That is an astounding graph. I didn't consciously realize this till the example of Apple made it clear a few years ago, but market share is actually an unambitious thing to aim for. When people treat market share as a proxy for profit share, they're implicitly assuming all the competitors are roughly equivalent. But Apple shows that if your products are sufficiently more desirable than competitors', you can make market share and profit share diverge.
It’s very dangerous to use a single metric as a proxy for something else that is obviously related to it but not directly so. We see this here with market share and profit share. We’ve seen similar things like lines of code and productivity.
There’s an apocryphal story told about an IBM salesman. He was the sales leader year in and year out, selling almost as much as all the other fellows in his office combined. One day, his manager retires and Armonk sends out a hot shot MBA to run the sales team. The MBA summons the top salesman.
“I’ve been running some numbers. Your sales are very good, but you’re only averaging 1.2 calls a day. The other guys are doing 3.7 calls. Imagine how much you could sell if you could get your average up to 3.7!”
The sales guy realized he was going to have to train another manager. “Oh? I was wondering how much the other guys could sell if they did a better job of qualifying leads and got their averages down to 1.2..."
Here's a very real, very dangerous example: conversion rate as a proxy for profit per visitor or # of unique people signing up.
A web page that gets users to visit an average of 2 times before buying instead of an average of 3 times seems to have a vastly improved conversion rate (depending on how you measure), but is not improving sales one whit.
A bad, very common (in my experience) definition of conversion rate is "goal actions/# of visits". It seems like you're thinking of conversion rate as "goal actions/# of unique visitors", which is a better definition, but still frequently at odds with profit.
I think people tend to over analyse this stuff which is why bottom line numbers need to remain the focus (and so often don't). Anything before the bottom line figure is about understanding the result and aiding improvement but not defining the success of the activity. Also focusing on the final outcome avoids the distraction of people cherry picking statistic to make their campaigns look successful when they present results, which many people buy into unquestionably when they see a nice looking graph.
Market share is very important in one business strategy: de-facto standard platform and monopoly rents (see: Microsoft).
If you (or one of your competitors) is planning on playing "monopoly" then marketshare becomes an important metric... either you are aiming for dominant marketshare, or proving that your competitors don't have it. This is why, despite profits being more important, market share is viewed as so important.
They can only diverge so far though. For example, Apple needs a reasonably sized slice of the pie to maintain the App Store. If they had 0.1% of the market, there would be drastically fewer people willing to write apps.
Another thought- market share is often desirable not only for profit, but influence in that market.
Clearly Apple has demonstrated you do not require market dominance to influence or even drive the market, but their success in that regard does not appear to be easy to replicate.
Large market share might also lead to more stable profits, though I'd want to look at empirical evidence before saying for sure. Large profits on small market share reeks of an unstable situation, because at least in theory very high margins shouldn't be stable in the face of functioning competitive markets. My guess would be that high profit margins can evaporate overnight more easily than large market share can evaporate overnight (look at how long AOL has been cashing in on the very slow draw-down of its once-large customer base). Though it probably depends on how fast the market typically turns over. On the other hand, arguably Apple is in something of a luxury goods segment, and economists have long recognized that luxury goods operate in strange ways when compared to "normal" neoclassical markets.
Yes, but AOL is a subscription service. Phones last 2-3 years tops. In that time frame if your product is made obsolete you can lose your pants overnight regardless of whether you sell 10s or 100s of millions of units today. Large marketshare is no guarantee of anything in the fickle tech world (look at Nokia), so I'll take profit over marketshare.
It should be noted, however, that many reports have concluded that Apple-customers are (much) more likely to pay for software and apps. This certainly plays a role in which platform developers choose, assuming they want to make money this way.
I don't think people do treat market share as a proxy for profit share. You don't really need a proxy for profit share because it's easy to measure. And if market share is publicly avilable information, so is probably profit share. It does make some sense to treat market share as a proxy for market power, though -- business people do this all the time.
An alternative interpretation of the article is simply that Apple is targeting a more profitable segment of the market -- smartphones.
It happens to be the case that this segment has grown really fast and have both the highest margins and the highest total profits. This is perhaps not the case in most industries, which may be interesting.
The remarkable thing about Apple of late is not that they target a profitable niche (which is a given with their product pricing), but how much they grow their niches. They did it the iPod, iPhone and iPad.
If Apple stopped selling these things tomorrow would other vendors capture the surplus? Or would people just go back to spending more money on other things?
Whether Apple exists or not, it doesn't seem like other vendors can raise their margins because they are in such a foot race. Apple has somehow risen above the fray through a combination of doing integrated hardware and software better than anybody and mastering the supply chain. Where HTC and Samsung are trying to one-up each other on screen size, Apple holds onto their margins selling a smaller screen for a higher price. This seems crazy until you actually use the latest Android phone and you're like "Why the F can't they get the screen to work half as good as an iPhone".
