The rise of smartphones unquestionably brought about one of the bitterest fashions of competition in the global tech industry. Different tech big wigs went back to the drawing board and advanced forward-looking strategies in view of what the future held, among them Apple Inc. (NASDAQ:AAPL). After stealing the thunder from enterprise-skewed Research In Motion Ltd (NASDAQ:BBRY), then Research in Motion, the iPhone maker enjoyed almost a full year of little competition and unimaginable margins (I can see current Apple shareholders salivating in reminiscence). As soon as talks of Apple’s success became the staple on Wall Street, Google Inc (NASDAQ:GOOG) barged in, changing the fate of what would have otherwise been Apple Inc. (NASDAQ:AAPL)’s heaven on earth.
Since Google joined the picture, things have never been the same. The two giants have been embroiled in what I could describe as “do or die competition.” In it all, lawsuits, counter-lawsuits, and wars among opposing fans on social media and other platforms, have been predominant. This Apple vs. Google Inc (NASDAQ:GOOG) war, despite being documented more than enough times, has, however, not been fully understood, mainly because of the attachments that people have to these tech gems.
Apple looked for immediate results
Apple Inc. (NASDAQ:AAPL) looked at the demographics of its target market and keyed out the easiest, yet most rewarding, entry point – the youth. For a long time, iPhones have been associated with coolness. Younger consumers feel the insatiable need to look cool and will pay whatever it takes to achieve that status. This explains why, even when Google Inc (NASDAQ:GOOG)’s Android started gaining market share, Apple still raked in the lion’s share of the global smartphone profits. Apple’s price points were much higher than any handset maker, offsetting the revenue lost from budget-inclined consumers who fled to competitors’ cheaper products. This was an ingenious strategy. But, for how long could it hold? I mean, consumers won’t be young forever, and it reaches a point where price points, more than anything else, dictate buying decisions. Would Apple Inc. (NASDAQ:AAPL) increase its price points every time it lost market share to competitors? I doubt it.
In the first quarter, Apple’s gross margins declined for the first time in a decade. Profits per share slipped from $12.30 to $10.09 year-over-year. In the same spirit, gross margins fell to 37.5% from 47.4% in the year-ago quarter.
Worse still, the guidance for the June quarter was non-moving. Apple Inc. (NASDAQ:AAPL) estimated a gross margin of 36% to 37%, a margin that BTIG analyst Walter Piecyk contends could translate into profits per share in the range of $6.50 to $7.50, a notable sequential and year-over-year decline.
Interestingly, the real headline was not the decline in profits, but rather the loss in market share. After all, Business 101 dictates that revenue is a product of unit sales and product price. The IDC argues that Apple’s market share dropped from 23% in the year-ago quarter to 17.3% in the quarter ended March. Going by Apple’s low estimates for the next quarter, and assuming that prices remain unchanged, market share is likely to dip even further. This could only mean one thing: unless Apple increases its product prices (which is suicidal and very unlikely), a decline in profits is the only song that investors will dance to. In my opinion, the recently-announced alluring buyback program is the consolation prize.
Google played smart
Google Inc (NASDAQ:GOOG), on the other hand, played smart. Instead of taking the David vs. Goliath approach of heart thumping and bravery that Nokia Corporation (ADR) (NYSE:NOK) took toward Apple (you can see where Nokia is today), it rallied numbers. The tech big wig knows the tyranny in numbers.
There is nothing easier than bringing together people with a common enemy, so they say. Google Inc (NASDAQ:GOOG) pitched its Android operating system to Apple’s competitors, in the process roping in an endless list of handset makers. Those who refused were pushed into tech limbo, forgotten and struggling to be recognized again.
Let’s briefly look at Nokia. Once the gem in the mobile segment, I contend that it refused to take up Android because it was confident in the numbers that it had in the feature phone segment. Now, however, it has failed to persuade its feature phone users to buy Nokia smartphones. Most newly-converted smartphone users are taking up Android-powered Samsung. Worse still, smartphones, led by Android powered devices, have outpaced feature phones. This mass exodus to Android devices partly explains why Nokia Corporation (ADR) (NYSE:NOK)’s Q1 earnings report highlighted a 30% sequential and 21% year-over-year decline in mobile shipments, which came in at 55.8 million units.
Now, the IDC along with other research firms, asserts that Android-powered Samsung is bounds ahead of Apple. The IDC, in particular, believes that in addition to being ahead of Apple Inc. (NASDAQ:AAPL), Samsung increased its smartphone shipment by 60.7% from the year-ago quarter to the quarter ended March, shipping a total of 70.7 million units. This secured Samsung a 32.7% market share, compared with Apple’s 17% market share.
Conclusion
I have to admit that Google Inc (NASDAQ:GOOG) chose the better strategy. Apple’s strategy, despite being good for immediate results, was unsustainable. Google’s, on the other hand, was, and still is, assured of longevity. With more than 70% of the global smartphone market share currently inclined toward Android, a bright future lies ahead of Google. The 30% uptrend in its stock over the past year couldn’t justify this any better. Go long on Google, a $1,000 plus share price is feasible.
The article The Google vs. Apple Battle Explained originally appeared on Fool.com.
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