Profits are Life Blood
[Is profit share overrated as a measure of company viability? Guest author Jay Goldberg takes a contrasting viewpoint to our recent “Profit share trap” article, arguing that profitability has been the key to predicting Apple’s past – and future success.]
I like to think I sparked a meme. In 2009, I wrote a analysis comparing the market share of the various handset makers and their respective share of industry profits. At the time, Apple’s had 1% or 2% share of the global handset market, and everyone was writing off the iPhone as an unimportant niche. And by everyone, I mean not just analysts but major companies like Nokia and Motorola. The mobile phone industry had a case of willful ignorance back then, but by looking at profit share versus market share it was pretty clear that something important going on here.
Today, this â€˜profit share â€˜ line of analysis has become very common, some would say overused. Running a basis by looking at a single metric usually ends badly. There are pitfalls in focusing too much attention on profitability, especially when it comes at the cost of making good products and satisfying customers’ needs. Nonetheless, if you have to pick just one metric, profitability is the one that matters the most.
Profits matter because they give companies options. I could launch a line of phones today and give them away for free. I could reach 100% market share, but I could only do it once. Profits, not market share or revenue, are what let companies survive. Many argue that Apple is facing a host of problems now: Competitors phones are cheaper; Apple cannot do the web or â€˜big data’; low-cost phones from Asia, etc. The list is long. But everyone in the industry faces those problems. Apple has the ability to weather this sea of woes because they have profits. They can use those profits to do more marketing, or buy market share with discounts, or glue $100 bills to every iPhone. Samsung can too, but no one else can. By contrast, look at Blackberry. They are now barely profitable, and as a result analysts are wondering how Blackberry will be able to afford the next product cycle. No one is asking that about Apple and Samsung. Because of their profits those two can weather any storms that come their way. Profitability is the best way to assess the long-term health of a company.
You can buy market share, but you have to invest for profitability, and invest wisely.
There is no question that Apple needs to come up with ever-improving products and find new ways to inspire customers. But because of their profitability, they have options. Some would argue that as Android phones get ever cheaper and the OS itself gradually improves, consumers will migrate. After all, the functionality of an Android smartphone is â€˜good enough’ when compared to that of an iPhone. But I think that misses the point of what Apple is doing. Their goal has always been to create products that are designed to invoke an emotional response. That was clearly on display during the WWDC keynotes, especially with the new TV ads. Apple can afford to do expensive brand marketing because it has ample profits with which to invest. If they had focused on market share years ago, they would be in no position to defend themselves today and would face constraints in their ability to make those kinds of products and those kinds of ads. Ask Blackberry. Or HTC. Or Sony. Or LG.