Apple vs Apple, not the rest of the industry
Michael Liedtke, writing for the Associated Press, issued a wire report headlined "Apple earnings fall despite strong iPhone sales," comparing the company's just announced net profits of $7.5 billion with its year ago quarter, when it reported earnings of $8.2 billion.
Apple's operating profit (net before taxes and other expenses; the only profit number some companies report in detail) was just over $10 billion, down from $10.9 billion in the year ago quarter.
However, Apple is not competing against Apple 2012. It's competing against other mobile firms of today, most notably Samsung, which led worldwide shipments of phones with an estimated 120 million units, just over 3.5 times as many as Apple reported it sold in the quarter. Despite that volume disparity, Apple earned significantly more money.
Apple actually earned enough more to have beaten not only Samsung Mobile (which reported operating profits of 6.7 Trillion KRW, or about $6.3 Billion U.S.), but also the phone businesses of Nokia Devices and Services (-$118M), LG (-$75M) and Google's Motorola (-$192M).
That's actually easy to report because none of those companies earned much of anything on their smartphone sales for the quarter. The other profitable phone makers, Huawei ($3.4M) and Lenovo (which apparently hasn't announced earnings yet, but last quarter it reported just short of $1 billion) making it also quite easy to throw in the "makes less than Apple combined" pot, with room for about $2.7 billion left over.
Apple's profitability among phone makers is not exactly a new trend, as detailed by Cannacord Genuity analyst Michael Walkley (below).
Samsung Mobile is most directly comparable to Apple in selling phones, tablets and PCs, although its Mobile group is primarily funded by phone sales. The rest of Samsung Electronics, from appliances to TVs to its chip fab, earns just $3.3 billion more; the majority of all of Samsung's profits all come from phone sales.
That's notable because Samsung has continued to issue warnings to its investors all year, stating that it believes that profits from phones will be increasingly difficult to earn due to intensifying competition.
That's a problem that Apple's chief executive Tim Cook explicitly said he didn't see affecting iPhone sales last quarter, nor going forward into the holidays.
Pay no attention to the icebergs, here's the impressive Titanic!
Strategy Analytics once again defined the conversation by issuing a report for the quarter focusing entirely upon unit shipments and market share, making no mention of the fact that building mobile phones is, in reality, a capitalist enterprise, not an Olympic event showcasing personal achievement.
The firm released its shipment estimates following Apple's announced sales, no doubt because Apple is the only smartphone maker to actually report sales. Were Strategy Analytics to estimate Apple's iPhone "shipments" in advance, they could be compared against real numbers, unlike the estimates of other companies, and of course, "Other."
Assuming that the firm's estimates are close to reality (which the entire tech media did instantly, republishing the report without criticism), that means that Apple's 33.8 million iPhone sales earned more money for the company than Samsung's 120.1 million, Nokia's 64.6 million, LG's 14.4 million and Huawei's 12.1 million phone sales combined.
Again: Apple's sales of 33.8 million iPhones earned more than the combined sales of 211.2 million phones sold by rest of the world's top five phone makers.
Apple's sales of 33.8 million iPhones earned more than the combined sales of 211.2 million phones sold by rest of the world's top five phone makers
And no, that's not just smartphones: Strategy Analytics issued its report of "global mobile phones," allowing Nokia to take second place in the Press Release Olympics simply by losing tremendous amounts of money in a commercial failure so epic the group is now being sold off to Microsoft for scrap.
Given that Apple is sitting on $147 billion, an actual journalist might wonder why the company doesn't simply produce tons of "phones" to win this market share race, or why Apple only competes against itself in profits and, conversely, only against the rest of the industry in shipment numbers.
After all, with iSuppli's estimated production costs, Apple could produce 100 million iPhone 5c units for less than $20 billion and compete against Samsung in the "give phones away" business in order to claim the top spot among phone producers. No doubt a lot of Samsung's feature phone and low end Android users would upgrade to an iPhone 5c if it were free!
Incredibly, other companies in the phone business are actually losing money to maintain shipment levels and "growth." In fact, nearly all of them are, and the tech media doesn't seem find this at all unusual.
Share and share not alike
Strategy Analytics also reported smartphone shipments specifically.
In those numbers, Samsung is selling about 2.6 times as many units as second place Apple, which is roughly the same as the production of the next three makers combined: Huawei, LG and Lenovo. The profit numbers don't change however: Apple is still making more profit than Samsung across all of the two firm's comparable businesses, and all other smartphone makers combined hardly even account for loose change in comparison.
But even ignoring profits and looking only at smartphones, Samsung's shipment volume numbers are not really comparable to Apple's iPhone sales in the quarter, most of which were iPhone 5 (and apparently around a third of which were newly launched iPhone 5s or iPhone 5c devices).
Strategy Analytics Executive Director Neil Mawston noted that for Samsung, "While shipments of the flagship Galaxy S4 model softened, solid demand for the new Note 3 phablet and for mass-market devices like the Galaxy Y helped to lift Samsung's volumes," a quote that was broadly syndicated by CNET and others.
Facts get in the way of a good story
According to Samsung's own earnings report however, in its smartphone business "total shipments [were] up QoQ led by increased sales of mass-market models," while "high-end model shipments stayed at similar level QoQ driven by solid sales of current models with Note III launch."
So despite its Note 3 launch, smartphone sales that Samsung identifies as "high end" were flat. And if you're wondering what the "mass market" Galaxy Y is, it's a 3G-only Android 2.x phone with an ARMv6 chip, 290MB of RAM, a 2MP camera and a 3 inch, 240x320 screen. Those are hardware specs inferior to Apple's iPhone 3G from 2008.
This product is where Strategy Analytics says Samsung's growth is coming from, while euphemistically writing that Galaxy S4 sales have "softened." They are in fact so soft that they are on par with last year's Galaxy III. Samsung's modern, iPhone-class phone sales are not growing. They are stagnant.
Note too that last quarter, Samsung described its Galaxy S4 shipments as "solid," the same word it used to describe the Note 3 this quarter. As with the "smooth" Galaxy Tab that was actually as DOA as Steve Jobs predicted, Samsung's buttery shipment descriptions are simply designed to be hard to pin down and, in retrospect, meaningless.
That calls into question why Strategy Analytics finds shipment volumes so interesting to report while never discussing profits, despite being fully aware of the "softening" Galaxy S4 and Samsung's reliance upon "mass market" growth compared to Apple's high end growth that's leading the phone industry. Strategy Analytics actually minimizes Apple's phone sales growth the same way it minimizes iPad sales: by attempting to drown them in a bathtub of liquid shipments.
Apple rapidly outpacing the industry, unless you gerrymander "the industry"
Lance Whitne, writing for CNET, noted that Apple's year over year iPhone sales growth of 26 percent was "faster than that of the overall industry," which Strategy Analytics pegged at just 7 percent.
In its comparison of just the smartphone market, Strategy Analytics is careful to mention that "Apple grew just 26 percent annually during Q3 2013, which is around half the overall smartphone industry average of 45 percent," placing an arbitrary definition boundary between "feature phones" and smartphones, a line that puts Samsung's Galaxy Y on the same level as iPhone 5.
Imagine if the definition of smartphone were "a mid or high level phone that sells at a profit" rather than the arbitrary "Android phones, iPhones and Windows Phones" that the industry likes to use, a definition that includes devices that can barely display a web page and can't really run any modern apps.
"The screen is very low-res so reading websites means a lot of squinting and possibly a headache," CNET's review of the Galaxy Y stated, concluding that "the Samsung Galaxy Y is an okay starter smart phone for kids."
Samsung is doing exactly what analysts have recommended for Apple
Strategy Analytics achieves its attention-getting "smartphone shipments" headlines much the same way it gets attention for incessantly maintaining that Apple's iPad market share is falling: by muddling together sales of barely functional, profitless junk and comparing them (sometimes retroactively) against real products that people pay money to use, that businesses use, that schools use, and that people want to use.
It's also noteworthy that Samsung is doing exactly what analysts have recommended for Apple: rushing out Smart TVs, watches and other new devices while pushing down the price of its low end smartphone offerings for emerging markets. The result is that Samsung is making much less money building far more phones and watching its sales trend toward "mass market" low end sales while its high end fails to grow at all.
This all happened before in the PC industry.