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Monday, 16 August 2010 16:23

Empirical Evidence of Android Eating Apple!

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Android's market share is growing by nearly 900%, causing competing OSs and associated hardware vendors to experience negative smart phone market share gains. Many believe that Apple is not included in this category. Here I present hard evidence that Android is eating Apples along with everything else.

Continuing my analysis of the high growth smart phone market and putting the finishing touches on the RIMM, GOOG and AAPL models, I had my team perform extensive drill downs of market share and market penetration of the various players involved. As stated in my in my earlier posts, many (if not a majority of) retail investors and surprisingly enough - quite a few professional investors fail to take a purely empirical look at Apple, and instead inject a significant and material amount of passion and subjectivity into their perspectives. It is my opinion that this could potentially set some Apple investors up for an unpleasant surprise.

Below, please find the results of our market share and market penetration drill down for Apple. We have performed identical analysis for Nokia, Research in Motion and HTC. This dynamic model (complete with data populated from Gartnehttp://boombustblog.com/index.php?option=com_wpmuadmin&blog_id=1&task=post.php&action=edit&post=2922&message=1r, Canalyis, Nielson and other sources) provides a very rich, in depth view off the trends in handset sales growth, market share growth, and smart phone market penetration (an aspect I never see discussed on the web) for all of the players mentioned above. It is available for download as an Excel model to BoomBustBlog professional and institutional subscribers, here: File Icon Smartphone Market Model - Blog Download Version. Those who wish to subscribe or upgrade their subscription can do so here.

I often scan the comment sections of many blogs and websites to get a feel for the readers' perspective. One premise I see espoused often is that Android is succeeding at the expense of Nokia, RIM and MSFT, and not that of Apple. Both I, and the facts, disagree with this notion. As it stands now, Android is literally eating Apple's smart phone market share, and as of last quarter - which does include a partial month of the big sellers from both the Apple (iPhone 4) and Android (Evo, Samsung Galaxy, Droid X) camps - Apple's phone sales are actually growing slower than the market is expanding. In comparison to the near parabolic growth of the last few years, it is evident that that growth is going somewhere. Where do you think it is going? The potential for lag in phone sales right before a major hardware upgrade should be taken into consideration, for there was probably a lull in Apple phone sales in anticipation of the iPhone 4 release, but the same can be said for the Android handsets as well (all around the month of June).

Below is a graph showing the longer term trend of Apple market share in the smart phone space. It illustrates the explosive growth Apple has had through its iPhone series, and it also shows some seasonality (ex. lull before hardware upgrade season, etc.). As you can see, the growth trend, viewed either directly or as a moving average, shows marked downward momentum. Of course, it is highly unreasonable to expect a company to continue to grow at the pace that Apple has, but that is exactly what many Apple valuation models that I have come across have - literally hard-coded in. This is folly, in my opinion - particularly considering the effect of the Android competition that is already showing up. If you look closely, Apple's smart phone market share is already showing NEGATIVE growth!

Since I know that the chart may be a little difficult to read at the tail end encompassing several years of data, I have taken the liberty to drill down to the past year to get a closer look. Remember, Android sales didn't really get started until 8 months ago, and the big surge didn't occur until the Evo/Droid X/Samsung Galaxy series were launched in June, July and August - most of which is not captured here. The same is to be said for Apple and the iPhone 4.

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Despite increases in both the overall mobile market and more importantly, the smart phone contingent's penetration of said market:

Apple's smart phone shipments are showing a negative growth trend
and more importantly, Apple's smart phone market share is experiencing a very sharp downward trend as shown by both direct observation and that of the 2 period moving average.

By trailing the actual growth of the smart phone market, it is far from a foregone conclusion that Apple, nor any other company for that matter, can necessarily tread water by relying on the expansion of the smart phone market. It is quite possible for the winner in this space to capture enough market share to put a material hurting (in terms of valuation multiples) on the loser, primarily if that winner becomes a de facto standard (ex. Android OS, MSFT OS, iOS or even Nokia's Symbian OS) that can lock out the users of the competing devices for much of the smart phone functionality.

I will be exploring this concept in illustrative detail with the release of the Research in Motion forensic analysis and valuation within roughly 48 hours.

More on the Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars!