Why Apple rolls in iPhone profits while Android manufacturers starve for cash

According to a recent article in Apple Insider, Apple is now taking in 94% of the smartphone profits globally. And this is happening despite the fact that the company only sells about 14.5 percent of the total volume of smartphones.

Meanwhile the situation among Android device manufacturers has become quite grim. Many of them can’t make profits on their Android phones, despite flooding the market with various models.

A writer at The Verge recently explored the question of why Android manufacturers even bother to sell phones they can’t make a profit from.

Vlad Savov reports for The Verge:

Here’s a quick survey of the traditional Android device manufacturer landscape: Samsung is doing alright, LG and Sony could be doing better, HTC doesn’t know what it’s doing, and Motorola is done. Smartphones have grown to be the most essential piece of modern technology, and yet the industry manufacturing them has backed itself into a corner where only two companies, Apple and Samsung, are generating any reliable profit.

The quarterly earnings reports keep painting the same bleak picture, with most phone makers barely breaking even in spite of increasing shipment numbers and constantly improving products. It seems a Sisyphean task, and it’s been going on long enough to invite the question of why so many companies bother making Android phones at all.

The present situation is the product of combining the opportunities opened up by Google’s Android operating system with the inertia of a mobile industry that was in need of renewal. Into the void left by Nokia’s stumbles and Palm’s demise stepped faster-moving, spec-driven competitors like HTC, who could focus on iterating their hardware and design, relying on Android to be their software solution.

That worked beautifully for HTC for a while and has proven an enduring strength for Samsung. However successive waves of even faster, even cheaper competitors out of China have dramatically eroded the average price of Android smartphones (and manufacturers’ profits with it). Even Lenovo CEO Yang Yuanqing, whose company is no stranger to competing in China’s price-sensitive market, has described some of the local upstart manufacturers as irrational and unsustainable.

More at The Verge

So the question arises: why is Apple making so much money while Android device manufacturers are starving for cash? I think you can answer it with one word: control.

Apple has total control of its mobile operating system and hardware

Apple realized long ago that it needed to own the entire ecosystem, the hardware and the software. So it took OS X and created iOS from it, and iOS is one of the biggest differences between Apple and Android device manufacturers. Apple controls its own destiny in terms of its mobile operating system.

The Android device manufacturers, in comparison, are utterly dependent on Google. And since anybody can take Android and slap it on a phone, there’s very little to differentiate larger Android device manufacturers from their smaller, more cutthroat competitors. What one Android phone can do, most other Android phones can do. So why would a customer seeking a cheaper phone pay more for a phone from HTC or some other big Android device manufacturer?

Apple, on the other hand, can command a premium price for its iPhone. This is partly because of the company’s brand name but also is quite dependent on the successful marriage of iOS and the hardware it runs on. No Android device manufacturer has as much control over software and hardware as Apple does.

The tight unification of iOS and the iPhone’s hardware has also given Apple the ability to provide a superior experience in terms of battery life and performance. The company can tweak iOS until it runs like a dream on the latest iPhone, while Android device manufacturers are more or less stuck with whatever Google gives them in terms of software.

And Apple also designs its own mobile processors for its iPhones. It is not dependent on “off the shelf” processors the same way that Android device manufacturers are with their phones. Apple’s “system on a chip” designs have given it a very significant edge over Android phones for years, and have helped Apple provide a great experience for its customers.

And what is the end result of all this? Apple is literally swimming in money from its iPhone business while Android device manufacturers are starving and beginning to die off slowly. This grim reality is being played out around the world as more and more Android device manufacturers undercut each other in a vicious price war that can only be described as an incredibly destructive race to the very bottom of the market.

Google has realized that Apple was right about having total control

Google itself has finally begun to realize that Apple was absolutely right to want total control over the software and hardware for the iPhone. Google is now making noise that it wants greater control over the design and hardware of its Nexus phones. The company clearly wants to follow in Apple’s footsteps in terms of creating an “iPhone-like” experience that is superior to anything that has ever been offered on Android.

Ron Amadeo reports for Ars Technica:

A report from The Information (subscription required) states that Google wants to take “greater control” over the design and building of Nexus phones. Currently, a Nexus device is a co-branded partnership between Google’s Android team and an OEM, but this report says Google wants to move to a more “Apple-like” approach.

The report says that in the future, “hardware makers will be much more like order-takers, similar to the way contract manufacturers like Hon Hai (Foxconn) follow Apple’s directions for producing the iPhone.” Apple designs its phones, SoC, and other parts and then ships the plans off to third-party factories to have them built.

…the report says Google is conflicted about changing because it is fearful of angering its OEM partners. Reasons for more control are apparently piling up at Google HQ, though, with the report saying “Google leaders have become increasingly concerned about Apple’s monopoly over the high end of the smartphone market, the inability of Google to influence Android phone hardware so that it can enable new experiences, and the inability of the Nexus program to gain traction with consumers beyond a relatively small group of Android enthusiasts.”

More at Ars Technica

I don’t blame Google a bit for doing this, the company must be astounded to realize that Apple is taking in almost 95% of the smartphone industry’s profits. It doesn’t get much worse than that, and who cares about market share if you can’t earn a decent profit on your product? By letting Apple run away with the premium part of the market, Google has insured that Android is relegated to taking the leftovers at the bottom of the market.

Despite whatever success Google itself might have with its Nexus products, I think there are even darker days ahead for Android manufacturers as a whole. Eventually we’ll see a huge shakeout as many companies bow out of the Android smartphone business altogether.

Meanwhile, Apple will continue to rake in tons and tons of cash from its iPhone business.

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