updated 07:00 pm EST, Thu February 9, 2012
Profit margin is nine times industry average
The ability of Apple to dominate the telecom industry while only selling about nine percent of all handsets comes mainly from its ability to leverage a healthy profit off its products, something most of the other manufacturers are unable to do, according to a new report from Canaccord Genuity analyst Michael Walkley. Apple earned 80 percent of all profits in cell handsets (both feature and smartphone) with an operating margin of 47 percent, about nine times the industry average.
For most handset makers other than Samsung, the actual manufacturing of handsets is a break-even business at best. Of the six top makers, only Samsung and RIM had consistent profits, and still at a fraction of Apple's 47 percent margins.
Samsung was the most successful at 15 percent profit on the typical selling price of one of its handsets, while RIM managed only half that at eight percent. Nokia was the only other company to eke out any profit at all, at three percent. Motorola and LG reported essentially no profit at all on handsets, and Sony Ericsson (which has now been absorbed by Sony) lost 18 percent on every handset sold.
That handset makers are unable to turn high profits on mobile phones despite many using a "free" OS in the form of Android may foretell some fallout over the next year or two. Companies like LG and Sony could consider dropping out of the handset business in order to focus on more profitable products they are already well-known for, including HDTVs, monitors and other consumer electronics. Samsung, which derived half of its total profit in Q4 from smartphones, is likely to increase its competition rather than scale down, as it is the leading Android provider with 50 percent of all Android-based unit sales.
Apple now takes 36 percent of all revenue in the cell phone manufacturing sector and 74 percent of the industry's earnings before interest and taxes (EBIT). Although the combined total of Android-based smartphones leads in sales by 44 percent compared to Apple's 27 percent, neither Samsung nor any of the main players in the cell phone industry other than Apple have been able to make the products hugely profitable.
The lack of profitability in smartphones outside RIM, Samsung and Apple may actually create opportunities for Windows Phone-based units as people upgrade their feature phones. Though the platform has yet to gain any significant foothold in the market, it has the ability to offer both mid-range and premium models (mostly via Nokia as it transitions away from Symbian-based phones) and presents a clear alternative platform for those who for whatever reason want to switch from exiting Blackberry or Android models. Other companies that presently make unprofitable Android handsets, such as HTC, might consider "jumping ship" or expanding Windows Phone models as Samsung comes to dominate the Android market.
The iPhone is now Apple's dominant product in terms of both sales and revenue, accounting for 43 percent of the company's income in fiscal 2011 and expected to rise even higher in 2012. Overall, the cell phone industry will actually be down slightly in 2012, says UBS analyst Maynard Um, thanks to the deterioration of the feature-phone sector, but revenues should be up because of the shift to smartphones and cheaper "midrange" smartphones. Smartphones already grab 75 percent of revenue in cell phones, with Apple and Samsung together accounting for 55 percent of all smartphone sales and 90 percent of EBIT.