Apple Tops Smartphone List, But Problems Loom

12/6/13 10:33AM EST

Apple Tops Smart Phone List But Problems Loom Apple Tops Smartphone List, But Problems Loom

Image via IgorGolovniov/Shutterstock

Apple Inc. (NASDAQ:AAPL) still makes the most popular smartphone in the United States. Despite the rise in the quality and popularity of Android based mobile devices, the Cupertino company is still on top in the United States. A new Comscore report says that Apple Inc. (NASDAQ:AAPL) has 40.6 percent of the market.

That doesn’t mean that Apple  is safe, or that the company’s reliance on the iPhone is going to be a decent strategy for an indefinite period. The iPhone is the most popular smartphone in the United States, and it is likely to remain so for a long time ahead. The company will have to keep working in order to maintain that balance, however.

Apple Margins Trouble

There are three major moving parts in the smartphone market. The first is market share and the second is margin, and the third is selling price. Google Inc (NASDAQ:GOOG) is doing its best to decrease the price of smartphones across the board. The company’s Motorola division is offering high quality smartphones at a lower price, and the firm’s Nexus models produce almost no margin.

Apple is able to differentiate the iPhone, that much is clear from the Comscore report. The question is whether it can continue to do so as Google and other Android manufacturers continue to pressure the firm. So far the answer is yes, but that differentiation comes at a price.

Apple has to increase the quality, and manufacturing cost, of its smartphones beyond that of Android competitors. The firm has rapidly increased its research and development costs in order to keep ahead of competitors. The result is a reduced margin at Apple Inc. (NASDAQ:AAPL), and that pressure shows no sign of letting up.

Reduced margins mean reduced profits. Apple can only manage to grow sales so much, after that profits are capped and the company’s expected earnings are going to be in constant decline. Apple’s smartphone division is doomed as a growing business, but that doesn’t mean the company itself is doomed.

Apple’s Smart Phone Engineering

Apple Inc. (NASDAQ:AAPL) is impressive because of the design of its smartphones, but the company’s financial engineering is even more impressive. Apple has managed to slow the decline in its margins down to a level investors can accept. While the margins on the iPhone slowly recede investors are hoping the company will release a new product.

When the iPhone 6 arrives Apple is likely to take another hit to its margin. Investors are expecting that to happen, and it will not materially affect the way the company is perceived. The smartphone market is maturing. Apple will reap less from the business it sowed.

The company’s future earnings are riskier than they were a couple of years ago. Nobody is certain the company can form the next major business in tech, and many other companies are working on doing so. Apple is still in control of the smart phone market, but that won’t mean all that much in five years time.

Disclosure: Author represents that he has no position in any stocks mentioned in this article at the time this article was submitted.