Smartphone Profits Are More Concentrated Than Ever

Some curious editorializing from the Wall Street Journal’s report on Apple’s plan for new iPhones:

The dual devices reflect new pressures on Apple. The Cupertino, Calif., company has long commanded unique premiums for the iPhone, but consumer demand for cheaper products is spiking. A flood of smartphone entrants and rise of Samsung ElectronicsCo. 005930.SE +0.86% have commoditized the market, squeezing margins and dividing profits among an array of devices.

“There isn’t really any major differentiator between the players at this phase,” said Neil Mawston, an analyst at research firm Strategy Analytics. He says to cope Apple needs to take a page from Samsung and launch more products faster.

As you’ll see above, this idea that profits are divided among an array of devices is flat wrong. According to Canacord Genuity, Apple and Samsung combined to account for over 100 percent of the profits in the handset business last year. In other words, the rest of the industry lost money in the aggregate. Nor have Apple’s smartphone margins fallen. The average profit margins on iPads fell as a result of the introduction of the cheaper (and very popular) iPad Mini but these phone trends simply aren’t happening.

What is happening is that Apple’s share price has gone down a lot. But that reflects an assessment about the future. Nothing has actually happened that correlates with the steep drop in share prices, and the company’s price:earnings ratio is extremely low. The poor Wall Street results have simply led to a surge in random assertions about the state of the existing marketplace.