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Apple's profits fetish could spell its DOOM

Mobile world will soon be like PCs

Internet Security Threat Report 2014

Open ... and Shut The other shoe is about to drop in the mobile market. For years Apple has dominated mobile, both in terms of market share and in terms of profits. It was an enviable position, and a unique one, borne of Apple's commitment to out-innovating the industry, allowing it to consistently charge a premium for its products. But as the industry has matured, Apple has haemorrhaged market share to low-cost Android.

In turn, it is now also losing its hold on industry profits. Given Apple's fetish for profits over market share, it is consigning itself to a repeat of its battle with Microsoft, wherein it ends up as a profitable, but niche, market player.

It was supposed to be different this time. Apple had supposedly learned from its Microsoft mistakes. Hence, even as Android and other new entrants joined the smartphone and tablet markets, Apple lowered prices on older models to fend off threats. Some have praised Apple's pricing strategy, arguing: "Apple's ability to enjoy its impressive margins while offering such a wide range of pricing is evidence of great success at Apple and does not evidence deterioration of Apple as a competitor in the electronics industry."

Yes, it has worked. For a time. But Apple's hold on industry profits is starting to slip, even as its market share plummets. The writing has long been on the wall, even if some refused to see it.

For years, Apple fanbois have pooh-poohed Apple's loss of market share, crowing that it still controlled industry profits. MG Siegler, for example, gushed about all the different ways that Apple is amazingly, shockingly profitable. And it was. Is. But won't be for long. Not to the same extent, anyway.

After all, earlier in 2012, Apple controlled 77 per cent of mobile industry profits. Now that's down to 59 per cent, and this number will continue to fall, no matter what Apple does to boost profitability through chip-making or other means. Why?

Because market share matters.

Henry Blodget captures this nicely over on Business Insider:

The reason market share is important is that mobile is a "platform market." In platform markets, third-party companies build products and services on top of other companies' platforms. As they do, the underlying platforms become more valuable and have greater customer lock-in.

Building products and services for multiple platforms is expensive, so platform markets tend to standardize around a single leading platform. As they do so, the power and value of the leading platform increases, and the value of the smaller platforms collapses.

The PC software market is (or was) a platform market, and we saw how powerful that eventually made Microsoft back in the 1990s.

Not only is Apple losing market share in established markets like North America and Western Europe, but it's practically an afterthought in the world's most critical market: China. An Analysys International report, as detailed on BGR.com, shows Android with more than 90 per cent of the China market:

That's up from 58.2 per cent in 2011, and is even more interesting when you see Apple declining in China to 4.2 per cent (from 6 per cent in 2011). In a market with more than one billion subscribers, that's market share Apple can ill-afford to lose.

None of which is good for Apple but all of which is, as I've argued, very good for the industry. Apple has dominated the mobile industry in unhealthy ways. I love the products, but I can't love how the company has hoarded profits for itself. In Microsoft's desktop heyday, its partners made a lot more money than it did. In Apple's mobile dominance, it has captured most of the industry value for itself, even despite one million apps submitted to its App Store, roughly half of which are paid apps.

Apple is a great company, consistently building products that I've been very happy to buy. But its manic desire to control its ecosystem, coupled with its insistence on sky-high margins at the expense of market share, all but ensure that it will soon be an important, but niche, mobile vendor. A few years ago, this seemed impossible, at least, to those who had no memory of the desktop market. But for those of us who lived through Apple vs Microsoft, it's very, very familiar.

What's surprising is that Apple doesn't seem to have learned from its mistakes. It's not enough to be a profitable niche company in a platform market, as Blodget argues. Even profits suffer if a company can't deliver the market share to justify developers focusing on its platform. Apple, so incredibly dominant and profitable just a few years ago, stands to lose both attributes. ®

Matt Asay is vice president of corporate strategy at 10gen, the MongoDB company. Previously he was SVP of business development at Nodeable, which was acquired in October 2012. He was formerly SVP of biz dev at HTML5 start-up Strobe (now part of Facebook) and chief operating officer of Ubuntu commercial operation Canonical. With more than a decade spent in open source, Asay served as Alfresco's general manager for the Americas and vice president of business development, and he helped put Novell on its open source track. Asay is an emeritus board member of the Open Source Initiative (OSI). His column, Open...and Shut, appears three times a week on The Register. You can follow him on Twitter @mjasay.

Internet Security Threat Report 2014

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