By Shira Ovide And Daisuke Wakabayashi
Roughly 1,000 companies make smartphones. Just one reaps nearly
all the profits.
Apple Inc. recorded 92% of the total operating income from the
eight top smartphone makers in the first quarter, up from a 65% a
year earlier, estimates Canaccord Genuity managing director Mike
Walkley. Samsung Electronics Co. took 15%, Canaccord says. Apple
and Samsung together account for more than 100% of industry profits
because other makers broke even or lost money.
Events last week highlighted the lopsided financial picture.
Apple is asking suppliers to make a record number of new iPhone
models. Meanwhile, Samsung forecast disappointing profits, HTC
Corp. reported a quarterly loss, and Microsoft Corp. wrote down 80%
of the value of the smartphone business it acquired from Nokia
Corp. last year.
Apple's share of profits is remarkable given that it sells fewer
than 20% of smartphones. The disparity reflects Apple's ability to
command much higher prices for its phones. Its rivals mostly use
Google Inc.'s Android operating system, making it harder for them
to distinguish their offerings, and prompting many to compete by
lowering prices. Moreover, Samsung and HTC have made missteps in
recent years.
Neil Mawston, executive director at market researcher Strategy
Analytics, said many Android vendors are stuck between low-cost,
high-volume brands such as China's Xiaomi Corp. and Apple's premium
smartphones.
"There is that danger that you get trapped in the middle," Mr.
Mawston said. He estimates there are about 1,000 smartphone brands,
including several hundred in China.
Even Samsung, which for a time found success making smartphones
in all price tiers, is suffering in the now-crowded industry. Last
week, the company said it expects profits to decline for a seventh
straight quarter in the three months ended in June. Samsung appears
to have misjudged demand for its newest phones, ordering too many
Galaxy S6 phones and not enough of its higher-priced curved-screen
cousin.
The results demonstrates the rapidly shifting fortunes in the
smartphone business, which Apple transformed with the iPhone in
2007. At that time, Finland's Nokia was grabbing about two-thirds
of smartphone-industry profits, Canaccord estimates.
By the end of the decade, Apple and BlackBerry Ltd. joined Nokia
in the top tier. By 2012, Apple and Samsung essentially split
industry profits 50-50. Now, Apple stands far above the others.
"That high-end tier has really shifted away from Samsung to
Apple," said Mr. Walkley.
To be sure, many smartphone makers approach the market with
different strategies than Apple, which generates the lion's share
of its revenue by selling devices.
Microsoft and Xiaomi aim to profit after phones are sold,
through paid app downloads, phone accessories or other add-ons.
Samsung also makes money from making components that go into its
phones, as well as those of rivals.
Representatives of Samsung and HTC didn't comment. A spokesman
for Microsoft declined to comment. A spokesman for China's Huawei
Technologies Co. said the company's consumer business is
profitable, and growing more so as the company sells more midprice
and high-end smartphones.
Lenovo Group Ltd. in October bought unprofitable handset maker
Motorola Mobility; executives have said they expect to turn
Motorola profitable within six quarters.
An Apple spokeswoman declined to comment.
Canaccord's data doesn't include privately held companies
including Xiaomi and India's Micromax Informatics Ltd. Mr. Walkley
said those companies' profits--if any--are unlikely to alter the
industrywide profit picture.
One key to Apple's profit dominance: higher prices. Apple's
iPhone last year sold for a global average of $624, compared with
$185 for smartphones running Android, according to Strategy
Analytics. In its fiscal quarter ended March 28, Apple sold 43%
more iPhones than a year earlier, at a higher price. The average
iPhone price in the quarter rose by more than $60 to $659, on the
strength of the larger-screen iPhone 6 and 6 Plus models.
As the smartphone market matures and growth slows, it is
starting to resemble the personal-computer business in some ways.
Average PC prices have plunged, and most manufacturers struggle to
eke out profits. But Apple captured more than half of industry
profits last year, even though its Mac line accounted for only
about six of every 100 computers sold, according to Bernstein
Research.
Despite the changing leader boards of the past decade, some
industry veterans say Apple's profit crown looks more secure.
"The dominance of Apple is something that is very hard to
overcome," said Denny Strigl, former chief operating officer of
Verizon Communications Inc. "Apple has to stumble somehow or
another, and I don't think that's going to happen."
Ryan Knutson, Jonathan Cheng and Eva Dou contributed to this
article.
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