Addressable markets for high-end phones

There are all sorts of ways to estimate the addressable market for a high-end phone like the iPhone. One way is to look at price sensitivity, the propensity of lower income groups to spend on expensive entertainment products and how that might be affected by the increasing capabilities of cheaper devices. Another is to look at the mobile operators that do and do not actually offer the iPhone, which gives you a figure for people who cannot in fact buy one, at least on subsidy, even if they want to (assuming they're not willing to switch operator). 

However, it seems to me that the central issue in sales of the iPhone and other high-end models is the availability of subsidies themselves. After all, if a phone is good enough for consumers to want it and the OEM has the scale and budget to provide it (an issue for some) then distribution is just execution and time, not a fundamental constraint. Ability to pay, too, is a moving target: people substitute spending for products they really want, and $600 isn't that much money over two years for a large proportion of the world's population. 

So actually, the real questions are the big numbers: how many people are getting subsidies? How many are buying phones? 

Hence, my first chart shows just how the smartphone install base compares to the total global population. 

There were about 5.2bn adults on earth at the end of 2012. Of those, around 3.2bn had mobile connections, though not necessarily phones (some people have a SIM but no phone, and many have multiple SIMs, which is why the number of connections is well over 6bn). Within that, roughly 1.1bn had 'smartphones' at the end of 2012, of which around 900m ran either the iOS or Android versions of Unix. (As an aside, it is pretty striking that almost a fifth of the earth's adult population has a Unix box in their pocket.)

So how does that relate to contracts, and hence subsidies? According to my old colleague at The Mobile World, there were around 1.6bn contracts in place at the end of 2012. 

For now, the overall smartphone base remains below the contract base, though it is growing fast. But the non-contract portion of the world's population is much bigger. If I turn the chart upside-down the point is clearer. 

At the end of 2012, 2bn adults had yet to buy a mobile connection of any kind, and another 1.6bn were on prepay and not eligible to get subsidies. It doesn't matter how many operators Apple or Samsung puts on distribution: those people are not going to buy a $600 phone.

However, that leaves about 1.6bn who might. 

Polarisation, continued

Playing with a new chart format. This shows quarterly handset unit revenue at the 8 'branded' handset OEMs, over the past three years. It includes all phones, not just smart.

The polarisation of the industry is pretty clear. Not shown: the 'other category - Chinese OEMs making up increasingly large volumes for which this sort of data simply isn't available.

HTC and Samsung

It should be pretty obvious that Samsung (or even just Samsung Electronics) is a much larger company than HTC, with much more financial firepower. But it's interesting to look at some of the ways that scale affects things. Marketing is a good example. 

Both companies disclose a 'sales and marketing' line. For Samsung this includes activities for the TV and domestic appliance divisions, but the way the spending has grown in recent years suggests that the great majority of the spending is for mobile - and of course the brand is the same anyway, so advertising for TVs will also bleed across to phones.

Where is this money going? Well, Samsung discloses a split in the 'sales and marketing' line - around 40% is advertising and the rest is 'sales promotion expenses' - a lot of which is sales commissions. 

In Q4 2012 Samsung's budget was 13 times HTC's. Samsung hasn't disclosed the Q1 number yet, but if it dropped to, say, $2.5bn in Q1, the same proportionate shift as at the beginning of 2012, it would be about 19 times bigger. It's actually a little hard to see given the scale, but HTC's budget is down 40% year on year, to just $130m, a tiny amount. And given their operating profit was zero in Q1, they can't afford to spend much more.

In the handset market today, having a lovely product is necessary but insufficient. This chart ought to show why.

Incidentally, Apple doesn't break out a sales and marketing line (it only gives the advertising spend): in 2012 Apple spent about 25% as much as Samsung Electronics directly on advertising, some of which was obviously for iPads as well. However, it has contracts requiring mobile operators to spend money on advertising as well, so this isn't a direct comparison. 

Google's penetration of Android

It was interesting, though not terribly surprising, that Samsung found room in its announcement of the Galaxy S4 for a tap-dancing child and a live orchestra but not Google, and mentioned Android only once, in passing. It has been clear for a while that Samsung wants the Galaxy brand to replace the Android brand.  

What really draws out the potential importance of this, though, is to place Samsung's share of Android next to the share that comes from China. As most people know, most Android phones sold in China come with no Google services pre-installed - no Maps, Gmail, calendar, Play etc. It is possible but very fiddly to add them. In MWC I even saw a Motorola phone in this condition. 

Hence, Android in China (or an estimate thereof) plus Samsung (excluding its sales in China to avoid double-counting) adds up to 60% of all Android unit sales. Samsung never mentions Google services; China, by and large, doesn't have them. 

China alone is probably just under a third of total Android sales, meaning that Google's penetration of Android is no more than two thirds. Samsung has another third, and that is clearly marching off by itself, with the intention, perhaps, of reducing Android to the proverbial 'set of device drivers'. Hence, the portion of Android that is neither Samsung nor in China is only 40%. That must make some people nervous. 

Market share: Apple, Samsung and the seven dwarves

Smartphones passed 50% of all mobile phones sold on earth some time in the last month or two. With that in mind, talking about 'smartphone market share' has become pretty irrelevant: what really matters is share of phones sold, since the great majority of phones sold in the next few years will be smartphones. 

With that in mind, I offer two charts of the state of the industry today. The first is for Apple alone. In Q4 2012, it had 11% of all phones sold on Earth, the highest it has ever had. Share of smartphones, the legacy statistic, was stable over the cycle, as it has been for several years. (NB: these are not adjusted for Apple's 'short quarter', so the Q4 2012 number is skewed down.)

The second chart shows the context: the utter dominance of the handset business by Apple and Samsung. As should be obvious, Apple's lock on the high-end of the market has disproportionate effects on share of revenue and profit.

It occurred to me at MWC, incidentally, that one could characterise the Android market as 'Samsung and the Seven Dwarves': this may show why. 

Market share

This chart shows both the revenue share and the unit share of global handset market in Q4 2012. (This was an iPhone launch quarter, which means Apple's share is a little larger than normal). 

This is, of course, a combination of public data (eg Apple revenue and sales,, Samsung revenue) and estimates from various sources (the 'Other' is pretty speculative, and could be argued at various different levels), but there's nothing terribly controversial here. A couple of observations: 

  • The dominance of Apple, Samsung and (in volumes) Nokia is clear
  • Apple had around a third of the revenue in the industry despite selling only about 10% of the units: that's what selling phones for an average of $619 gets you
  • Conversely, most of the volume in Android is at significantly lower prices than Apple (a blended average in the $200-250 range), especially in the 'other' category, which really reflects low-priced Chinese manufacturers targeting the $150 sweet spot. 
  • Smartphones in total had about 50% of the volume of the market, but around 80% of the revenue

This gives a pretty good illustration of some of the key questions facing the industry in general and Apple in particular. How much more growth is left in the market? How many more people will convert from non-smart to smart phones, and at what prices? And with Apple already taking a third of the revenue in the market, how much more can it grow?

Below: the same data in a more compact form. 

Galaxy versus Android at the Superbowl

On the basis of (the not-entirely-reliable) Google Trends, it looks like the Samsung Galaxy brand is starting to overtake 'Android' in consumer awareness. 

'Samsung galaxy' itself is some way behind Android, but 'galaxy' alone has equaled it, and I can't offhand think of another reason why that term would have shot up (suggestions gratefully received), while the spikes in the line are clearly correlated with 'Samsung' and 'Samsung galaxy'

US data shows much stronger iPhone share (which is unsurprising) and flat to-declining Android search volume. 

EDIT: Google Trends seems to have broken, and is claiming there's no data for any terms for the USA. That's the last time I get clever and embed the chart instead of taking a screenshot. 

This reflects a couple of dynamics. First, Samsung has around 50% of Android unit sales (outside China), so one would expect it to be strong. Second, given the lower price points at which most of its smartphone volume sells (the GS3 is less than half Samsung's Android volumes) one might expect a slightly less tech-savvy buyer, perhaps with more interest in the phone brand than the ecosystem. 

Third, and most interesting to me, though, is the fact that Samsung really doesn't talk about Android at all in its marketing - which now has a $14bn run-rate budget (around 13-14x Apple). A lot of Samsung marketing for Android devices doesn't even mention Android. 

You can see this very clearly in the new Samsung Superbowl ad. This has got lots of attention by (depending on your point of view) mocking Apple for trying to patent basic concepts or brazenly flaunting Samsung's systematic copying of Apple's innovations. But to me, what's striking is that it doesn't show the phones or any features, let alone mention Android. 

The subtext, of course, is: 'the UX is a commodity, the apps are a commodity, the stuff Apple talks about is a commodity that's absurd to patent - we're going to compete on hardware features'.  That's a natural angle for a hardware company with no control over the platform, of course. For now. 

Samsung brand creep

A bay of 'how to use your smartphone' books is now a common sight, but the 'Samsung apps directory' caught my eye this morning.

Samsung barely mentions Android in its (firehose) marketing, and it has around 50% of the UK Android market. Clearly, enough people want apps but don't know they have an Android (or don't make the connection) for it to be worth selling not one but three of these. In any case, this illustrates how at least one OEM brand is becoming relevant again.

Apps directories, incidentally, are a growing print category that reveal a fair bit about how easy 'normal' users find these devices.