Apple Squeezes 71% of Q2 Cell Phone Industry Profits

Apple claimed 71 percent of all handset industry profits during the June quarter, according to a research report from Canaccord Genuity analyst T. Michael Walkley. This, despite the fact that Apple shipped jut 6.5 percent of the units sold during the quarter.

This isn’t the first time Apple has managed to achieve this feat—the company has taken 70 percent or more of the hardware profits out of the industry for several years now. Mr. Walkley’s report does, however, shine a spotlight on just how bad this is hurting everyone else in the market that isn’t Samsung.

Samsung managed to increase its share of the industry’s profits to 37 percent, a significant achievement of its own, especially considering that in the first quarter, Samsung claimed “only” 26 percent of the profits. In short, Apple and Samsung own the cell phone market in terms of profits.

It doesn’t take a rocket scientist to note that 71+37=108, give or take a bit, but the “total profits” figure includes some significant losses from Research In Motion, Motorola, Sony, and Nokia. LG broke pretty close to even, while HTC turned a small profit.

First, let’s look at Canaccord’s profit data for the top handset OEMs:

Mobile Profits

Chart by The Mac Observer, from Canaccord Genuity Data

This shows the stark bleak reality the rest of the industry is faced with. The big are huge and everyone else is an afterthought.

A look at the gross margins picture shows how there is very little chance of seeing significant change in the profit picture any time soon.

Operating Margins by OEM

Chart by The Mac Observer, from Canaccord Genuity Data

Only Samsung is shipping enough volume to find a profitable operating margin of 20 percent, but even that is less than half of Apple’s 43 percent. What’s more interesting about this is that the profit and margin pictures are both being driven by what is supposed to be Apple’s weakness and everyone else’s strong suit.

Apple ships one device, the iPhone. The company addresses the lower end of the market by selling the previous two generations of that one device, models which have long since paid for their R&D many times over. By having such a simplified product line that includes the world’s single most popular device, the iPhone 4S, Apple is able to extract massive profits its mostly Android competitors can’t.

Remember that Samsung sells many more total devices than Apple, and that Apple had just 6.5 percent of the mobile handset market in the June quarter.

At the same time, Android’s strength is its openness. Many comers bring their wares to market, and collectively they shave costs, bringing ever-lower costs to consumers. The above graphs show that the result is that only one of them can make money doing this, and that’s Samsung.

There’s another part of the picture, though, and for this we’ll turn to T. Michael Walkley’s own table of subsidy levels for all the major OEMS.

Canaccord Table

Table by Canaccord Genuity
(Click the image to see a larger version that includes April 2012 subsidy rates)

Here we see that Apple earns the highest subsidy rates in the industry. In fact, some analysts have openly worried that Apple can’t sustain those subsidies, but they’ve been worrying about it for more than two years, and nothing has changed.

These subsidy rates are another reason why Apple is taking so much more profit out of this industry than its competitors. Each individual device fetches Apple hundreds of dollars more than any other device can bring in for its maker. Apple’s value proposition and ecosystem has kept its customers happy, and carriers have been forced to continue paying these prices because Apple knows that iPhone users have a lower churn rate and pay more for their data plans than other device owners.

Mr. Walkley expects Apple to lose share in the September quarter, and to begin regaining share in the December quarter after the release of the iPhone 5.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.