Oleg Andreev

People discuss how Apple has plenty of room to grow by indicating market share in terms of units which is very small (less than 10% among mobile phones). However, the only correct way to predict growth is by looking at the revenue. And not only Apple’s revenue, but also at the general money supply and revenue distribution in all other industries and/or competitors.

First of all, units do not tell you much. There are very different categories of products and prices hidden behind the units. A person who buys a $50 phone does not usually consider buying an iPhone for $500. Or he may consider buying an iPhone instead of buying a cheap phone, handheld game console, wristwatch, a calculator and a flight to visit parents. We cannot predict anything here in terms of units because we cannot compare things in aggregate — only individuals may compare importance of particular units for themselves.

Fortunately, in our economy we already have an efficient instrument: money. We use money to exchange units of any good imaginable. Each person allocates his money to various needs according to his personal subjective valuation. First, he allocates money to the most urgent need, then to less urgent and so forth. So one might prefer paying for his wedding ring instead of an iPhone this month while another one will decide to pay for an Samsung phone instead of going to a hairdresser. These seemingly incomparable things are comparable only through the money allocated to them. When masses of consumers increasingly prefer one product more to all other possibilities to spend their money, you get a nice growing revenue chart.

This means, a revenue is an indicator of how much value all consumers put on your product. What is a revenue share then? First, it depends on how you define the market, that is what products you compare your product with. In case of iPhone, it could be a mobile phone market: all the money people spend on mobile phones.

Today Apple has about 8% unit share and 40% of revenue share in mobile phones. This tells us that so far people spend 40% of their “phone budget” on iPhones and 60% on other phones.

So how do we know how iPhone sales will behave in the future? Revenue share is not enough to decide as “phone budget” may grow or shrink comparing to other goods. We need additional charts for all other possible goods people spend money for. So if we see that people allocate less for gaming devices (and other specialized gadgets replaceable by mobile apps) we may guess that they will spend more on an iPhone as a replacement. But if at the same time they spend more money on food, water and guns, it might mean they are preparing for bad times and iPhone sales won’t grow much.

So Apple’s room of growth today is determined by how much money people are willing to give them comparing to all other possibilities. Thus, we need to understand the whole market: sales of related gadgets, rent prices, migration, inflation etc. And 8% of mobile phone units tells us a lot less than 40% of mobile phone market revenue share and a general mobile phone market growth (which is total amount of money spent on all the phones).

So if in two years people will allocate on phones in general twice as much money as today and if they will spend on Apple phones twice as much money they spend today, Apple will get 80% revenue share and 4 times bigger revenue.

What about profits? Apple is said to gain about 75% of the profits. This does not tell us much about future growth direction, but rather the speed and precision of that growth (or decline). Profits show efficiency of the company. Today Apple is more efficient than others, so it’s getting more money back to reinvest into production. Meaning it has a stronger influence on the market than other companies, but it still does not mean in what direction it will go as it is up to consumers and Apple shareholders and management to decide.

What about “every phone will be a smartphone”? Well, if 80% of people still prefer to pay very little for their phones (that are becoming smarter over time) and Apple is still having a high price for iPhone, the unit share will not change dramatically. On the other hand, if Apple invents an iPhone which replaces your car and a wife at the current price, their unit share will increase significantly as people will rush to pick a $500 iPhone instead a car or a wife if it can replace both of them.