counternotions

From Microsoft to Dell to Motorola, 2008 has been a very burdensome year for number-chasers. For those who find value in and thus only pay attention to market share, units shipped and revenue, the argument for volume is becoming increasingly more difficult to justify.

In What Sony Ericsson Must Do To Stage a Comeback, Jose Fermoso includes an interesting table:

In any argument advanced to show why, for instance, Nokia is trailing Apple in the smartphone market, some will always counter by pointing to Nokia’s volume dominance in units shipped, which dwarfs Apple’s by a factor of 25X. Nokia’s revenue is about 1.5X higher than Apple’s as well. What’s more interesting for shareholders, however, is the fact that Apple’s profit is more than 2X over Nokia’s.

Indeed, for every phone sold in this scenario, Apple makes over 55X in profits compared to Nokia:

Make it up in volume?

The corollary to units shipped is often the notion of a platform: the larger it is, the more lucrative it usually gets. Once a product gains network effect, it often dominates a market and thus is able to siphon off most of the revenue in that market. Revenue without profit, unfortunately, is not very meaningful.

Motorola, for instance, has shipped an awful lot of RAZRs but its mobile division has been at the brink of going under. In the table above, Sony Ericsson is shown to lose over $10 for each phone sold. No wonder Sony is slated to become one of the casualties of the contraction in the cellphone market. Nokia is the volume leader, but its per-phone profit is a meager $6.64, versus Apple’s $369.27.

Surely, products without significant market share will fail to create an ecosystem necessary to garner mind share, developer interest and, ultimately, users. Android is not yet a significant threat to iPhone because it doesn’t nearly have a comparable ecosystem and because it doesn’t have a significant ecosystem it hasn’t been able to attract enough developers to create one. Google may be able to fund Android’s growing pains, but a company like Palm cannot do the same for its upcoming Pre.

Profits matter

Pre has to compete directly against the iPhone. But while Palm continues to spiral downward financially quarter-by-quarter, its competitor Apple is very profitable, likely to have about $30 billion in cash by the time the first Pre is sold.

The most amazing trick Apple has performed over the last six years has been the unflinching fiscal discipline to introduce new products into new markets to establish new platforms while maintaining remarkably profitable margins. Apple hasn’t carved out 3/4 of the digital music market by inundating it with cheap devices. Neither has it elected to chase after market share by peddling $49 “iPhone nanos” at Radio Shack. As can be seen above, the iPhone is an extremely profitable product which fuels its own R&D that keeps it a generation ahead of its potential rivals. In iPhone charts, third parties see not just the number of units sold but more importantly, a competently managed, profitable, growing ecosystem with which they can reliably associate, whereas any discussion of Pre’s prospects must necessarily include Palm’s dismal financial outlook.

Therein lies the magic of the iPhone numbers.