Smartphones – No Longer a Duopoly?
Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’m not actually sure if I should really call the smartphone market a duopoly. If recent numbers from analysts are to be believed, the Android OS reigns as king. According to data from research firm IDC, Android dominated market share for the third quarter in this sector. The OS, developed by Google (NASDAQ: GOOG), seems to be the most popular choice for consumers, with nearly 75% of the market share of phones shipped in Q3.
"Android has been one of the primary growth engines of the smartphone market since it was launched in 2008," IDC Mobile Phones Research Manager Ramon Llamas said in a statement. "In every year since then, Android has effectively outpaced the market and taken market share from the competition. In addition, the combination of smartphone vendors, mobile operators, and end-users who have embraced Android has driven shipment volumes higher."
The Google-developed OS has been steadily gaining market share 2010. In the same quarter of 2011, Android-based phones commanded only 57.5% of market share, with 71 million units shipped. In the third quarter of 2012 that number has increased to 136 million units.
Although Apple’s (NASDAQ: AAPL) iOS is far behind in this race, IDC believes that iOS sales increased courtesy of the Q3 release of the iPhone and the lowered price of older models. The iOS had only 14.9% of the market share in the same quarter, with 26.9 million units sold. Geographically, according to numbers released by Kantar Worldpanel ComTech, Android is continuing to make market share gains across Europe in the 12 weeks ended Sept. 30. In that region, Google's mobile OS rose to a 67% share, compared with 51% for the same period a year ago, while iOS edged down slightly, to 16.5%. However, in the US, the iOS leapt from 21.5% a year ago to nearly 38%, while Android slipped from 66% to 57.5%. Still, the difference in the total units shipped seems quite large; but is the difference particularly significant?
While Apple seems to be behind in the numbers, it is definitely ahead in operating margins. Jefferies analyst Peter Misek concludes that the iPhone 5 has a bill of materials worth $293, including certain soft costs, such as royalty payments. If you assume an average selling price of $650, that’s a gross margin of 55% on the phone. According to Morgan Stanley, Samsung’s Galaxy S3 has gross margins of about 37%, but they note that Apple leads the way when it comes to operating margin. Apple has an operating margin of close to 30, so even if gross margin slips a few points, operating margins should be in the high 20s. The Galaxy S3 has operating margins somewhere in the mid-teens.
If you assume that every phone sold from the list of Android’s shipped (I know this isn’t possible) then it seems that profits will be fairly even, based solely on operating margins. Since the assumption that the Galaxy S3 is the only phone shipped doesn’t really stand, Apple still is a pretty dominant smart phone maker, despite being the second choice in OS for smartphones.
The clear winner in all of this mess is Google. The company has ensured its tie up with phone makers has added to its vast repository of data thanks to information collected from the Android OS. The catalogue of products at Google’s disposal now is vast, and they will benefit from the advertising revenue brought up about by the popularity of their Android OS.
Meanwhile, Microsoft’s (NASDAQ: MSFT) CEO Steve Ballmer expects the Windows Phone will quickly become a viable third option in the market. Microsoft is somewhat similar to Google in the sense that their profits do not necessarily come directly from the sale of Windows based smartphones, but they will from the close environment that Microsoft hopes to achieve by linking it with its Desktop and tablet OS as well. The Windows phone is expected to turn a few corporate heads too, thanks to the fact that Office will be available on them – Excel, Word, and PowerPoint at your disposal. However, Microsoft needs to catch up with Android that is sitting right at the top of the pile and looks to remain there, helping its partners such as Samsung lead thanks to sheer volume. Will Microsoft be able to mimic the popularity of the Android with Windows 8? If reception to Windows 8 enabled phones isn’t great, they might even be overtaken by Research in Motion’s Blackberry 10.
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ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.
