Apple Will Stand The Test Of Time

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It is now becoming more urgent than ever for Apple (NASDAQ: AAPL) to stake a claim in international markets. As it stands, Apple is leaving a large market open for companies like Samsung, HTC and Motorola to compete in.

Exponential growth for smartphones internationally

International adoption of smartphone devices is continuing to rise. According to the International Data Corporation (IDC) Worldwide Quarterly Mobile Phone Tracker, the number of phone shipments grew from 402.4 million in the first quarter of 2012 to 418.6 million mobile phones in the first quarter of 2013. The demand for standard phones is on the decline as smartphones are starting to become far more common and in greater demand internationally.

IDC also states that the worldwide smartphone market grew by 41.6% year over year. The number of units shipped increased from 152.7 million in the first quarter of 2012 to 216.2 million units in the first quarter of 2013. It is the first time the number of smartphones shipped were greater than half that of normal cell-phone devices.

What is Apple’s game plan?

Apple has been investing aggressively into sales and administrative expenses in order to prepare itself for foreign market expansion.

Source: Ycharts

Over the past three years Apple’s research-and-development spending along with its sales, general and administrative expenses have grown by 80% in a three-year period. Apple has increased its spending on sales, general and administrative by an astounding $2.5 billion over the previous year. Apple is heavily focused on opening new Apple stores as the company opened 33 new retail locations in fiscal year 2012. Of the 33 new store locations, 28 were located outside the United States.

Apple knows that one of the most effective marketing strategies is to give consumers a safe retail environment in which to try out its products. Now to be fair, Best Buy and Wal-Mart offers low prices, but they can’t offer the customer service of a dedicated retail chain. The success of Apple’s retail strategy is exemplified by the 44% year-over-year growth it had accomplished in fiscal year 2012.

The Apple retail store will be instrumental to the company’s success internationally.

Fortunately Apple is doing more than just opening stores

The company also acknowledges the sheer income inequality between different countries. The truth is Apple can, in fact, sell its devices at a cheaper price in order to capture a larger share of underdeveloped markets. According to Business Insider, the total cost of making an Apple iPhone is $209. So it is possible for Apple to sell its phones at $400 or less and still remain profitable. Of course, Apple is only selling the iPhone at a lower price point in order to enter into certain markets like China, which has a GDP per capita of $5,444.

The falling price point is a bit of a concern to investors who have gotten comfortable with the premium pricing strategy Apple has been able to pursue with substantial success over the past 10 years. I don’t think Apple’s premium pricing strategy is going away altogether, but it has to sacrifice pricing in order to capture a larger piece of the global market share for smart phones.

In emerging markets, it wouldn’t be practical to pursue a 300% mark-up, when if you lower profit expectations a little you could net a lower gross margin but increase overall net profit. Pricing is an essential component of running a business.

Google running a little flat-footed

Google (NASDAQ: GOOG) has two options: turn Motorola Mobility into the best phone company in the world (which it isn’t, let’s be brutally honest); or optimize the business for short-term profits. Turning Motorola into a best-in-class phone will take more than just advertising and creating a better-looking phone. Google needs to take on a much more active role in developing Motorola phones, which may involve finding a need and satisfying it better than what Apple can do.

One of the problems I have with the Google platform is that it’s purely mobile. You don’t have interaction between desktop, laptop devices and mobile devices. The development of a full ecosystem that addresses the need for integration between a desktop and mobile device should be pertinent to the company. After all, both Microsoft (NASDAQ: MSFT) and Apple have fully vertical ecosystems. Apple is much more integrated than Microsoft. But let’s re-examine Microsoft’s changing business strategy with Windows 8

Windows 8 could hurt Android's market share

Source: ComScore

To be fair, Microsoft hasn’t actually done much in terms of market-share gains. We can observe that domestically within the United States, Microsoft is at least making gains. The advantages that Microsoft has over Google are that Microsoft has a fully integrated ecosystem of products.

To be more specific, I believe that Microsoft’s Windows 8 makes it less difficult for users to go between a desktop, laptop, tablet and mobile device. File formats are fully supported between the devices. It also helps that more and more applications are purely accessible through the cloud.

It’s highly probable that Microsoft will continue to win consumers on its mobile platform. Not enough to make it the next king in mobile, but enough to at least establish itself a comfortable home in the space.

Conclusion

Never disregard the potential of Microsoft and Apple. If I were in Google’s position, I would think hard about Microsoft and the potential a full product suite of Windows devices could offer. Apple has been able to gain 3% market share in the United States, which shows that given enough time, Apple can steal back market share against its rivals. So given enough time, I see the potential in Apple taking away Android’s ever-growing market share in foreign markets. Apple’s international strategy is truly methodical while Google’s is very spontaneous.

I still vote Apple. It’s only a matter of time before the Apple bug bites the hearts of consumers across every continent. While I won’t deny Samsung and HTC create compelling mobile products, it doesn’t change the fact that Apple is perhaps the best in the world at building long-term brand loyalists.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.


Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure