Apple – Apples and oranges

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Apple doesn’t quite reach 50%.

• While the finding that Apple generated over half of all revenues in the smartphone market in Q4 17 is factually accurate, I believe that it is misleading because Apple is monetising far more than just hardware.
• Consequently, I think a more balanced picture would be achieved by including Google’s mobile advertising revenues from Android which RFM estimates was somewhere in the region of $5bn.
• The reason for this is that through the sale of its devices, Apple is monetising both its hardware and its ecosystem.
• In contrast, Android handset makers are monetising only hardware because they all carry the Google ecosystem which Google then monetises separately.
• RFM’s ecosystem monetisation model describes three methods of monetisation for any digital ecosystem:
  • First: Own the hardware and keep the ecosystem or the service exclusive to that hardware and charge a premium for the hardware to get access to the ecosystem.
  • This is what Apple does so effectively and where the Android makers are really struggling.
  • Second: Make the ecosystem or service available on as many devices as possible and sell advertising based on usage.
  • The experience is “free” and money is earned by using users’ personal data to generate advertising or relevant marketing.
  • This is Google, Facebook, Baidu, Twitter and so on.
  • Third: Charge the user a per month fee to get access to the service and keep it free of annoying advertising.
  • This is just beginning to emerge for ecosystems but individual services like Netflix, Spotify, Amazon Prime, Tencent Games and Xbox Live are already well established.
• I have long believed that if Apple were to sell exactly the same device but with Google Compliant Android on it rather than iOS, its gross margins would be much closer to 20% than 50%.
• There are plenty of Android handset makers who attempt to do exactly this but fail to make a decent return.
• Consequently, I conclude that the difference is a result of the iOS ecosystem rather than the hardware.
• The devices Apple sells are merely the conduit by which it distributes its software and ecosystem to its users with the majority of the value residing in the ecosystem.
• Apple is very vertically integrated making both hardware and ecosystem while the Android makers make only the hardware and get the ecosystem from Google.
• Therefore, to make a fair comparison one would either have to subtract the ecosystem portion of revenue from Apple (very difficult) or add in Google’s revenues that it generates from Android devices (much easier).
• Adding $5bn to the Strategy Analytics figure to level the playing field gives a total $125.2bn of which Apple had 49% in Q4 17.
• The fact that the total has only slightly moved also reinforces another finding of RFM’s monetisation research which is that monetisation using hardware is many times more effective than monetisation via advertising.
• Consequently, while I believe that Apple has not quite achieved 50%, it is very nearly there underlying just how effectively Apple is earning a return from its ecosystem.
• While Google Android remains a fragmented and out of date experience (it takes 5 years for a new version to fully penetrate the user base), there is very little to challenge Apple’s position.
• That being said, Apple’s valuation has fully priced in this reality and is not nearly as attractive as it was to long-term investors which is why I remain pretty indifferent.