Apple Inc. NASDAQ:AAPL and Samsung Electronics Co., Ltd. LON:BC94 (KRX:00593 have been seeing increasing pressure on average selling prices, mainly due to increased pressure from Chinese competitors. Currently the two companies are highly dominant in smartphones, but will that dominance remain?
In a report dated Aug. 8, 2014, Bernstein analysts, Alberto Moel, Mark Newman and Toni Sacconaghi, Jr. said they believe Samsung will be able to hold off the low-end Android competitors. However, they think the company will have to lower its margins to do that. But will Apple be able to do the same? They think so, based on the company’s experience in the PC industry.
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Apple goes it alone
They say currently the smartphone industry seems to be developing along the same paths of the PC market. They note that 10 to 15 years ago, Microsoft Corporation’s NASDAQ:MSFT Windows platform was the dominant force. Meanwhile Apple stayed on its own, just as it has within the smartphone industry.
Today, Windows is still the PC market’s dominant ecosystem, and Asian vendors Lenovo, Acer and Asus make up nearly a third of the market. In 2003, they held just 5% of the PC market. Meanwhile the average selling price of PCs declined dramatically, while Apple dropped its prices far less dramatically (All charts and graphs are courtesy Bernstein), keeping its margins mostly intact.
The result is that Apple’s NASDAQ:AAPL Mac business isn’t much different than it was a decade ago, although the company has sheen modest gains in market share. In fact, the Bernstein team estimates that Apple continues to hold gross margins of about 25% in its Mac business, which is far above other PC vendors that have margins in the 10% to 15% range.
Why Apple’s margins may be mostly shielded
Looking back at the smartphone market, they note that Apple continues to go it alone with its own operating system. They think that Samsung will be the hardest hit by the decline in average selling prices because it uses the Android operating system, just as low-end Android smartphones do. The reason for this is because it’s pretty inexpensive to switch from one Android device to another, although it remains rather expensive to switch from Apple to Android and vice versa.
The Bernstein team thinks Apple NASDAQ:AAPL has an opportunity to keep its smartphone ecosystem alive by keeping it differentiated from Android and continuing to price its iPhones at the high end of the market. This strategy would follow what the company did in the PC market, and it worked there.
They believe Apple’s share of the PC market was only about 5% last year. However, they think the company made up 12% of total revenues in the PC market, resulting in an average selling price that is materially higher than computers that run Windows. The gap in these percentages is similar to what we have seen in Apple’s unit and profit share in the smartphone market, although of course they are much smaller than Apple’s NASDAQ:AAPL smartphone percentages. Because of this trend, they think Apple will be able to “remain above the pricing mayhem” in the smartphone market.
They don’t think Apple NASDAQ:AAPL will gain share like it did in the PC market, especially because it had a 15% unit share in the smartphone market, which was “significantly higher” than the company had in the PC market. Nonetheless, just because margins in the Android ecosystem are being eroded by inexpensive competitors, they think Apple could stay out of the fray and continue holding “a significant percentage” of the industry’s overall profits.