The Summer of iPhone’s Judgement
For once, competitors’ roaring success may silence the cacophony registered by the Apple hype meter. For two years, iPhone has run alone and unchallenged. Its real competitive test starts next month, with launch of the Nokia N97, Palm Pre and new handsets expected this summer from HTC and Samsung, among other mobile manufacturers. Apple’s smartphone isn’t smart enough, I say. Only App Store can save iPhone now.
Many iPhone fans—no, fanatics—will balk at such an assertion. That’s because too many have taken a US-centric viewpoint. They don’t see how poorly iPhone fits into the global handset marketplace. US bloggers and journalists are nearly obsessed by iPhone. No day passes without someone writing about some new iPhone application or speculating about the new model(s) expected in July. As measured by hype, iPhone is a huge success. Sales success is another matter.
For example, yesterday, Gartner released first quarter worldwide handset sales data. Apple blogs beamed with headlines like “iPhone marketshare doubled in Q1.” It’s true that iPhone sales rose from 1.7 million units in Q1 2008 to 3.9 million units in the quarter just passed. But in these tough economic times, sequential sales matter more. Quarter-to-quarter, iPhone shipments slightly dipped, while smartphone marketshare increased by 0.1 percent, as seen in the chart below.
That’s not to diminish iPhone’s tremendous early sales success that catapulted it to third place in worldwide smartphone marketshare. Still, quarter-on-quarter sales foreshadow iPhone’s future. In third quarter 2008, Apple sold 4.7 million iPhones, according to Gartner, for 12.9 percent smartphone marketshare. Sales dropped to about 4 million units in fourth quarter and to 3.9 million in first quarter. Apple lost more than 2 percentage points of share, too. By comparison, RIM sold 5.8 million BlackBerries in Q3, for 15.9 percent smartphone marketshare. Unit shipments topped 7 million units in the two following quarters, with smartphone marketshare nearly reaching 20 percent in Q1.
But there is something else not immediately obvious from the data. Gartner records actual sales, while Apple reports shipments into the channel. For first calendar quarter, Apple reported 3.79 million units shipped—less than the actual number sold: 3.9 million, for a difference of about 146,000 units. The difference means that, like many other handset manufacturers, Apple sold through excess inventory during Q1. According to Gartner, 269 million cell phones were sold worldwide in first quarter, but only 244 million units shipped into the channel, for a difference of 25 million unit. It’s the second quarter in a row for this unusual circumstance.
By the way, the difference in shipments versus sell-through should concern financial analysts. The iPhone generates revenue for Apple based on sales into the channel. Apple appears to be still clearing out older iPhone inventory in preparation for the new model.
iPhone Would be Nothing If Not for Massive Marketing
Some people will argue that sales are trailing off in anticipation of the new iPhone model(s). Perhaps this is true in an alternate universe, but not here. Sales aren’t dramatically declining. They’re consistent, at a plateau. Through marketing, Apple expends large resources to accomplish even this much.
From Apple’s fiscal second-quarter 10-Q filing, I couldn’t quite grasp how much the company spends on marketing. “The Company also believes increased investment in marketing and advertising programs is critical to increasing product and brand awareness,” according to the document, which puts “accrued marketing and distribution” at $232 million for the quarter; $16 million went to marketing related to 11 high-profile stores.
I can say that Apple does a tremendous amount of iPhone advertising, nearly all for the App Store. The commercials are seemingly everywhere during prime-time TV broadcasts. Then there are the full-page ads in major dailies, like The New York Times and Wall Street Journal.
The last three The New Yorker magazines (I’m a subscriber) have full-page, back-cover iPhone ads. The magazine’s published ad rates put the cost for the back cover between about $109,000 and around $143,000 per issue, depending on frequency. Now multiply those kind of rates by the number of places iPhone ads appear in print or online and by even more for television. Apple is spending loads of money just to sustain that sales plateau. If iPhone were the runaway hit the hype meter suggests, Apple wouldn’t need to invest so much selling the device.
Apple rightly focuses advertising on App Store. I can’t speak for Apple’s reasons, but I see a couple obvious logistical ones:
- App Store makes iPhone and iPod Touch into mobile platforms that could replace PCs.
- iPhone isn’t a great phone (call quality is so-so), but is an excellent pocket computer.
- New applications extend iPhone’s utility and give newness to the device.
Smarter Smartphones Will Expose iPhone Shortcomings
Apple is right to focus marketing more on App Store than the device. The question: Can the new iPhone model boost sales. I say, “No,” unless:
- Background applications can run on iPhone.
- iPod touch helps App Store reach critical mass adoption.
- Apple improves iPhone such that it’s actually a good phone.
- Carriers, particularly AT&T in the Unites States, lower 3G data access fees.
- iPhone battery life greatly improves or, better, battery is made replaceable.
- Apple increases US distribution (not happening this year) or begins distribution in China.
Many, perhaps most, of iPhone’s cheerleaders simply ignore the device’s shortcomings. But savvy shoppers, who will have better smartphone choices come June, aren’t necessarily buying the hype. This already is apparent in the sales data. According to Gartner, HTC and Samsung posted strong handset share or sales gains. HTC sold about 2 million smartphones in first quarter with marketshare rising to 5.4 percent from 4.3 percent sequentially and 4 percent year over year. Samsung didn’t make the smartphone Top 5, but solidified its second ranking for all cell phone shipments. Samsung’s marketshare rose to 19.1 percent in first quarter, up from 18.3 percent sequentially and 14.4 percent year over year; the marketshare gains came even as sequential sales declined.
No. 1-ranked Nokia slowed handset marketshare losses, even as overall shipments declined to 97.4 million units in first quarter from 119 million in fourth quarter 2008. Cell phone marketshare declined to 36.2 percent from 37.7 percent, quarter to quarter. Nokia smartphone shipments declined about a half million units to 15 million quarter to quarter, but sequential marketshare increased to 41.2 percent from 40.8 percent. Gartner noted strong sales of the 580o XpressMusic, which Nokia shipped late 2008 to international markets and early this year to the United States. Gartner classifies the touchscreen device as a smartphone.
Smartphones accounted for 13.5 percent of global handset sales in first quarter, up from 12 percent sequentially and 11 percent year over year. Touchscreens mattered, and not necessarily as good as iPhone’s
“Much of the smartphone growth during the first quarter of 2009 was driven by touchscreen products, both in midtier and high-end devices,” Roberta Cozza, Gartner principal analyst, said in a statement. “‘Touch for the sake of touch’ was enough of a driver in the midtier space, but tighter integration with applications and services around music, mobile e-mail, and Internet browsing made the difference at the high end of the market.”
The 5800 XpressMusic touchscreen doesn’t deliver as good an experience as the iPhone’s, at least in my testing. But it’s good enough to have boosted Nokia smartphone marketshare quarter on quarter. Touchscreen competition is iPhone’s first challenge, as newer, highly-anticipated smartphones release starting in early June.
The second challenge: Newer devices with better integration of content, e-mail and Web browsing and other services. Apple may have, as measured by hype, the leading mobile applications store. But Google, Microsoft, Nokia, Palm and RIM, among others, either have built or are building out mobile application stores and supporting services.
The iPhone easily commanded the field when it was the only player. The field is suddenly crowded. The N97 and Pre are coming. HTC, RIM and Samsung—all marketshare gainers over the last year—are preparing much better touchscreen smartphones than 2008 models for summer and autumn release.
Then there is the global marketplace, where Nokia and Sumsung lead for all handsets and Nokia and RIM lead in smartphones. For at least another year, Apple is bound to a single carrier in the United States, while RIM has all the major ones. Apple still doesn’t have China distribution, and in markets like India iPhone is expensive and locked to carriers. People expect to switch carriers but keep the device in India; but not iPhone.
Apple’s immediate challenge is the new iPhone’s launch—how best to keep the hype meter at high register. It’s no coincidence that the highly-anticipated Palm Pre releases days before Apple commences its Worldwide Developer Conference. Apple debuted iPhone 3G during WWDC 2008. Apple CEO Steve Jobs would be the obvious person to launch the new iPhone, but he’s not attending WWDC.
Pre registers high on the hype meter, too. It’s purely geek nirvana. So does Apple wait for its CEO’s return to launch the new smartphone, risking Pre drowning out some of the iPhone hype? Or does the company launch the phone on June 8, almost certainly muting marketing noise and hype about Pre—and possibly the Nokia N97, which is rumored to be available June 2? I would officially announce the new iPhone on June 8. Would you?
Do you have an iPhone story that you’d like told? Please email Joe Wilcox: oddlytogether at gmail dot com.
Jesus, would you like to take 5, spell check and repost that?
I found one misspelling of smartphone. Corrected. Something else? Smartphone and marketshare are purposely treated as single words.
Yes, unless Sumsung is one of those hot Engadget KIRF contestants…
Btw, thanks for the article – it would be interesting to look at ad spending between Nokia, RIM, HTC, etc… Do these companies have equivalents to SEC filing? Is that a global thing or a US companies only thing?
Just a little interesting aside, I’ve just completed a systems roll-out for a major major phone outlet (120+ stores) in Australia and found out that Apple have a few interesting policies in order to allow selling phones. For instance there has to be at least one fully loaded and working, WiFi connected iPhone in store for demo purposes. None of the other manufacturers have this fully working demo policy apparently.
It also seems these outlets have a much more direct relationship with Apple compared to other manufacturers – where all just goes through the telco.
No point – just found it interesting…
I am one of these special customers that is now out of contract and looking to replace my beaten-up 1st gen iPhone. It does not matter when the iPhone is released – I am going to wait for it before making a decision. I would prefer June but I think July looks more likely.
The Pre looked awesome, 3 months ago. I will try to have a look at a real demo machine but Palm has not announced a UK release date yet. The Nokia is not too interesting to me, Nokia are nice functional devices but they are not very exciting.
I thought the other day what really keeps me wanting an iPhone, I think the App store was probably number one, followed by nice (mostly) responsive OS, nice slim design and then keyboard. Yes, the keyboard is a feature, I can type faster on it now than on a physical keyboard, I just need the pauses to be gone with the new device.
All the competition you mentioned have a physical keyboard (maybe the software is too hard?). That makes the phones 1cm thicker which is not good. There are 2 competitors you missed, the Samsung i7500 and the HTC Magic, both of those look like real iPhone competitors. The Pre and the Nokia are more Blackberry competitors as far as I am concerned.
I agree, at the core of it i think the Pre is far more aligned with the Blackberry than the iPhone – even though it visually is of course a lot closer to the iPhone.
Joe,
I’m always surprised by your focus on market share, at the expense of good business practices (i.e., generating profit).
RIM’s been on a “Buy One Get One Free” campaign for the last several months. Does that have any impact on RIM’s success, or is this all about market share?
In most cases profits trump marketshare. It’s why I’ve said Apple should resist lowering Mac prices in this economy. As long as people are buying, it’s better to preserve margins (and profits) than hold marketshare.
Compaq got in trouble during the 1990s for cutting prices to gain marketshare, ultimately hurting profits.
But there are times when share matters. The mobile marketing is the time and place, because there is opportunity for one platform to emerge as replacement for the PC platform. If Apple can gain share fast enough, with enough people hooked on App Store, iPhone/iPod touch could be that next-generation platform.
The last thing we need is the one platform that everyone has to use or miss out.
I hope the future will be based on many platforms with open standards (like the web).
I love Apple products, but the last thing I want is for them is to be the next Microsoft. I don’t think that will happen though.
In the 80s/90s Microsoft and IBM created the one ring to rule them all so to speak.
No matter how good the different mobile software platforms, there will never ever be that same scenario in the mobile computing area.
Interesting analysis, Joe, but I don’t think the data is nuanced enough to support your conclusions. You’re not making an “apples-to-apples” comparison (excuse the pun).
Apple = iPhone.
The numbers for Nokia and HTC, and to a lesser extent RIM, sum up a variety of platforms offering widely divergent feature sets, not all of which are directly comparable.
For better or worse, Apple seems to have a consistent platform offering that consumers and third-party developers understand. If they can continue to sell through in this market, keeping margins where they are, I think it will be a success, much like their disciplined, slow-and-steady approach to maintaining margins while incrementally growing share in the Mac market.
All that said, I have little visibility into the Nokia offerings in the US and how they stack up feature and sales-wise against the competition.
Saw this: http://ifwnewsletters.newsletters.infoworld.com/t/5123465/250881602/193084/0/
They compare the iPhone (not sure which version) to the Bold which is probably not the best comparison. Navigation through their slideshow is awkward and ugly, which is really odd since this is a review that focuses solely on usability. Unless you’re a speed reader, don’t let it play automatically; Just select each page by its number.
The review is fairly accurate. For what they both do, the iPhone is more usable and more fun to use. However, the review doesn’t mention Google Maps availability for the Blackberry nor do they mention that it’s free, which is a pretty striking omission.
On one hand, I know of a multi-hundred millionaire who could use anything in the world that was for sale, has both an iPhone and a Blackberry, and prefers the Blackberry on a day-to-day basis.
On the other hand, I noticed most recently that AOPA (Airplane Owners and Pilots Association) now offers their airport directory as an iPhone app but nothing for the Blackberry. And more and more high-end aviation apps and access are now being made exclusively for iPhone.
This post and its comments are interesting and entertaining. But the battles are far from over, and the future is anyone’s guess and nobody’s sole domain.