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Apple Inc. Fights Off Samsung's Quadruple Bypass Hummer of a Phone


Apple's iPhone sales numbers show the benefits of differentiation.

We serve the single bypass burger, the double bypass burger, the triple, all the way up to the quadruple bypass burger. That's two pounds of beef. It's absolutely slathered in lard. It's got tomatoes, onions, and so many slices of bacon that you can't even count them. That's what makes the quadruple bypass burger incredible.
-- Doctor Jon, The Heart Attack Grill


We like big stuff.

Houses, cars, and food portions are just a few of the things that are bigger here than in the rest of the world.

Heck, America gave the world the Heart Attack Grill referenced above:

And the Hummer!

And Hummer cologne!

Yet, the world's most dominant technology company -- the very American and very minimalist Apple (NASDAQ:AAPL) -- frowns on the idea of quantity over quality.

My gosh, could it be a California thing?

And interestingly enough, America's other tech superpower, Google (NASDAQ:GOOG), won the search war with a differentiated offering that was far simpler than the competition.

Remember the 1980s and 1990s, when consumer technology was dominated by Japanese superpowers like Sony (NYSE:SNE)?

Trinitron was the bomb:

Now let's connect this back to this week's big news -- Apple's third quarter earnings report from Tuesday.

Apple sold 31.2 million iPhones, smashing analysts' expectations, which were in the 26-27 million unit range.

That equates to a year-over-year unit growth number of 20% where analysts were expecting sub-5% growth.

Sequentially, iPhone unit sales fell by 17% -- a significant improvement over last year's 26% drop.

And what's happening elsewhere in the smartphone universe?

Well, supposed Apple-killer Samsung (OTCMKTS:SSNLF), maker of the smartphone-equivalent of a Quadruple Bypass Burger -- the Galaxy S4 -- is hurting.

On July 5, the company announced that it expected a Q2 operating profit of 9.5 trillion won, which according to Bloomberg was 7% below consensus of 10.6 trillion. It has been rumored that the company was hit by a slowdown in high-end smartphone sales, which would imply a shortfall for the S4.

That same day, fellow smartphone giant HTC (TPE:2498) reported a huge earnings miss.

Even Google's own Motorola unit has been a major disappointment in terms of sales up until the second quarter, where it finally showed some improvement.

And what do these three companies have in common?

They make gigantic phones running Google Android, and constantly play a game of one-upsmanship focused on ever-expanding display sizes and fanciful but poorly implemented modifications of the operating system.

There is a major problem with this game.

It makes consumers think of smartphones as priced in terms of megahertz/display size/pixels per dollar.

Aside from the lousy add-on software -- a huge obstacle to the idea of consistency throughout the Android ecosystem -- can the average shopper really tell the difference between a Samsung Galaxy S4 and an HTC One and a Sony Experia Z and a Google Nexus 4 (which thankfully, offers a "pure" Android experience)?

Of course not -- the only really obvious differences lie in the specification sheets.

Ooh, this one has more megapixels on the camera? I'll buy that one.

It's as if the entire smartphone industry, ex-Apple, had decided that it's going to make its own version of the quadruple bypass burger, but instead of jamming beef patties, it's using pixels.

This is highly destructive, and exactly why we have smartphone companies failing to make real money in a market that, for all talks of slowdown and maturation, is still growing at a 40%+ rate.

This is the dark side of running on a standardized operating system. If you can't create a truly unique experience, it's difficult to stand out and generate outsized margins. It feels like we are seeing 2010's Great Smartphone Bear Market all over again, when I wrote this:

Forget the whole concept of a rising tide lifting all boats. The smartphone market ex-iPhone has turned into something truly awful: a bull market in unit shipments, a bull market in product quality, and a bear market in profits.

Mobile-phone makers have fooled themselves into thinking that slapping together a processor, a touchscreen, and Android is the way to make money -- or at least avoid the potential embarrassment of trying to stand out from the crowd. The Motorola Droid was hot for a few months but then was overshadowed by the Google Nexus One. And of course, the HTC Droid Incredible will show those two up before getting crushed by yet another hot Android phone three months later.

Now, is an iPhone inherently better than an Android phone?


But it's inherently differentiated because it's the Apple experience.

And now, the smartphone industry increasingly looks like the PC industry, where no one can gain an edge because everyone essentially offers the same product with minor cosmetic differences. It's the operating system makers that end up winning when commoditization sets in -- Microsoft (NASDAQ:MSFT) in the PC heydays and Google (NASDAQ:GOOG) now.

Now let's talk about smartphone pricing, which has been another hot topic of discussion this week.

Market research firm IDC said that the average price of a smartphone fell to $375 from $450 since the beginning of 2012 as companies like Lenovo (OTCMKTS:LNVGY) and Huawei (SHE:002502) pursue the low end of the market.

That's a 15% drop.

So let's look at how Apple is doing.

In the first calendar quarter of 2012, Apple hit an average selling price of $647 on the iPhone.

That number fell to $581 this quarter, a drop of 10%. So Apple is taking a hit on average selling price, but it's at least doing better than average.

And since Apple is in the neighborhood of 20% of the smartphone market, it has a noticeable impact on overall industry pricing.

So let's do some backwards math.

In Q1 of 2012, Apple had 24% of the smartphone market according to IDC. Apple itself reported an average selling price of $647. So if the average smartphone price was $450, then the average non-Apple smartphone was priced at $387.79.

That's right. My eighth grade math skills just got upped to ninth grade.

For Q2 of 2013, let's assume Apple had 20% of the market. We now know that its average selling price was $581. Plugging those numbers in implies an average non-Apple selling price of $323.50.

That actually brings us to a 17% drop in non-Apple smartphone prices.

And note this number could actually be much higher because Apple's smartphone sales were 17% ahead of expectations while some other companies like HTC and BlackBerry (NASDAQ:BBRY) are clearly underperforming. If Apple's market share shakes out to 22%, the non-Apple average price falls to $317 (an 18% drop). At 24% Apple market share, it goes to $310, a 20% increase.

Admittedly, my math is fuzzy enough for a presidential election here as I don't know exactly how IDC made its estimates, but you get the point -- smartphone pricing trends aren't helping Apple, but they're certainly hurting less in Cupertino than in the rest of the industry.

So let's add this up.

Apple's iPhone franchise showed some major resilience as the company sold 17% more units than expected, while multiple competitors, all of which sell gigantic Android phones, are reporting lousy financial results. And while pricing trends stink, they stink a little less for Apple.

We won't know for sure how big Android fatigue is until Samsung gives a full report, as it is the major superpower.

But for now, it seems more important to be different than bigger.

Twitter: @Minyanville

Disclosure: Minyanville Studios, a division of Minyanville Media, has a business relationship with BlackBerry.

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See also:

Apple Inc.'s Feud With Samsung Puts Future Innovation at Risk

Apple Inc. Steps Over the Lowered Expectations Bar -- Now What?

The Two Types of Users That Apple and Google Have Abandoned
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