This is an updated view of the AMP index including Q2 data. As a reminder, the AMP (Asymco Mobile Performance) index is an unweighted average of four “shares”:
The updated index figures and spark lines are shown also on the right-most column on this site.
The biggest mover was Nokia which dropped 6.5 points. The second mover was Apple, with a gain of 3.2. Samsung followed with a gain of 1.38 and LG with a 1.21 and HTC with a gain of 0.95.
RIM lost about 1 point and Motorola and Sony Ericsson remained nearly flat.
The plunge in Nokia's AMP score is nearly matched by Apple's gain over the four year time period observed.
The full picture of each component is shown below:
The violence with which new platforms have displaced incumbent mobile vendor fortunes continues to surprise.
Nokia's Symbian platform has gone from 47% share to 16% in three years
Microsoft's phone platforms have gone from 12% to 1%
Other platforms have gone from 21% to zero
Although far less dramatic, RIM's decline from 17% to 12% is causing acute pain and anxiety
This while entrants have grown share in spectacular fashion:
Android from zero to 48% (A two year period)
iOS from 2% to 19%
Bada from zero to 4% (two quarters only)
The picture of platform share over time looks like this:
The platform volume growth is shown in the following graph:
Shocking
Or is it?
The surprising thing is that it should not be surprising. When the iPhone re-defined the basis of competition (at the beginning of the time frame of these charts) it unleashed forces which are still spinning the industry into a new configuration.
In that context, Android is a natural consequence. As iPhone created a threat, the response from all other vendors (other than Nokia and RIM) was to seek something that would sustain their business. Android was salvation.
It enabled the pursuit of better margins and hence better returns. So much so that Android offers the escape up-market they have always sought. It enables vendors to abandon the profit-free feature phones to low-end entrants like ZTE and Huawei.
LG, Samsung, Motorola and Sony Ericsson all took the bait. They are racing as quickly as possible to turn their feature phone portfolios into Android portfolios. This is certainly something that Google also wants to see happen and has been planning all along.
However one of the consequences of the modular (aka "open") approach is that the low end disruptors gobbling up low-end share are also motivated to move into the Android business as soon as it comes within reach. The only reliably predictable consequence of Android will be the postponement of displacement of the existing brands by the low-end entrants.
Is this fate unavoidable for all brands?
Clearly some vendors see the trap. For all its apparent failings, Nokia saw this outcome and chose to attempt a "Hail Mary Pass" with Microsoft. The strategic point being that because they no longer had faith in their ability to execute on an independent platform, they would pick a platform that gave them at least some control or leverage. There are serious risks and problems with this approach--something which has been covered here already--but the bet being made is a clear rejection of the slippery Android slope.
RIM is trying to resist with QNX which is a similar approach but timing may also be the undoing of this strategy. HP's approach with WebOS and Samsung's Bada are also hedges to avoid this fate.
And what about Apple?
Apple is always skating in a different direction. iOS needs to be seen as not so much a phone platform but a computing platform. Given what we know, iOS was always conceived as the future of computing. Voice, after all, is just an app on iOS. So my expectation is that Apple's iOS will continue its attack on the mobile computing market, skimming (or carving as the case may be) profits from the phone business to sustain its ultimate target of reclaiming the computing universe.
By this thinking iOS lives only by improving more rapidly than anything else in dimensions that redefine the basis of performance. In other words, doing more of what the iPhone did in the first place to set off this disruption.
Smartphones made up about 30% of global phone sales last quarter. That is a significant increase from 10% in Q4 of 2007.
From this perspective, iPhone obtained 5.6% share, Android 14.2%, Nokia Symbian 4.6%, RIM 3.6%, Bada 1.1% and Windows 0.4%.
The competition however still has 70.5%.
The chart to the right shows the challenge remaining and the progress being made.
The good news is that the non-smartphone market is not growing while the smartphone market is. In fact, the non-smart market has had a three year CAGR of 0% and a y/y growth of 1.0% and a sequential decline of 6%.
The non-smart portion of each branded vendor's business is pretty dismal:
Nokia saw 17.57% decline y/y
Samsung's non-smart business declined by 8.14%
Sony Ericsson's dropped by a dramatic 80%
LG's fell by 38.56%
Motorola is the only one that grew y/y, by 17.86.
The reason all these brands fell is because the unbranded vendors took their place. "Other" non-smartphones grew by 43%. They have been sustaining growth at the rate of 57% compounded over three years.
The following chart shows the increasing share taken by the "other" vendors in non-smartphone units:
The non-smart business is so dismal for branded vendors that I've been assuming that they will cease to build such devices in the near future.
The trend is shown in the following chart which shows the percent of units for branded vendors which are smartphones.
Motorola, Sony Ericsson and Samsung are fleeing to smartphones as rapidly as they can. LG is following as quickly as possible as well.
The only question remains with Nokia. While their smartphone business evaporates they've also made a commitment to the non-smartphone market and are thinking about "the next billion" users who, presumably, will not buy smartphones and will buy some variant of Nokia's Series 40.
Targeting the low end may be commendable, but the question they need to answer is why would those next billion buy anything other than a low cost smartphone? And if not, then what's so different about the next billion?
Nearly all the data on smartphone shipments is now available for the second quarter 2011. Some fragments are still not public, including ZTE and Huawei (and any others) shipments. We also have estimates for the various platforms including an estimate for Windows Phone and Bada (though not for WebOS).
This allows the following chart:
Using the traditional color scheme which separates "integrated" from "modular" vendors, the chart shows overall volume growth and how the volumes are split among vendors.
The market grew at about 73% y/y and 50% compounded over three years and 9% sequentially. The y/y growth rates for individual vendors were:
Samsung 525%
Apple 142%
HTC 124%
Motorola 63%
"other" 29%
RIM 18%
Nokia -30%
In terms of unit share, the pie charts below show the before and after (three year span):
And the stacked area below shows every quarter over a four year period.
The story is largely unchanged since last quarter except perhaps in the rapidity or deterioration in Nokia's performance and Samsung's partial exploitation of that decline.
It should be noted that not all of Samsung's volumes are licensed platforms. An increasing share of Samsung smartphone volumes is Bada, an internally developed OS.
In the charts above I arranged the bars to place Nokia and RIM in the middle to show their double envelopment. A pincer movement is only an analogy but perhaps it's evocative of what's happening.
As previously pointed out, Apple reached two thirds profit share in mobile phone vendors among the eight vendors I track. The following charts shows the historic growth in that share and the share of revenues (including 4 quarter trend line). Revenue share increased to 28% in the last quarter.
The share doubled from Q4 2009. I should also point out that it was the highest of all the competitors. The following chart shows the split over time:
The dedicated smartphone vendors (highlighted with segment bars) are now at 47% of total sales, a significant increase from the 6% share they held four years ago. Another remarkable show of entrant power and incumbent weakness.
The major publicly traded phone vendors have all reported results for the second quarter. Based on the data available so far we can begin putting together a picture of the market.
The first picture I'll draw is usually the last: profitability. The following chart shows operating profit from the sale of mobile phones among the eight vendors I follow (Nokia, Samsung, LG, Sony-Ericsson, Motorola, HTC, Apple, RIM).
This quarter saw a slight sequential decline in overall profit for the sector, but four vendors did not manage a profit from selling phones. Nokia, Motorola, Sony-Ericsson and LG all saw losses. The other vendors split the slightly decreased pie with Apple getting two thirds of it (66.3%)
This share is up from 57% in Q1 and 50% in Q3 and Q4. Samsung's share went to 15%, though that's not a peak level historically. In Q1 2008 the company was at 21%. RIM was at 11%, a level in a range that has been unchanged for three years. Finally, HTC captured 7.4%, a new high and an increase from 6% since last quarter. The profit share chart follows:
The ranking chart for profitability follows:
Finally, the "before-and-after" view of profit capture showing the change in profit share over a four year period.
The story remains largely unchanged from last quarter: Three companies which captured 11% of the profits before the modern smartphone era started (four years ago!) now capture 84% of the profits. Only one global brand phone vendor selling non-smart voice-oriented feature phones is still profitable however, as we shall see later, the only reason profits still exist for any vendor is due to the strength of their smartphone portfolio.
As Verizon has reported iPhone sales for one and a half quarters, it's time to try to discern the impact on the product. There were several hypotheses floating around prior to the "big bang" of Verizon.
Some assumed that there would be a large migration away from AT&T and that AT&T iPhone sales would slump. Others that there would be no Verizon iPhones volumes at all because there were so many Android users already converted. There were also suggestions that the iPhone would explode in growth with two major operators carrying it.
What really happened?
The first chart shows historic AT&T activation with Verizon activations added. It also shows sales to "none of the above", namely non-US sales of iPhones[1].
AT&T iPhone activations show no significant impact from Verizon and Verizon itself shows a modest start to sales[2]. What did not happen is an exodus from AT&T. We also did not see a rejection of the iPhone by Verizon customers long exposed to anti-iPhone Droid advertising. We also did not see a considerable impact of Verizon on growth.
Verizon did contribute (4.5 million Verizon iPhone users is nothing to sneeze at) but the contribution was to a degree that was nowhere near a big bang.
That was because the real big bang was from the rest of the world. The same data in the first chart is shown below as a stacked area chart and a share chart. Had Verizon not come on board the business would still have grown year-on-year over 100% (and sequentially).
The US activations have been decreasing as a percent of total iPhones sold. Before Verizon came online, the US share was decreasing (from an average of 45% share in 2008 to 33% in 2010). After Verizon, the US continues to slide to an average of 30% share (two quarters).
After waiting nearly four years, American observers of the iPhone could perhaps be excused for their obsession on the impact of expirated AT&T exclusivity. But the real impact is that by the time it came, it was moot.
It would be a mistake to look upon Q1 and Q2 and say that the explosive growth was due to Verizon or the end of US exclusivity.
The global market is far greater than the US and the iPhone business has simply grown to reflect that.
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Notes
Non-US sales are total iPhones sold minus activations in the US. There is the possibility that some of the unactivated phones were activated on T-Mobile or that there is some delay between purchase, channel inventory and activation, but the time frame shown should smooth out any of the noise.
What we don't know is what was the impact of iPhone sales start on Verizon's other smartphone platforms. Unfortunately, Verizon does not report overall smartphone sales/activations so we can't conclude directly that iPhone has slowed other platforms on Verizon. Some other data (NPD, Changewave, ComScore) do indicate some slowing in Android growth in the US but we have no definitive data to prove it.
After Apple reported earnings growth of 125% its share price dropped to a P/E of about 15. This reduction in valuation is part of a trend I've written about for over a year so there were no surprises. The first chart below shows how the stock has traded between increasingly lowered P/E bands.
As the second chart shows, not only is the P/E ratio declining, but when seen against the trailing twelve months (TTM) average growth rate, the P/E/TTM ratio is now at the lowest since the great recession (around 0.17--a value of 1.0 is a rule of thumb for "fair value" in a growth stock).
Those values include cash. Excluding cash, the P/E as of Friday was 12.4. On a forward basis (my estimate--which has shown be be conservative lately) the P/E is around 7.
Perhaps some day in the future investors will come around to looking at Apple as a growing company, but there has been no such inclination for over two years. As I've pointed out numerous times, growth and valuation are moving in opposite directions.
The only correlation to the stock price has been found on the balance sheet, not the income statement. Looking again at the relationships between cash and the stock price, we see a clear relationship (r squared of .9)
After a lapse during the first quarter, the relationship that has been in place since October 2008 is returning.
Note the formula of the trendline which allows some interesting guesses on what the stock price will be. For example, putting $95 in cash per share results in a share price of $500. Let's see if the relationship holds until then.
Apple's cash and marketable securities increased to $76,156,000,000. The increase was 15% sequentially or $10.4 billion in three months. That's the equivalent of an increase of $11 per share (to a current $81.2/share.)
The composition and growth of liquid assets is shown in the following chart:
There is little I can think to say about this that hasn't already been said (see last Critical Path show.)
Except maybe that the amount is now nearly 16% higher than three months ago. And that the amount added last quarter is higher than the amount on hand 4.5 years ago. And that the cash added is higher than Google's overall revenues in the quarter.
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Footnote:
In Q1 2009 the company's share price briefly traded at $78. A buyer of shares at that price will have recovered their investment in retained earnings in nine quarters.
Almost all valuation models for Apple assume it's a hardware company. The modeling algorithm for hardware is simple:
For each year in near future
For each product line
Compute contribution
Determine company value by summing contributions and multiplying by a P/E ratio
The major difficulty is in predicting the growth of each product line. This is difficult because buyers can be fickle. Companies employs all sorts of tools in order to secure repeat customers but if switching costs are low, the company can crash in value. For this reason, analysts pick various ways to predict device sales. Some choose to index each product on production (channel checks), demand (customer surveys,) or even on a top-down share of total (market research on growth of whole market and assumptions of share).
Although simple and convenient, this model does not probably match the way Apple is managed. The company does not build hardware products to sell and forget. It builds platforms which are best seen as sources of recurring revenues. Users are incentivized to continue buying devices. iCloud, iTunes and other Apple properties are expressly designed to that goal--and they are not cheap to run. So, the company must see the world through a different set of lenses than the default model shown above.
To think about the business like they do, we need to put the data through a similar set of lenses. I began with a modest proposal last month to value each user as a source of recurring revenue. Now it's time to expand on this method.
The following chart shows the recurring revenues per user by product and the current and possible future size of user bases.[2]
Revenues/yr/user are bars with the left axis and the User bases are various colored circles indexed with the right axis.
The assumptions that went into the data are as follows:
Device life span is as per previous article linked above
User base growth for 1 year is: Mac 20%, iPhone 80%, iTunes 10%, iPod 30%, iPad 100%
User base growth for 2nd and 3rd years (recurring): Mac 20%, iPhone 50%, iTunes 10%, iPod 20%, iPad 80%.
The Revenue per user is assumed constant
Note that the user base growth figures are lower than the product growth levels seen historically. Obviously, the model is highly sensitive to these growth assumptions so they need to be scrutinized and tested rigorously.
Nevertheless, as a straw-man proposal, the recurring revenues for all these products[1] is shown in the following chart:
Once the income is estimated, we can take that value and assume a profit margin (net) and then multiply the earnings by a multiple. Using a 20% net margin and 12x P/E yields the following chart.
(I added an assumed level of cash in green.)
This model would imply that the company today could be valued at $208 billion on the basis of its installed base alone. That value would be about $323 billion in one year and $620 billion in three years. Dividing by the number of shares outstanding (935m this year increasing at 2% a year) yields a share price of $222, $339 and $629 by mid 2014.
These values can be considered "lower bounds" on valuation since they assume income from previously secured customers. The speculative part of investment would be based on what the future bases will look like (so, for example, if one believes these assumptions, the $629 figure could be considered a target to be discounted to today).
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Notes:
Excludes Software, Peripherals, non-iOS devices, and any other service revenue.
Steve Ballmer stated and Andy Lees confirmed that Microsoft views iPad and other tablets as "just PCs". From a market measurement point of view Canalys agrees. IDC and Gartner don't, calling the new devices "media tablets."
Before deciding whether tablets belong with PCs in market metrics, it would be interesting to look at what the data shows. When seen as a combined market, the focus should be on platforms. The following chart shows the four main PC+tablet platform volumes since late 2008 [1].
The second chart shows the same data as share of total market:
This comparison allows for some fresh observations:
Excluding iPads, Apple is very close to being 5th largest global PC vendor. Global share likely to be above 5%. Including iPads, Apple would be 2nd.
Platform year-on-year growth was Windows: +1.3%, OS X: +26%, iOS: +170%. Android growth cannot yet be measured since Android tablets have not been on the market for more than 1 year.
In Q2 2011 one million more Windows PCs were sold than in Q2 2010. In same time, 903k more OS X PCs and 5.5 million more iPads.
Excluding tablets, nearly 50% of the global PC growth was due to the Mac. Including iPad, Apple was responsible for ~70% of the growth in the PC market in Q2.
The picture that emerges is that while Windows continues to be dominant with 84% of units sold in the last quarter, the growth belongs to tablets which captured about 90% of it. If Windows remains marginal on tablets, the "PC market" will likely tip away from Microsoft in two years (depending on how quickly Apple can build iPads.)
Microsoft is making the commitment to move Windows to a tablet form factor but they are doing it while retaining the user interaction model of a desktop. This may or may not work but they are also conceding that a separate experience is also necessary. By rejecting the notion that a mobile OS alone can do the job, they are essentially building a "hybrid" tablet/laptop/desktop product which may be challenging to use but preserve their presence in the form factor.
Whether Microsoft succeeds or not will depend on whether the new form factor is disruptive in more than user experience. In other words whether this is just a "new PC" or a "post-PC". The argument comes down to business model changes. For example the new model comes with different cycle time of product development (deep, integrated, yearly changes), different ecosystem (apps), different cost structures (high R&D in hardware), vast scale (device economics, components, ramps), and potentially new distribution (operators in the channel mix.)
Summed up, the real challenge for Microsoft is whether they can keep their business model (selling OS licenses to hardware vendors) as PCs become more device-like. Not only is iOS setting the benchmark for performance but Android is potentially ready to take share if the market turns slightly more modular. Microsoft's differentiation looks to be primarily its legacy of PC software.
It may also seem that much remains to be discovered in this market but I think the main bets have already been made. The PC market as we know it is in the end game.
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Notes:
I used Gartner data for overall world-wide PC market and merged it with Mac and iPad data from Apple. Android data is estimated.
