Apple Estimated to Account for 20% of Cellphone Industry Profit

[seedster2]

I wouldnt doubt that Apple & RIM account for much of the industry profit. You cant purchase either without data plan on most of the carriers that furnish them. They're basically the only devices to consider when looking for a smartphone. If AT&T service wasn't poor, I would have upgraded my 3G to a bold already.

Where are the macrumors' analyst bashers in this thread? Could those sort of negative commentary reserved for only unfavorable apple news....

 

[mrtune]

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.

There is. This is probably why AT&T forces a data plan on the iphone and not on windows mobile or blackberry smart phones. They need to make up for that huge subsidy they pay to Apple and recouping it via voice and data plans is the key instead of just the voice plan with optional data plan like the rest of the phones.

 

[mkrishnan]

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.

Ahhh, okay, my apologies.

 

[diamond.g]

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.

Interesting, so basically Apple is only able to have this large margin due to the subsidy. Mainly due to very few people willing to pay the true price for the device, Apple can ding AT&T (for the 400) get the 299 from the end user and basically make out like a bandit. How can any other manufacturer keep up? No other manufacturer can get a 400 subsidy from the carrier (and sell a ton of phones too), can they?

 

[SandynJosh]

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).

In the U.S.A. the competition between carriers is possibly the most severe. As I see it, AT&T made a significant investment in G3 type infrastructure while most of the rest coasted on slower speeds. It's almost as if AT&T foresaw the future of the industry better than the others, so they were best positioned to ride the digital data wave early on.

Even so, the speed at which consumers jumped on the RIM and Apple iPhone bandwagon may have taken the infrastructure planners by surprise. AT&T, for one, has struggled to build ahead of the demand of the greater capacity of resources these new smart phones require. This is why some of the iPhone features have not been turned on by AT&T; to do so would bring areas of their system to its knees.

While the data plan pricing costs may seem to be enriching AT&T, it is also consuming a significant percentage of the tower traffic, and is where AT&T is plowing its profits to build ahead of the need while also improving the speed through even more upgrading toward a G4 day.

Sometimes growth in some fields is a bit of a "chicken and egg" thing. One needs the capacity of service to do things that have not yet evolved into reality of demand. The money to build that extra capacity comes from the lesser profits of a simplier dumb-phone market.

While a lot of people on this forum have thrown stones at AT&T over the last two years, I think AT&T is doing a remarkable job of keeping barely up to speed with an accelerating demand for greater tower resources per smart phone.

 

[sjo]

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.)

why is it better? according to the article nokia accounted for 55% of the profits made in cell phone business, i really cannot see how that is failing in any sense.

 

[SandynJosh]

Interesting, so basically Apple is only able to have this large margin due to the subsidy. Mainly due to very few people willing to pay the true price for the device, Apple can ding AT&T (for the 400) get the 299 from the end user and basically make out like a bandit. How can any other manufacturer keep up? No other manufacturer can get a 400 subsidy from the carrier (and sell a ton of phones too), can they?

And no other phone manufacturer has an App Store that pours more profits into the coffers on the backside. This income stream wasn't included in the WSJ analysis as far as I can see. Nor does it seem any other phone maker has computers and entertainment devices to enjoy the halo effect of the phone saleds and buzz. So, the real profit impact to Apple is staggering.

I wish I had Steve Balmer's actual quips blowing off the iPhone when it was first announced. I recall them as priceless in retrospect.

 

[kdarling]

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.

Yes, that's how I read it, too... but I could be wrong. (We need to go look up the original report.)

The original report seems to be about how much operating profit the carriers make from each phone.

Edit: bzzt, yep I was wrong.

After more digging, it appears that it really is about profit before taxes for each phone maker.

So (not being a finance major) my question is, is this profit above and beyond the manufacturing and R&D costs? If so, does this mean that we and/or the carriers are getting ripped off on the price being paid to RIM and Apple?

 

[seedster2]

While a lot of people on this forum have thrown stones at AT&T over the last two years, I think AT&T is doing a remarkable job of keeping barely up to speed with an accelerating demand for greater tower resources per smart phone.

I strongly disagree about AT&T being on the forefront of the digital data wave.

I can't imagine you saying that after comparatively experiencing how AT&T performs in one of the nation's largest data markets. You must treat yourself to the pleasure of using an iPhone in midtown Manhattan

 

[mrtune]

Interesting, so basically Apple is only able to have this large margin due to the subsidy. Mainly due to very few people willing to pay the true price for the device, Apple can ding AT&T (for the 400) get the 299 from the end user and basically make out like a bandit. How can any other manufacturer keep up? No other manufacturer can get a 400 subsidy from the carrier (and sell a ton of phones too), can they?

Easy. Can any other manufacture produce a phone that mandates $30 data plan on top of a voice plan and still sell 1 million phones in a matter of a few days? And the amount of new subscribers are bug too. Lot's of people switched carriers just because of the iPhone. AT&T has no issues with paying crazy money to Apple because of this. I bed part of that $400 is also because of the exclusiveness deal.

 

[reverie]

100 minus 38 minus 58 leaves pretty much nothing

According to the article, only 4 % of the cellphone profits are made by all the other companies combined, including the #2 to #5 on the market Samsung, LG, Motorola, and SonyEricsson which hold 40 % market share as well HTC, Palm, the Japan-only brands like Sharp, Panasonic and other smaller competitors. That's really scary. I wonder if some of these companies will exit the handset market in the next 5 years. There might be a smartphone cut-off where some manufacturers won't be able to make the transition into the new market paradigm.

 

[DELLsFan]

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?

Maybe ... if one is ever released at a price that would make the shift worthwhile.

 

[azshopper]

It's like auto industries

I think phone market is getting more like auto industries in the prime time (few years ago). You have low budget cars selling for 10k to 15k for commuting with 100,000 miles warranty. Because those manufacturers are desperate to get into the market. The volume sold is huge for this category. Other manufacturers are trying to make higher end vehicles which has higher profit margin. If they don't and still try to compete with the low end market, they will lose big time. Eventually there are only two tiers of phone manufacturers will survive, dirt cheap basic phones and multi-function high end phones. Unfortunately iPhone got the high end spot way too early than other competitors. Unless some kind of technology breakthrough from other manufacturers (single battery charge last for 7 days with web browsing in 3G / WiFi network + watching Youtube). I can't see how other can catch up the high end spot. For the low end spot, basically it's a battle between Samsung and Nokia.

For the carrier side, I don't know their breakdown in terms of profit from voice only customers and data customers. But I think eventually the percentage will shift with more data customers and less voice only customers. At that point they data plan should be cheaper to make it competitive. Remember the carrier is just like your DirecTV/Cox/Comcast TV channel providers, customers don't really care as long as you have the channels they want. But they would spent $$ on a better TV.

When the 4G roll out next year, that will be the blooming time for 3G phones and basically all phones will be 3G compatible by then. I think we should see a better deal for 3G data plan And I guess the speed of 3G network satisfy most casual customers...

 

[WildCowboy]

According to the article, only 4 % of the cellphone profits are made by all the other companies combined, including the #2 to #5 on the market Samsung, LG, Motorola, and SonyEricsson which hold 40 % market share as well HTC, Palm, the Japan-only brands like Sharp, Panasonic and other smaller competitors. That's really scary. I wonder if some of these companies will exit the handset market in the next 5 years. There might be a smartphone cut-off where some manufacturers won't be able to make the transition into the new market paradigm.

Motorola's handset business actually ran at a significant loss in 2008. They accounted for about -16% or so of the overall industry profit. SonyEricsson basically broke even, so they had no contribution to industry profits.

 

[deconstruct60]

....Modoff estimates that Apple and Research in Motion ....raking in roughly 58% of the total industry profit between them.

...only market leader Nokia is able to leverage its economies of scale to pull in a greater share of industry profits (55%)

Errrr. 55% + 58% = 113%

Either the analyst has dubious math skills or the description of the article is clearly misquoting the facts or a bit of both.

Analyst come up with dubious findings but somehow I doubt someone that incompetent would widely quoted. The "total industry" is quite likely different industries. Perhaps one is the smartphone industry. The other would be cellphones overall ( or perhaps the cellphone minus the smartphones. )

 

[Evangelion]

Errrr. 55% + 58% = 113%

Either the analyst has dubious math skills or the description of the article is clearly misquoting the facts or a bit of both.

some companies (like motorola) ran substantial losses, so their contribution to the percentage was actually negative

 

[deconstruct60]

Interesting, so basically Apple is only able to have this large margin due to the subsidy.

Labeling it as subsidy is wrong. Apple is charging much higher prices that most of the other phones. They "get away" with that because the features on the phone allow the celluar carrier to charge more money to the customers. Customers, on average, are paying more, over time, to use these phones than to use "not as smart" phones.

Mainly due to very few people willing to pay the true price for the device, Apple can ding AT&T (for the 400) get the 299 from the end user and basically make out like a bandit. How can any other manufacturer keep up? No other manufacturer can get a 400 subsidy from the carrier (and sell a ton of phones too), can they?

Of course the other phone manufacturers can keep up. If there phones are attached with more expensive services (e.g., required/larger data plans ) then selling cost can go up too. Those folks may not be able to go as high in selling price but may be able to have a larger margin than Apple at a lower price in some cases. (e.g., Smartphone vendors leverage Android or some other phone OS that has the development costs split across a broader set of contributors. )

As long as RIM is #1 in smartphone sales and Apple is #2 then is a tough nut to crack. Not impossible though. Android is layered on Linux. The number of companies throwing R&D into Linux is quite large. Likewise Webkit is open source ( including apple throwing money into it so that evens the playing field.)

Over time hardware technologies will disperse and even out. ( In fact, Apple has trial lots of vendors. For example camera. The hype was so high few noticed the camera was a laggard. Over an extended period of time and as the devices get closer won't be able to do that to jack up margins. )

 

[deconstruct60]

some companies (like motorola) ran substantial losses, so their contribution to the percentage was actually negative

That is hard to believe. Still haven't accounted for Samsung, Sony Ericsson, HTC, and LG.

You mean to tell me they *ALL* ran losses? That they all were giving away cellphones at below cost of manufacturing prices? Some of those loses are accounting flip-flam. How did the analyst get the profit margin for the company's specific cellphone business? The corporate loss (which could include a variety of products) or this is broken out specific to just the cellphone products?


Even still that is extremely dubious analysis. If those companies may zero (or negative profit ... gave away phones) they contribute zero the the industry profits. Negative profits..... what is that suppose to be??????? A profit is something larger than zero.

 

[vipergts2207]

Errrr. 55% + 58% = 113%

Either the analyst has dubious math skills or the description of the article is clearly misquoting the facts or a bit of both.

Analyst come up with dubious findings but somehow I doubt someone that incompetent would widely quoted. The "total industry" is quite likely different industries. Perhaps one is the smartphone industry. The other would be cellphones overall ( or perhaps the cellphone minus the smartphones. )

Read that article again. The 58% number is the estimated number for 2009. The number for 2008 was 38%.

38% + 55% = 93%

 

[peterdevries]

Read that article again. The 58% number is the estimated number for 2009. The number for 2008 was 38%.

38% + 55% = 93%

You cannot add percentages from two different years together. What does that number mean?

 

[vipergts2207]

You cannot add percentages from two different years together. What does that number mean?

Deconstruct was the one adding from two different years. 38% and 55% are both numbers for 2008. 58% is an estimated number for 2009.

 

[bobertoq]

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

I second that.

Read that article again. The 58% number is the estimated number for 2009. The number for 2008 was 38%.

38% + 55% = 93%

For the first 30 minutes of my car ride I was going 40 mph, for the other 30 minutes I was going 60 mph, so 40+60mph, which means I was going an average of 100mph for one hour. yay

 

[deconstruct60]

Read that article again. The 58% number is the estimated number for 2009. The number for 2008 was 38%.

38% + 55% = 93%

As said either analyst or bad quote. The Nokia number doesn't have an year on it. The closest year to the quote is tthe 2009. If switching back and forth between 2008 and 2009 would be more clear if grouped the 2008's together and the 2009 afterward. Don't have access to the full WSJ article. However, if the article is primarily about 2008 stuff then yeah I guess you leap back to the 2008 at the top to get the context.

While not outrageously bad still seems a bit skewed. That means the whole rest of the industry garnered a whole 7%. That's whole lot of phones sold for a such a small percentage.


Apple and RIM only have 32% of the smartphone market (again back to quoted material). If the smartphones are the more profitable phones then the majority, 68%, of the smartphones are sold but the other 6+ vendors in the market. However, while a large majority they only come up with something like 7% of the profits ( and the rest to of the headsets roughly earning nothing. )
[ Edit: OK Nokia accounts for a large fraction of the 68%. Still left with HTC, LG, Samsung .... large vendors with small chunks but substantive smart phone sales. ]



Sure the others are higher percentage because in part their costs (and unit profits ) are lower but how much lower? The non contract replacement costs at your local store is widely different for Samsung and RIM ? Been a while since I looked, but don't remember them being widely different if compared models with similar abilities.

I don't have doubt that Apple is getting a disproportionate share of profits per unit sold. The problem is with the accuracy of the numbers. The appear to be inflated. If they are inflated evenly across vendors then it is just noise in his measurement. If uneven then there is skew. ( which likely is kicking some vendor who is "down" in the shins so that can pump up someone who wants to place more emphasis on. And if you believe that nobody associated with D bank went long before this report came out knowing the skew... I got a bridge to sell you. )


P.S. Even if buy into the numbers. Largely that says that the majority of the cellphone market is sold to price sensitive customers. (given that most of the phones are being sold primarily at costs with "almost zero" margins. ) So why would the more expensive phones jump 20% profit share year over year. Apple and RIM are going to market even cheaper phones for 2009 ( Apple the 3G. ). Sure the component costs are going to lower by shipping an older phone, so price drop mostly comes out of cheaper construction cost. That jump presumes the other vendors are going to lay down and get walked over. The others can't compete with Apple's last year phone either. The Web OS , Android and other stuff that will roll out with latest tech has better chance to hold its own against 1 year old stuff.

 

[D*I*S_Frontman]

Apple's new motto:

"Recession? What recession?"

 

[vipergts2207]

I second that.

For the first 30 minutes of my car ride I was going 40 mph, for the other 30 minutes I was going 60 mph, so 40+60mph, which means I was going an average of 100mph for one hour. yay

Percent of industry profits for a year add together just fine. Simple math.

As said either analyst or bad quote. The Nokia number doesn't have an year on it. The closest year to the quote is tthe 2009. If switching back and forth between 2008 and 2009 would be more clear if grouped the 2008's together and the 2009 afterward. Don't have access to the full WSJ article. However, if the article is primarily about 2008 stuff then yeah I guess you leap back to the 2008 at the top to get the context.

While not outrageously bad still seems a bit skewed. That means the whole rest of the industry garnered a whole 7%. That's whole lot of phones sold for a such a small percentage.


Apple and RIM only have 32% of the smartphone market (again back to quoted material). If the smartphones are the more profitable phones then the majority, 68%, of the smartphones are sold but the other 6+ vendors in the market. However, while a large majority they only come up with something like 7% of the profits ( and the rest to of the headsets roughly earning nothing. )

Sure the others are higher percentage because in part their costs (and unit profits ) are lower but how much lower? The non contract replacement costs at your local store is widely different for Samsung and RIM ? Been a while since I looked, but don't remember them being widely different if compared models with similar abilities.

I don't have doubt that Apple is getting a disproportionate share of profits per unit sold. The problem is with the accuracy of the numbers. The appear to be inflated. If they are inflated evenly across vendors then it is just noise in his measurement. If uneven then there is skew. ( which likely is kicking some vendor who is "down" in the shins so that can pump up someone who wants to place more emphasis on. And if you believe that nobody associated with D bank went long before this report came out knowing the skew... I got a bridge to sell you. )


P.S. Even if buy into the numbers. Largely that says that the majority of the cellphone market is sold to price sensitive customers. (given that most of the phones are being sold primarily at costs with "almost zero" margins. ) So why would the more expensive phones jump 20% profit share year over year. Apple and RIM are going to market even cheaper phones for 2009 ( Apple the 3G. ). Sure the component costs are going to lower by shipping an older phone, so price drop mostly comes out of cheaper construction cost. That jump presumes the other vendors are going to lay down and get walked over.

I think the culprit is a bad paraphrase by MR.