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Why smartphone marketshare is overrated... and not Apple's top priority

If you listen to the pundits, Apple really messed up by not making the iPhone 5c more affordable. The underlying assumption by those so quick to second guess Apple's iPhone 5c strategy is that Apple is losing the marketshare war with Android. Consequently, the reasoning goes, Apple needs to churn out some cheap devices (and quick!), flood the market and gain some of those elusive marketshare points back.

Apple, however, doesn't let marketshare be the overarching metric that guides its business strategy. Indeed, it's somewhat bewildering that analysts who get paid to make sense of the tech industry so often lose sight of the fact that marketshare in and of itself is not the be all and end all.

In truth, the type of users you have can sometimes be more important than how many users you have. Indeed, this dynamic can be seen across many industries.

This notion is why television shows with a core audience of 18-34 year old males, for example, can often command higher advertising rates than programs that otherwise have higher ratings. As a specific example, Friends during its heyday was able to command three times as much for ad-time than Murder She Wrote because the latter's viewership skewed much older.

So what's the parallel?

Apple doesn't view all users as created equal, a point Tim Cook touched on in his recent Bloomberg Businessweek interview, which was published in its entirety this weekend.

When asked about the rise in $100 and $150 phones from Chinese and Indian manufacturers, Cook explained that Apple isn't interested in a race to the bottom while explaining that unit marketshare doesn't keep him up at night.

I think it's important that we grow, but I don't measure our success in unit market share. So if there are a lot of $69 tablets sold that you're just pounding on to get something to work and get some responsiveness, and it's thick and fat and just a terrible experience, I don't really weigh that unit of share like I do a different unit of share. I don't weigh them to be equivalent.

So I think in most markets in consumer electronics, there's always a large junk part of the market. We're not in the junk business. We don't want to make something for that.

...

I think, fortunately, these markets we're in-the smartphone market, the tablet market-these are huge markets, and yes, the market might bifurcate. It has to some degree, as you just pointed out. There's a segment of the market that really wants a product that does a lot for them. And I want to compete like crazy for those customers and really convince those customers that the iPhone is the best experience for them.
The tablet market is the same case. It sort of bifurcates. You've got the players down here that would say-you know, your kid is tugging at you saying, "Daddy, I got to have a tablet." And you just want to shut them up and buy something cheap. That's not a market I'm crazy about. I'd like to convince you that the iPad is a better experience and that your kid's going to learn a lot from using it. And the experience they're going to have talking to their grandmother across FaceTime is unbelievable, and it's going to change your life by doing that. I'm not trying to say "Pick me" to shut up your kid.
So on this market, the market that cares about those things, I want us to just over-index like crazy on those. I want us to convince everyone to buy like that. I'm not going to lose sleep over that other market, because it's just not who we are.

So while analysts obsess themselves over metrics like marketshare, Apple isn't terribly concerned with catering to users who aren't interested in a premium smartphone experience.

And because Apple doesn't blindly go after the low end of the market, dangling cheap phones in front of customers who are just looking for something cheap that gets the job done, the iPhone is able to garner more customer loyalty than its Android counterparts.

This past August, the Consumer Intelligence Research Partners (CIRP) collected a year's worth of smartphone loyalty information and found that 81% of iPhone users stuck with the iPhone when purchasing a new device, compared to 68% of Android users who stuck with Android. More telling is that over 40% of iPhone buyers came over from Android while approximately 5% of Android users come over from the iPhone camp.

Put differently, once a user gets an iPhone they are more likely to stay within the iOS ecosystem than an Android user is to stay within the Android ecosystem.

To that end, there is an undervalued benefit in focusing on the high end of the market where folks are willing to pay a little bit more in order to get a little bit more.

What happened to both RIM and Nokia over the past few years should underscore how fickle marketshare is. RIM, for example, was able to appear healthier than it really was because it relied on "buy 1 get 1 free" programs as a means to flood the market with their devices. Their ability to keep their seemingly high marketshare afloat was nothing more than an illusion that eventually came crashing down.

The iPhone, meanwhile, isn't close to rivaling Android when it comes to marketshare, but is second to none when you look at other metrics such as profitability, customer loyalty, and customer satisfaction.

Marketshare of course isn't wholly irrelevant, but if it's the only metric analysts are focusing on, they're clearly missing the big picture.

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