Apple making 92% of phone profits? Monopoly or misleading?

If you grok numbers, it is not hard to state that a baby born into a traditional Chinese family can be aged 2 years just a couple of weeks after the baby’s birth.*

Likewise, when you see the Wall Street Journal (subscription required) headline “Apple’s Share of Smartphone Industry’s Profits Soars to 92%”, you should suspect that something is amiss.

However, it seems to have been taken even further amiss by ace blogger John Gruber in his Daring Fireball blog, who then appends:
“At just 20 percent of unit sales, Apple isn’t even close to a monopoly. At 92 percent profit share, they have a market dominance that rivals any actual monopoly the tech industry has ever seen. We don’t even have a term for this situation, it’s so unusual. Profit monopoly?”

First you have to read very, very carefully what the WSJ headline says, as it is accurate, just psychologically tricky. Most of the time, when we use percentages with profits, we are referring to profit margins. A profit margin of 92% would be almost diagnostic of a monopoly being abused.

But this time, the story is not about profit margins, but about Apple’s share of the total profits being made in a given market, which is totally different. Apple could be making a modest profit margin (around 37% in 2014) on its iPhones, and the rest of the market could be just breaking even, or making a loss – which is not far from the actual situation, according to the figures from Canaccord, on which the story is based.

Next, this story isn’t even news. Last quarter’s almost identical figures were reported by most, including MacRumours, back in February 2015. In February 2013, Forbes ran a similar story with figures that were not greatly different then, two and a half years ago. And a year before that, the Mac Observer quoted a similar report that Apple had taken 80% of all mobile handset industry profits.

There is also quite a lot of vagueness about what profits are actually being discussed. To derive these figures each year, Canaccord (Canaccord Genuity, wealth managers, investment bankers, and financial services providers) ignores 992 or so of the manufacturers, and examines just the eight “leading OEMs”: Apple, Microsoft, Samsung, BlackBerry, Lenovo/Motorola, Sony, LG, and HTC.

For each it takes the “mobile device operating margin”, which presumably includes all such “mobile devices”. It is not clear whether this includes tablets, which of course are hardly the “smartphones” which made the headline.

In 2014, of those eight “leading OEMs”, three (Microsoft, BlackBerry and Lenovo) turned in a loss for their “mobile devices” sectors. Another three (Sony, LG and HTC) made such small operating margins (profits) on their “mobile devices” as to just break even. That leaves just two profitable operations: Apple and Samsung. Given the latter’s steadily declining overall profits and consistently low profits on its “mobile devices”, it is hardly surprising that Apple’s profits are most of those being made in the ‘industry’ (whichever industry we are really referring to).

More worrying is what is unsaid.

Given that most of Apple’s competitors are pricing their products at the point where they are either just breaking even, or actually making a loss, they must either be profiting more handsomely by other means, or they will soon be going out of business, in this sector at least.

It is of course perfectly possible that they could be running a ‘dumping’ operation, in which they sell their smartphones at a loss, and then make their profits by tying customers into other revenue-generating operations. This could be a bit like the old printer scam, where a manufacturer sells the printer at a substantial loss, then ties customers into using their consumables, which have very high profit margins. Most trade regulators take a dim view of such behaviour, particularly when it comes to imported goods, and consumer champions quite rightly try to expose those attempting to get away with it.

So rather than wondering why Apple is making handsome profits from its “mobile device” sales, shouldn’t WSJ and commentators be asking how most of the other “leading OEMs” are sustaining their operations if they do not make much or any profit?

* The answer of course lies in the traditional Chinese way of calculating age. Rather than starting with 0 years at birth, the moment a baby is born they are 1 (as they might be under the Western concept of being in their first year of life). Age is then incremented each New Year, not each birthday. So a baby born a week before Chinese New Year will, two weeks later, be aged 2 years according to the traditional method.