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Will the iPhone 5S Boost Apple's Market Share?


Apple's iPhone business is at a key inflection point.

I'm thinking about getting a new smartphone.

I'm a Verizon Wireless (NYSE:VZ) customer, so I have a lot to choose from!

From Motorola, I can get a Droid Ultra, Droid Maxx, Droid Mini, Droid RAZR M, Droid 4, or a Moto X.

Samsung (OTCMKTS:SSNLF) also has a lot to offer. There's the Galaxy S4, Galaxy SIII, Galaxy Note 3 (both with and without the Galaxy Gear smartwatch), Galaxy Note II, and the ATIV Odyssey.

Then there's HTC (TPE:2498), which makes the One, Droid DNA, Droid Incredible 4G LTE, and the Windows Phone 8X.

Of course, on top of all this, I can go Nokia (NYSE:NOK), BlackBerry (NASDAQ:BBRY), or LG (NYSE:LPL) if I want.

Nah, I'm actually going with an Apple (NASDAQ:AAPL) iPhone 5S.

Hey, I'm a single guy looking for love in the big city, and 'round these parts, image is everything.

And since I need to lose 20 pounds and own more than five shirts, buying a new iPhone is the easiest way to kickstart my personal makeover.

But in all seriousness, the iPhone 5S is by all accounts an outstanding device.

Countless reviewers, including Wall Street Journal's influential Walt Mossberg, have proclaimed it to be the best smartphone on the market.

People are going gaga over the polish and simplicity of the iOS 7 operating system, not to mention the Touch ID fingerprint sensor, which puts Apple in the lead in consumer biometric sensors category (because it actually works).

But let's ask the tough question:

Will the iPhone 5S actually help Apple win back market share in the face of the 9 bazillion competing smartphones I listed above?

Keep in mind, that list actually represents only the models from one wireless service provider in one market. The worldwide stage is far bigger, with fierce price competition in emerging markets.

As it stands now, Apple is on a market-share slide. Last quarter, it posted a significant upside surprise in iPhone shipments at 31 million units, but nonetheless, its share of the global smartphone market fell to 13.2% from 17.3% in Q1.

However, the bulls have been giddy over reports from market research firms Kantar World Panel and ComScore, indicating that Apple has actually gained share in developed markets like the US in recent months. That's actually quite an achievement given the age of the iPhone 5, and the fact that competition just keeps getting tougher and tougher.

This jibes with commentary from Apple's most recent earnings call, in which it said the following:

We had a sequential decrease of about 600,000 iPhones in channel inventory in the June quarter of about 31.8 units. iPhone sales were ahead of our expectations and we were particularly pleased with very strong year-over-year growth in iPhone sales and a number of both developed and emerging markets, including the US, UK, Japan, Brazil, Russia, India, Taiwan, and Singapore.

But emerging markets, in which sub-$200 smartphones are all the rage, are an important component of the broader market's growth.

In all likelihood, Apple is going to suck up market share in the US because of buzz around the iPhone 5S, which makes for an easy buying decision versus the 900 look-alike Google (NASDAQ:GOOG) Android phones fighting it out.

However, markets like China may be tougher to crack as the new lower-end (but still pretty awesome) iPhone 5C clocks in at a pretty high price.

Of course, Apple's strategy through its entire history has been to compete on design, functionality, and branding -- not price. While the company could chase the low end and build market share, it would be sacrificing its name longer term.

The Phablet Question

One of the more interesting phenomena to hit the mobile device market has been the rise of "phablets" -- a.k.a. giant smartphones with huge screens that also function as tablets.

IDC issued a report last week indicating that phablet sales could cannibalize the sales of low-end tablets.

Now if there's one thing that we've learned from the smartphone boom, it's that device convergence is finally a reality. Single-function devices like MP3 players, portable gaming machines, digital cameras, and GPS systems have, to some extent, been replaced by smartphones.

Smartphones got "good enough" at a bunch of things, and thus many people see no need for specialized gadgets.

Heck, the three most popular cameras on Flickr are iPhones:

But what if the phablet starts eating the small-screen smartphone, which is eating everything else?

Apple is holding steady at a 4-inch screen size on its iPhones, which has some battery life and usability benefits (particularly if you like using your phone with one hand), but as of yet, it's completely ignoring this potentially important market.

So What's the Story?

Apple does seem to be at a fulcrum point as it needs to get its global market share moving in the right direction. Market share increases are very important from an investor-psychology standpoint, and when it comes to locking people into the iOS ecosystem.

And as the smartphone market inevitably slows, market-share gains will be required to keep the stock moving higher.

The company has undoubtedly made a spectacular device in the iPhone 5S, and it should take hold in the US.

However, emerging markets and lack of phablet exposure are strategic challenges that warrant some attention.

In my opinion, it's a wash -- but that's what will make next quarter so exciting.

Twitter: @Minyanville

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

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