Analysts argued today over the significance of Apple's falling market share, reflecting the uncertainties the Cupertino, Calif. company faces in a transition to lower profits.
"The current iPhone portfolio is under-performing and Apple is at risk of being trapped in a pincer movement between rival 3-in. Android models at the low-end and 5-in. Android models at the high-end," contended Neil Mawston, executive director at U.K.-based research firm Strategy Analytics, in an email.
Mawston pointed to a drop in Apple's share of the global smartphone market for the second quarter; Strategy Analytics estimated it fell from 16.6% in the second quarter of 2012 to 13.6% this year, the lowest in three years.
Samsung, meanwhile, boosted its share from 31.1% to 33.1% in the last 12 months, while other smartphone OEMs, including LG, ZTE and Huawei, also gained share, according to Strategy Analytics' data.
Yesterday, U.S. researcher IDC plotted a similar decline in Apple's smartphone share, from 16.6% a year ago to 13.1% in the second quarter of 2013.
But Ramon Llamas of IDC didn't agree with Mawston that the share slump forecast Apple's doom. "The sky is not falling," said Llamas in an interview Friday. "We expected this [because] this is the usual seasonality you see in iPhone sales. There was going to be a dip in market share."
Llamas referred to the typical decline in iPhone sales as the newest model ages and a replacement approaches.
Apple's share will bounce back in the fourth quarter, Llamas maintained, assuming Apple reprises last year's timetable and launches a new iPhone in late September.
Even so, the declining market share numbers are important. If market share impacts Apple's iOS ecosystem, as the analysts maintained, then Apple must react to keep what it has or have a shot at growing its share in the battle against Android.
"Market share isn't everything," said Kevin Restivo, also of IDC, and like Llamas part of the team there that tracks smartphone shipments. "The number one goal of any publicly-owned company is to generate profit. That said, for the long term, market share does matter. It's a question of reach. The more people who have iPhones, the greater Apple's ability to sell software, unique online services and other incremental offerings."
While that revenue may have been incidental in the past, it's becoming more important as the smartphone industry steps away from the initial "land grab" of users and -- as saturation approaches in developed markets like the U.S. and Western Europe -- shifts to a software and services model, said Restivo.
Apple has hinted at the transition to software and services in its earnings statements this year, breaking out those revenues for the first time. In the second quarter, for example, the category Apple labels as "iTunes/Software/Services" booked $4 billion in revenue, 11% of the company's total and 25% more than the same period the year before. No other reporting segment came close to that year-over-year gain.
But market share is linked to more than software and service revenues.
The iPhone has been successful, most agree, because of the "virtuous cycle" of sales that lead to developers committing to the platform that leads to more apps that leads to more iPhone sales. A shrinking market share means an end to that cycle, or at the least, a departure of developers.
Llamas disagreed. "The installed base [of the iPhone] is huge and the loyalty rate by customers is still pretty high," he countered, suggesting that gloomy speculation was unwarranted.
Still, analysts are convinced -- though clearly, not unanimously -- that Apple's shrinking share has motivated it to design and sell a lower-priced iPhone and discard the years-long strategy of filling those price points with older models.
"That's just not a good enough strategy," argued Restivo. "Apple is known for its latest and greatest products, and even in pre-paid and emerging markets, that customer base still needs to feel that they have a new, shiny object. If it's yesterday's news, there's not as great a sales potential."
With a lower-priced phone in its portfolio -- more importantly, a new phone in that range, not the "yesterday's news" of the iPhone 4 or iPhone 4S -- Apple can take advantage of the sales opportunities around the world and grow its market share.
Restivo is confident Apple could and would do so.
"There's a reverence for the brand. Apple is a global, aspirational brand, that's key," he said. "And there are opportunities for Apple to compete, even in China, where they're really only skimming the surface."
Mawston, of Strategy Analytics, came to the same conclusion. "Apple's share of the mobile phone market is struggling to break through the 10% ceiling into double figures, and it will only be able to achieve this on a sustainable basis if it adds new iPhone models at lower price-points or with bigger screens in the future," he said.
"One quarter does not an ecosystem make," said Restivo. "But I think a lower-priced iPhone is inevitable."
If Apple makes that decision -- according to the rumor mill, it already has, and plans to ship an entry-level iPhone this fall -- that means the company has come to terms with lower returns than during the heady days when the iPhone faced little competition. Revenue may continue to pile up, but profit margins have slumped. That trend is likely to continue.
A lower-priced iPhone, and lower margins, will tell the tale about whether Apple adapts or continues doing business as usual.
"As any market matures, it becomes more about volume," said Restivo, who believes that Apple clearly understands that -- no matter how little stock its CEO puts in market share. "I think Apple learned that lesson in the personal computer market."
This article, iPhone share slump spurs calls for low-price model, was originally published at Computerworld.com.
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is email@example.com.
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