Come On, Apple Fans, It's Time To Admit That The Company Is Blowing It

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Tim Cook

AP

Cut some prices, Mr. Cook!

Third quarter global smartphone sales came out earlier this week.

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The message was clear:

Apple is getting its clock cleaned by Samsung, which is now by far the dominant smartphone maker in the world. (Samsung had 32% of the global market in Q3, the same share as a year ago. Apple, meanwhile, had only 12% of the market, down from 14% a year ago.)

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Yes, both companies sold more smartphones this year than last year. But Apple's sales badly lagged both Samsung and, importantly, the broader smartphone market.

Apple's sales increased 23%. Samsung's increased 46%. The smartphone market as a whole, meanwhile, grew 46%.

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In other words, Apple's smartphone sales grew at only half the rate of the market.

Apple fans have developed excuses for Apple's lagging sales. The most popular is that Apple is a "premium" gadget maker, not a hoi polloi gadget maker, and it only wants to sell its phones (and tablets) to people who can afford to pony up for them. Apple, in other words, is like BMW, not Ford.

There are two big problems with this analogy. First, unlike cars, smartphones are a "platform market" - third parties build products and services that run on top of smartphones - and in platform markets, market share is a huge competitive advantage. Second, in emerging markets, which is where most of the growth in smartphones and tablets now is, there just aren't that many people who want to buy BMWs when many very high-quality gadgets are available for much lower prices.

The actual reason that Apple's gadget sales are now so badly underperforming the market is that Apple no longer sells products at price points that appeal to the growth segment of the market.

Apple fans can keep telling themselves that this is just fine, that Apple doesn't want or need to sell gadgets to earthlings of more average wealth, but what these fans need to recognize is that this is effectively a major change in Apple's pricing strategy.

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In the first few years after the iPhone and iPad launched, Apple led the market not just in product quality but in product price. The iPhone and iPad were not just way better than the competition, they also cost the same or less.

Now, Apple may still have an edge in product quality (this is debatable and a matter of personal preference), but in most countries, its gadgets are considerably more expensive than the alternatives. And those alternatives - from Samsung, Google, Amazon, and many other vendors - are getting better and better.

If gadgets were not a platform market, this wouldn't matter. But they are. And the more market share Apple surrenders in China, Brazil, India, et al, the less chance it will have to become the leading platform in these countries. (In fact, in many of them, it's probably already too late.)

The simple answer is NOT for Apple to make low-end gadgets that it considers crappy. It is for Apple to use its phenomenal profitability as a competitive weapon. Specifically, the answer is for Apple to sell some of its gadgets -- not the latest, greatest ones, but some - at prices that are highly competitive with local alternatives.

Now that Apple has "forked" its iPhone product line into the 5S and 5C, for example, it could sell the 5C at a sharply lower price point. Instead, Apple is still charging almost as much for the 5C as the 5S. (Yes, Apple is selling the iPhone 4 at a significantly lower price than the 5s, but this phone is now old, weak, and small.)

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Similarly, in iPads, Apple is selling its "Mini" at prices that are radically higher than high-quality alternatives. Instead, it could sell the latest, greatest version of the Mini at a high price and other recent models at a very competitive price.

Importantly, this would cost Apple nothing more than some near-term profits. And Apple has plenty of profit to spare. (In fact, it has so much profit to spare that it has no idea what to do with the cash piling up on its balance sheet.)

Significantly increasing its market share in key markets around the world would make Apple's long-term competitive position much stronger. It would help Apple increase the value of its content and app "ecosystem" in these countries and, thereby, strengthen the "lock-in" of its products and services.

But, instead, Apple is being greedy and shortsighted and choosing to maintain its already fantastically high profit margins at the expense of market share.

Let's go to the charts:

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(These charts are all from BI Intelligence, our premium industry research service. You can sign up for a free trial here >)

First, as you can see, the global smartphone and tablet markets are still growing like mad. Here's smartphones:

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And here's tablets:

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And now look at Apple's growth in these markets.

First, as the line in the chart below shows, Apple's iPhone sales have slowed sharply:

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Business Insider

Apple's tablet sales, meanwhile, have hit a wall. (Yes, the new iPads will help. But it is going to be very hard for Apple to make up this lost ground.)

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When confronted with these statistics, Apple fans generally point out that Apple still has a very strong position in the U.S. market and that Americans keep scarfing up Apple's top-of-the-line iPhones.

That's true.

Apple's market share in the United States is indeed strong, as the following chart shows:

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Business Insider

But the U.S. is an anomaly. In most other countries, Apple is losing share fast. And that means that, at best, Apple is missing a massive opportunity.

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The bottom line is that, by trying to maintain its price points and super-high profit margin, Apple has radically underperformed the market for the past couple of years, especially in tablets. Because of the importance of the platform and ecosystem for long-term value, this is a shortsighted decision.

Meanwhile, Google's Android has become the world's dominant smartphone and tablet platform:

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If it continues to pursue its current pricing and maximize-short-term profit strategy, Apple may continue to increase its profits for the next couple of years. But it will continue to lose platform and ecosystem share in most of the world. Apple fans can talk all they want about how Apple is "like BMW," but in a couple of key competitive respects, it isn't. And if the gadget platform market behaves the way other platform markets have (think Windows), Apple and its fans may come to regret this short-term thinking in the end.

SEE ALSO: The Future Of Digital [SLIDES]

Disclosure: I'm an Apple shareholder.