Can Apple Replicate Its Smartphone Success in Emerging Markets?
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The success of the iPhone from Apple (NASDAQ: AAPL) in the United States is well known to nearly every investor. The iPhone and the iPad are the reasons why the stock has performed so well for so long. But what about the future? At least as far as the smartphone market goes, the future seems to lie in the emerging markets and cheaper smartphones.
The number of entry-level smartphones, according to Deliotte, sold this year (mainly in emerging markets) is expected to soar to 300 million units. This will more than double the total number in use globally to in excess of 500 million units.
Emerging markets, especially China, are key to Apple's future growth. It is expected that in excess of 150 million smartphones will be sold in China alone this year. Apple's CEO Tim Cook has said numerous times that demand there is “mind-boggling”. China, which has surpassed the United States as the world's biggest smartphone market, is already Apple's second-largest market after the U.S. Some analysts are worried that it may be losing its touch in China since its revenues in the region for the second quarter fell by 28 percent to $5.7 billion. The same quarter in 2011 had seen revenues jump sixfold. On the bright side, iPhone sales in the quarter still doubled year-on-year.
The main reason for the drop in Apple's China region revenues is simply competition for market share in the world's biggest smartphone market. The company's main competitor right now has to be Samsung with its Android-powered phones. Android is the smartphone operating system developed by Google (NASDAQ: GOOG). Samsung's smartphones currently have 30 percent of the Chinese market compared to only 10 percent for Apple. That is due to Samsung's strong retail presence in the country, even in the hinterlands.
In fact, Android phones have been so successful in China and other emerging markets that it led analyst Benedict Evans of Enders Analysis to recently tell the Financial Times that “It is very clear that Android is hoovering up market share in emerging markets”. This includes India where Apple is actually struggling, selling less phones there than in Norway. Its market share there is about 3 percent, versus 45 percent for Android-powered phones.
Apple has more to worry about than Samsung too. Microsoft (NASDAQ: MSFT) and its partner Nokia ADR (NYSE: NOK) are placing a definite emphasis on China and other emerging markets as a growth engine. Microsoft believes that the only reason Android is so successful in China is that it happens to be on the cheaper smartphones. It and Nokia plan to match the low prices ($100-$150) while at the same time offering users a better experience with its Windows-powered phones such as Nokia's Lumia, a prototype of which was spotted in China this week.
The major plus for Microsoft's push into emerging markets with its phones later this year is that Nokia, unlike in the United States, has an almost unmatched reputation in the emerging world for producing quality products. But in China, Microsoft is covering its bases by also partnering with Samsung, HTC and ZTE.
Will Apple decide to compete on the low-end of the smartphone market? They may have to do something as the developed markets where they are so successful are becoming saturated. Most likely Apple will decide to the lower the price of their older 3G iPhone in order to make it more affordable to people in emerging markets. If they do this, these phones should sell well due to Apple's reputation. And don't forget that in China later this year Apple will, for the first time, release Siri in Mandarin.
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