Apple, RIM Outsmart Phone Market
No wonder they are called smart phones. Not only can these fancy phones send email, get directions and play music, they can generate huge profits for their makers. — At least for iPhone's manufacturer Apple and BlackBerry's Research In Motion.
Context & Ripple Effects
The iPhone’s competitive position had been debated since questions about Google’s challenge to the iPhone in 2007, while Research In Motion was already focused on staying ahead in BlackBerry in 2008. The July 2009 profit estimates put a financial measure behind that contest: Apple and RIM together account for about 35% of cellphone-industry operating profit, with Apple at roughly 20%.
First-order effects
- Apple and Research In Motion gain disproportionate financial capacity from the handset market’s profit pool, reinforcing the iPhone and BlackBerry businesses as their central competitive assets.
- Handset makers outside Apple and RIM are left competing for the remaining operating profit, making volume alone a weaker measure of market success.
Second-order effects
- Google’s prospective challenge to the iPhone and other handset rivals face a higher bar: matching device sales is insufficient unless they can also sustain Apple- and RIM-like profitability.
- Apple’s estimated 20% share of industry operating profit increases the commercial importance of its forthcoming fiscal third-quarter earnings for suppliers, investors, and competing phone makers.
Third-order effects
- The handset business is separating into a high-profit smartphone tier led by integrated device businesses and a lower-return remainder, if Apple and RIM can preserve their margins.
- Competition is likely to center increasingly on the systems-design advantage that supports recurring device profits rather than on handset shipments alone.
The trend: Smartphones are becoming the industry’s profit center, concentrating returns among vendors that pair differentiated devices with tightly managed software and services.