Why shrinking iPhone sales equals bad news for Android smartphone makers

Be careful what you wish for, Android fans. With iPhone sales starting to falter, Apple now has Android handset makers in its sights, and with profit margins already razor-thin, many won't have the stomach for a long battle.
Written by Adrian Kingsley-Hughes, Senior Contributing Editor

There appears to be a common misconception that the iPhone and Android are somehow locked in mortal combat, and if one loses, the other somehow automatically wins. Nothing could be further from the truth. In fact, plummeting iPhone sales could be the worst thing to happen to Android since, well, forever.

And Android hardware makers could already be starting to feel the effects of the iPhone slowdown.

Allow me to explain. So far iPhone and Android have existed as two separate ecosystems. Apple was selling iPhones to people who wanted iPhones, and Android hardware makers were catering for those who wanted something else. Sure, there might have been a little crossover where the premium-priced Android handsets overlapped a little with the iPhone, but for most of the time that iPhone and Android have coexisted, there's not been a lot of overlap.

While the iPhone was selling well, Apple didn't need to worry about putting in the time and effort to poach Android users. Sure, the Cupertino giant likes to throw some jabs at the Android camp, but up until recently Apple has been happy with grabbing about 20 percent of the smartphone market in exchange for some 90 percent of the profits.

Why go after that other 80 percent of sales when it didn't represent that much of a return on investment?

Essential Android and iPhone accessories

But things are changing. Primarily, the astonishing momentum that the iPhone has experienced over the past eight-and-a-half years is beginning to show some signs of slowing down, and that has Apple investors more than a little spooked. Fully two-thirds of Apple's ginormous profits are generated by this single product.

If Apple can't find enough people who want to buy iPhones willingly, then it has to start going after a wider market, and the most obvious demographic to target are those who have their eye on buying a premium Android handset.

These are the "Android switchers" that Apple CEO Tim Cook was talking about during the last earnings conference call.

"We continue to see a very high level of customers switching to iPhone from Android and other operating systems," Cook told investors. "In fact, we added more switchers from Android and other platforms in the first half of this year than any other six-month period ever."

And Cook even went as far as making it clear that targeting "Android switchers" was going to become a priority: "It's our job to come up with great products that people desire, and also to continue to attract over Android switchers."

I think it's particularly interesting that Cook sees coming up with "great products that people desire" and tempting "Android switchers" as separate tasks.

That's because they are.

The high-end, high-priced, high-margin iPhones are, in Cook's eyes, the "great products that people desire," but Cook is smart enough to know that price plays a big part in the thinking of even premium Android customers -- remember, 80 percent of unit sales only account for some 10 percent of smartphone profits -- so this part undoubtedly calls for some "cheap" iPhones.

And it just so happens that Apple has a new "cheap" iPhone, and it's not last year's model. It's a brand new device with some cutting-edge features.

Now, you're probably thinking that this is all just a fancy prediction I'm making, and that things will work out differently.

Sorry to burst your bubble, but Apple is already having an effect on Android. Remember this: "In fact, we added more switchers from Android and other platforms in the first half of this year than any other six-month period ever."

Well, where do you figure this fits in with HTC's sales tanking by 64 percent during this first quarter? Do you think that's a coincidence? Do you also think that it's a coincidence that over the past two quarters, HTC has seen its gross margin slashed in half?

When you look at how bad things have become for HTC in under a year, you start to understand why this company is desperately pushing its $799 pair of VR goggles.

The Android smartphone market is far more cut-throat than the PC business ever was, and those razor-thin profit margins mean that these companies are unlikely to have a stomach for any sort of prolonged war against Apple. And while iPhone sales are indeed weakening, Apple is still a company that pulls in tens of billion of dollars each quarter, and which has $233 billion in cash and marketable securities.

This isn't to say that going after Android switchers won't hurt Apple too. It will. The overwhelming majority of Android users are cheapskates, and they aren't willing to pay over-the-odds for a smartphone (certainly not the over-the-odds that Apple asks). That means Apple is going to have to shave a few percent off its profit margins (which, quite frankly, it can afford to do) in order to attract Android users into the fold.

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