Handset Industry – Oranges and lemons
We think Apple earns between 64%-68% of industry profits, not 91%.
We believe the notion that Apple makes almost all the profits in the mobile phone industry is not accurate because Apple’s handset margins are underpinned by both hardware and its ecosystem.
Strategy Analytics has analysed the profits of the global handset makers and concluded that of the $9.4bn in industry profits in Q3 16A, Apple accounts for 91% of them (see here)
To get the real picture, we think one must either separate the ecosystem from the hardware or include companies like Google which has effectively drained the Android industry of its profitability.
Separate ecosystem from hardware.
In order to do this, one has estimate what margins Apple would make if iOS did not exist and it was merely a handset vendor selling Android devices.
In Q3 16A Apple sold 45.5m devices with an ASP of $625 giving revenues of $28.44bn and EBIT of $8.5bn giving an EBIT margin of 29.9%.
If Apple was selling Android devices, we suspect that its gross margin would be around 20% and its EBIT margin 4-5%.
This leads me to believe that in Q3 16A Apple made $1.4bn in profits from hardware and $7.1bn from its ecosystem.
This is a fairer comparison to the other handset makers who don’t have an ecosystem and using Strategy Analytics’ numbers would lead me to include that hardware profits of the industry were $2.2bn of which Apple earned 64% and the Android handset makers 36%.
It is important to note that Samsung’s dreadful Q3 16A due to the Note 7 has substantially skewed the current numbers in Apple’s favour.
Include the ecosystem.
We have long believed that the real difference between Apple and Google is much less than many commentators believe.
Both companies own global ecosystems from which they derive most of their profits.
However, they monetise them in different ways (hardware for Apple, advertising for Google).
Consequently, to compare oranges to oranges, one must include the profit that Google generates from mobile devices to get a real picture what is happening in the industry.
We have excluded the Chinese ecosystems from this analysis for reasons of simplicity and the fact they only operate in China.
In Q3 16A, Edison estimates that Google generated $7.8bn in revenues from mobile devices upon which it made margins of at least 40%.
This means that the mobile ecosystem generated $3.1bn in profits for Google which we have long believed comes at the expense of the Android handset industry.
This means that hardware and ecosystem profits (adjusting SA’s numbers) in total were $12.5bn of which Apple earned 68%, Google 25%, leaving the Android handset makers with just 7%.
Take Home Message.
Whichever way one cuts the cake, comparing oranges to oranges or lemons to lemons, the end conclusion is the same:
Apple earns the majority of the industry’s profits but it is not the huge 91% that a simple calculation indicates.
Furthermore, the re-addition of Samsung into the mix once it has got back on its feet after the Note 7 disaster will further reduce Apple’s real share of industry profits.
We expect that as time passes, more and more of the profits of the consumer device industry will be made by those that have ecosystems at the expense of those that do not.
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