Tim Cook should be losing sleep over lower priced iPhones if he cares about the iOS App ecosystem!

In this Bloomberg interview, Tim Cook explains (“I’m not going to lose sleep over that other market, because it’s just not who we are.”) how Apple’s phone strategy follows the traditional Apple “premium margin” strategy: focus on delighting the hog-end of the market with a superior product experience and cash in the fat margin that comes with it. Let your competition kill each other over the low-end, low-margin business where product differentiation is low.

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That works well for an Apple that sells high priced products and generates $100s of margin with each sale. As happened in the PC market, by taking that stance, by 2005, Apple was able to siphon the vast majority of the PC industry profits while enjoying very modest market share. And today Apple is on top of the industry with all others struggling or bailing out. With the iPhone, Apple has a similar profit engine, a combination of volume growth, margins and attach of “pure profit” accessories. Apple enjoys  high upgrade rates within its current user base (people that already have an iPhone buying a new model), so even if it does not expand its total user base as fast, it can generate large volume through repeat buyers.

But the smartphone market is different than the PC market of 2005. With the browser dominating the app scene on PCs, Apple could afford to have a limited portfolio of software for Macs. It covered the bases with the likes of Officer and Photoshop. It lacked enterprise software, games, and many vertical apps. But it had enough to meet the average needs of the premium consumer.

The smartphone market exploded when the App market took off, morphing a (smart) phone into a pocket computer. App developers have a very different model than Apple. They make $0.7 per user for each $0.99 sale, if they make anything at all when they adapt a freemium model. The growth engine of the App developer is volume-volume-volume. And to get more App volume, you want more phone volume, which means going after the more price sensitive phone customers (for whom a $0.99 App or a fermium app can still be a decent bargain). And those repeat iPhone buyers Apple has? They do nothing for App developers when their Apps are simply transferred over to the new iPhone as part of the migration process.

In the volume game, Android already leads the pack and will further consolidate its lead in the coming years as the market moves to more price sensitive audiences (in the US and abroad). Today Apple enjoys 43% share in the US, close enough to Android’s fragmented 51% share. Add to the superior Xcode development environment and Apple remains the # platform most App developer target today. But move to a world where Apple share drops to <25% (as is projected by IDC for 2017) and things may change. Where will App developers focus to gain that volume they need then?

Sooner or later, Tim is going to need to spend a few sleepless nights…

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