphones and the other 72% comes from the 98 customers who do not. I think that is the sort of argument the analysts are making.

[diamond.g]

Originally Posted by mkrishnan

No, I don't think this is quite right (although I don't have a WSJ subscription to read the full article).

I think what is meant is that most profits by cell service providers are made from the high-price service add-ons -- unlimited texting, cellular data services, BIS/BES service, tethering, etc. For this reason, devices that are designed from the ground up to need / work with these services are so much more profitable than standard telephones that most of the profit being made is being made through contracts with customers that have BBs or iPhones.

Does AT&T have a cut of App Store revenues (from within Apple's cut, that is)? If not, I would guess that this number purely reflects the portion of profits at the cell service provider (AT&T, Verizon, etc) that is due to iPhone and BB owners vs. owners of all other phones, not including revenue directly to Apple such as increased iTunes sales revenue, App Store revenue, or Apple's hardware profit margin.

Yeah, that was part of my earlier question (but not as clear). They are making tons of money bundling services with the devices. Not sure what the subsidy has to do with anything. It seems like it could have been left out (thus making it all the more clear that the data plan is making the carriers bank).

[SimonJ]

Originally Posted by crackpip

The point is that Apple and RIM are causing the focus to shift to the interface rather than the hardware itself. Yes, they both use advanced hardware, but they don't advertise it. For example, they don't advertise the amount of RAM nor the chips being used. It's just storage size and, oh hey, look at all the cool software.

crackpip

Then again, Apple advertises the touchscreen, the digital compass, the accelerometer, and the camera..

[BongoBanger]

Originally Posted by LagunaSol

I wonder when the Nokias and Dells of the world will realize that it's better to sell 10 things at $10 profit each than 100 things at $1 profit each.

(Numbers simplified to make the point.)

Probably never because not everyone in the world can afford £200 for a mobile phone and £35 a month for a two year contract.

Just a thought.

[Saladinos]

Brian Modoff?

Uh oh.

[mkrishnan]

Originally Posted by diamond.g

Yeah, that was part of my earlier question (but not as clear). They are making tons of money bundling services with the devices. Not sure what the subsidy has to do with anything. It seems like it could have been left out (thus making it all the more clear that the data plan is making the carriers bank).

Well, hopefully the subsidy would have been accounted for in the calculation -- the subsidy dilutes the profit the service provider makes on the customer. I think, though, that the basic point remains true, that most of the profit in the cellular service business is coming from customers who pay for high monthly cost postpaid plans including features like unlimited texting, data services, and tethering.

I wonder how profitable the whole MVNO industry is, on both the sides of the MVNO and the cellular network selling access. What this really argues, more than the idea that iPhone customers are goldmines for AT&T, is that they are doing a really terrible job in running their business for lower end customers -- they're not able to profit from that business at all, really.

So I wonder, if Verizon, Sprint, AT&T, etc., can't profit from those customers, what is happening when Verizon and Sprint lease their space out to Boost or Cricket and they sell their undercut plans (e.g. $50/mo for unlimited talk time, texting, and data services -- much cheaper than anything offered by a major carrier)?

Is leasing space to Cricket profitable for Sprint or Verizon or whoever leases it to them? In turn, does Cricket actually make money doing this?

If they don't -- if Cricket and Boost and the like are essentially paper tigers, this trend is eventually going to be a disaster for the operators. They're not going to be able to recover the pricing space lost in the process and they're not apparently able to make a profit even at their own higher prices, so they certainly can't make a profit at Cricket's prices.

[WildCowboy]

To clarify, the report is only addressing hardware sales. Carriers and their revenues do not factor into it all except for that fact that they're able to provide handset subsidies to the manufacturers because of their revenues on the other end.

For example, when subsidies from carriers are accounted for, Apple receives ~$600 for each 16 GB iPhone 3GS sold. Given Apple's usual profit margins of rouglyy 33%, about $200 of that is profit. Add up that profit for each phone sold by each manufacturer (well over a billion of them in 2008), and you've got the total industry profit.

Manufacturers of basic cellphones sell a lot more phones at the moment, but they make a heck of a lot less profit per phone, so Apple's proportion of overall hardware industry profit is significantly larger than its handset market share.