Why Apple and Samsung make more than 100% of the industry’s profits

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Apple and Samsung rake in 106% of the smartphone industry’s operating profits

According to a report from Canaccord Genuity published earlier this month and as the chart below shows, Apple (AAPL) and Samsung (SSNLF) were responsible for 106% of the smartphone industry’s operating profits in 1Q14. The report also mentioned that Nokia (NOK), BlackBerry (BBRY), Motorola, Sony (SNE), LG, and HTC all lost money in their smartphone businesses.

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This is surprising, considering that Samsung and Apple only make up a combined 37% share in the global smartphone market. As we discussed in the prior part of this series, Samsung’s share reduced to 25% while Apple’s share reduced to 12% in the global smartphone market last quarter. As the chart below shows, Apple contributed 65% and Samsung contributed 41% of the industry’s operating profits in the first quarter of 2014.

Smartphone players operating profits

Apple caters to the premium smartphone market

Apple has always been a premium player. It sells the iPhone for more than $500. According to Apple’s filings, the iPhone’s average selling price declined from $637 in its fiscal first quarter of 2014 to $561 in its fiscal third quarter of 2014.

The average price declined because of the increasing popularity of the lower-priced iPhone 4S in emerging markets. Another reason for the decline was Apple’s reduction of iPhone 5S prices last quarter before the impending launch of the iPhone 6. Yet the average pricing could again increase to more than $600 once Apple introduces the iPhone 6 next month.

Still, the iPhone’s average pricing is way higher than Google (GOOGL) Android–based smartphones. Their average pricing is around $200. This explains the high profit margins for Apple’s iPhone.

Samsung also caters to the premium category through its flagship Galaxy smartphone series. But Samsung also sells low-end smartphones. As a result, its operating profits aren’t as much as Apple’s even though it has higher unit market share than Apple.

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