Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

The smartphone business is cutthroat, and no one can stay on top for long. Even tech industry die-hards would have had trouble predicting that two Chinese upstarts, Oppo and Vivo, would come out of nowhere to collectively sell one in 10 new smartphones worldwide, as they did this spring. 

My Gadfly colleague Tim Culpan wrote a compelling column about how Chinese smartphone brands have their sights set on the U.S. and will inevitably steal sales in a country where Apple and Samsung sell a majority of smartphones -- a much larger market share than they have in other parts of the world. I'm not sure Tim is right. It's hard for relatively unknown brands to catch on in the U.S., at least not without expensive marketing campaigns or buying a brand already well known, as Lenovo did by purchasing IBM's ThinkPad laptop business a decade ago.

If Tim is correct in predicting a shake-up in the U.S. smartphone sales ranks, it still won't budge the profit picture, which has been as reliable as a metronome despite the ups and downs in the tumultuous industry. When it comes to what matters, Apple and Samsung rule, and they're unlikely to be dislodged soon. 

Consistent Dominance
For four years, Apple and Samsung have captured more than 100% of industry operating profits among high-end smartphone handset makers. Their rivals barely break even, or lose money.
Source: Canaccord Genuity

Mike Walkley at Canaccord has been keeping close tabs on the communications technology industry for more than 15 years. And according to his data, since early 2012 -- practically an eternity in the smartphone business -- Apple and Samsung together have generated 100 percent or more of all operating profits among makers of premium-priced smartphones, which grab enough buzz to lift an entire brand. Yup, that means every other competing company barely breaks even on what should be a high-margin product or is bleeding money. 

Profit Pain and Gain
Apple and Samsung seesaw for smartphone dominance but have stayed reliably profitable as rival high-end smartphones lose money or barely break even
Source: Canaccord Genuity
Note: Profit market share figures for Lenovo/Motorola are for Motorola alone prior to Q4 2014 and for the combined companies after that.

There are a few important caveats in the Canaccord profit data. It doesn't include some important private companies, including China's Huawei and Xiaomi, which are selling a bigger chunk of the world's smartphones both in their home country and in fast-growing smartphone markets like India. Still, those companies aren't likely making much of a profit and certainly not enough to alter the picture of Apple and Samsung's profit dominance of higher-priced phones.

The bigger question mark is how the changing complexion of the smartphone market will dent the Apple and Samsung profit duopoly. Most of the volume and nearly all of the growth in smartphone sales is happening in places like India, Indonesia and the Middle East, where lower-cost smartphones rule.

India in particular seems up for grabs, and Apple is trying desperately to make India a foundation for future iPhone sales as the country nears passing the U.S. as the world's second-biggest buyer of smartphones behind China. But it's unclear whether premium-priced phones will ever catch on among India's consumers. The average smartphone sales price there is expected to be $102 by 2018, according to research firm IDC, while an iPhone sells for an average price of nearly $600.

Still Not Cheap
iPhones sell for three times the price of an average Android smartphone. But Apple's average iPhone sale price declined to a two-year low in the June quarter.
Source: Bloomberg data and Apple
Note: The quarters shown here reflect Apple's fiscal year, which ends in September.

What's happened in the high volume end of the smartphone market hasn't eroded profits at the luxury end -- at least not yet. But it's easy to imagine that Apple and Samsung will need to concentrate less on their flagship iPhones and Galaxy phones, and more on the lower-priced tier to the point where their profit advantage erodes. Already the average iPhone sale price slipped to a two-year low in the June quarter after Apple introduced a lower-priced iPhone for the masses.

Even as the smartphone industry shifted from hypergrowth to barely budging, Apple and Samsung have continued to gorge all available profits at the fat end of the market. The question is whether the dominance its rivals can't shake might be undone by the slow-growth, more profit-conscious smartphone market that we're entering now.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. That said, I can't wait to see what Huawei, Xiaomi and other prominent Chinese smartphone makers do if they make serious sales efforts in the U.S. Chinese companies in particular are making good smartphones packed with some interesting features battle-tested in competition with hundreds of other domestic smartphone makers. Xiaomi has been clever about stoking demand through limited-time online sales and other marketing tactics we don't see in the U.S., where most sales happen through phone carriers. And no one should discount the disruptive ability of Huawei, an impressive company that wreaked havoc on the entire global industry for telecom equipment.

  2. It's interesting to see the swapping ascendant periods of Samsung and Apple show up in the profit picture. At times when Apple is stuck in a slow-growth period, as it is now and was in 2013, Samsung manages to find its stride. The reverse is also true. 

     

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net