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For Apple, the next stage of smartphone competition unfolds

July 13th, 2014 |  Published in Apple, Digital and Mobile Technology, The Smartphone Wars

 

Apple strategy

 

 

13 July 2014 – The iCloud was Steve Jobs’ last big bet, a way to tie users into an expanding family of devices and services. Apple has yet to deliver fully on the promise but it is getting there.

The smartphone, as the brains and the connection hub, sits at the center. But success will depend on the quality of the experiences, both on the big screen of the handset itself and beyond. The surge of enthusiasm among iOS developers following the company’s annual developer conference in May is a promising sign that Apple has refined its formula in a way that will keep the ideas flowing.

Users of the iOS platform have long shown a greater willingness to spend more time – and money – on their devices, but that cannot be taken for granted. Users of Xiaomi smartphones in China, for example, are spending more time interacting with media and entertainment apps on their handsets than even iPhone users, according to app research firm Flurry. It is the first time that an Android handset has generated such a level of engagement.

The expected launch of an iWatch risks making Apple look like a follower rather than a leader. But, as with its previous i-devices, it still has the chance to come up with a category-defining product, even if it is not first into the market. This will be the test of whether it can break ground in an entirely new market without Steve Jobs at the helm.

The expected arrival of the iWatch also hints at how the next stage of smartphone competition will unfold. With the iPod, Apple was the first to demonstrate that hardware, software and service working in union could deliver a deeply engaging digital experience. Now, it needs to bring that same level of wizardry to the proliferating range of hardware that populates the multi-device world. With its 800m iTunes accounts – up 40 per cent in just a year – Apple has one of the biggest and most attractive customer bases ever amassed. It now needs to draw those people deeper into its world. It also needs to persuade them to spend more – on watches, apps and films, as well as the latest phones and Macs.

And what a difference a year has made in the smartphone business. Twelve months ago, Samsung was riding high. With Galaxy phone sales surging, the profits pouring out of its handset division were within a whisker of Apple’s. Apple, by contrast, was facing a tough reassessment from Wall Street as its growth slowed and gross margins slipped. With the subsequent launch of the iPhone 5s and 5c, it felt like smartphone innovation had come to an end. Apart from a design makeover for the software, the annual product rethink was distinguished mainly by the 5c, a case of old hardware dressed up in new plastic.

Things look very different today. Samsung’s warning last week that profits were softening showed how fiercely competitive the Android world has become. Though partly the result of a cyclically weak quarter, the numbers also reflect an uncomfortable fact: Samsung risks being caught in the middle, between the low-cost Android handsets that are starting to flood the market, particularly in the developing world, and Apple at the premium end of the market.

Occupying the high ground as sales volumes of Android phones exploded risked marginalizing Apple and the iPhone developer ecosystem over the long term. Also, signs that Samsung is losing ground in China to locals such as Xiaomi and Lenovo is ominous for Apple there as well. But at least for today, Apple’s decision to keep betting on the most profitable part of the smartphone market is paying off. Its share of total smartphone profits had already bounced back to 65 per cent in the first quarter of 2014. The group’s shares have soared 60 per cent over the past year as profit margins have stabilized and Wall Street has warmed to the new willingness to distribute excess cash flow to shareholders. This has added $230bn to its stock market value – considerably more than the entire market value of Samsung, whose shares have languished over the same period.

This new phase in the smartphone wars is unfolding, and Apple once again has the chance to define the terms of engagement.

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