Apple's Profits Vs. Market Share Conundrum

When Steve Jobs teamed up with Steve Wozniak to create the original Apple PC, he fully expected the company to be the first to bring personal computers to the masses. However once IBM entered the PC market, the game changed. By 1983 the IBM PC was the de facto standard in personal computers and Apple was pretty much left in the dust.

When Jobs introduced the Mac in 1984, he was convinced that it would be considered easier to use than the IBM PC and as a result leapfrog the IBM PC in popularity. But at that time, the masses could not afford the Mac or the IBM PC. The real growth in PCs was driven by the business market, a market which IBM helped define. (It continues to be the top-selling PC even today.)

After Jobs was forced out at Apple, then-CEO John Sculley took the company in a new direction. He emphasized the Mac's use in desktop publishing and graphics, finally accepting that Apple would never become the overall market share leader in PCs. He focused on profits instead of market share.

For about a decade, this strategy paid off. That is, until the PC makers and software vendors caught up and standard IBM PCs could rival what Apple was delivering in desktop publishing and graphics solutions for the business market.

When Sculley was fired in the early 1990s due to declining market share and profits, Michael Spindler took his place. Spindler looked at Apple's overall position in the market and decided that if the company couldn't beat the PC crowd, it could license the Mac OS in order to drive Apple's market share in PCs and hopefully boost profits again. If you know Apple's history, you know this move was a disaster and by the time Spindler was forced out in 1996, Apple was $1 billion in the red.

After a short stint as CEO, Gil Amelio brought Steve Jobs back to Apple and Jobs, who eventually became CEO, was faced again with the question of profits versus market share. I met with Jobs two days after he returned and asked him how he was going to save Apple. He said he would go back and meet the needs of his core customers—desktop publishers, graphics professionals, and engineers—who valued the Mac as a tool to get their jobs done. He also wanted to try and find ways to make Apple relevant to more users.

Jobs did just that. He introduced the candy-colored iMacs and brought the all-in-one PC mainstream. While I think he expected the Mac to grow in overall shipments, by then he realized he could never dominate the PC market as he had dreamed of in his early days. So instead he began to focus on bringing out new concepts. His first new product was the iPod, which defined the market for portable media players and surprisingly, Apple still dominates this category.

Then he introduced the iPhone. Here again Apple defined the market for smartphones and for at least five years, the iPhone has wowed the market. But as in the past, competitors eventually caught up to Apple. Most market forecasts predict that while Apple will continue to own about 22 to 25 percent of the smartphone market going forward, it will take a back seat to Android phones.

Apple next introduced the iPad. While Apple dominated this space for about two years, this time around the competition moved even faster to catch up. Most analysts predict Apple will fall to second place in tablets by the end of 2013 or early 2014, with most of the volume going to low-cost Android tablets.

Low-cost versions of these products drive market share and given this fact, Apple is being prodded to create a low-cost iPhone in order to gain more market share, especially in emerging markets. The reasoning seems to be that with more volume in smartphones Apple will be more competitive. That could be true, but with low-cost products Apple, and even its competitors, sacrifice profits to gain market share.

In what appears to be an exception to this rule, Samsung is doing very well with both high-end and entry level smartphones, giving itself a large worldwide market share as well as stellar profits. Of course, it is nowhere close to delivering the kinds of margins and profits Apple gets on its products, but its low-end phones clearly add positive numbers to the bottom line.

So here lies Apple's conundrum: Does it deliver a low-cost iPhone or iPad to be competitive in a larger market and at the same time dramatically cut its margins in order to gain market share even if it impacts profitability? Apple's current strategy has served it very well up to now, but given the growing competition from Google and its partners, is it time for a change of course?

Apple has wrestled with these questions many times and it has strategically denied the urge to create cheap products just to gain market share. I see no reason for its strategy to change. This does not mean that it won't deliver iPad and iPhones with more consumer-friendly prices. But knowing Apple, even if it does you can still expect it to have healthy margins, even if a bit smaller than what it gets on its premium products today.

It will be very interesting to watch Apple's actions over the next six months. Trying to balance the demands of Wall Street and still march to the beat of its own drum is tough to do. However, I do not believe it will ever go after the cheap market for iPhones and iPads just to gain market share. It will only create lower priced products if it can still get healthy margins on them. From where I sit, I never expect Apple to play the market share game and it will continue to create what Jobs used to call "insanely" great products that meet the needs of as many global customers as it can.