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Apple Riding High, but for How Long?

When Ellie Turner decided she wanted an upgrade from her iPhone 3G, she expected to pay more for Apple’s new iPhone 4S than for the other leading smartphones on the market.

Apple Store
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Apple Store

Instead, Ms. Turner, a public relations specialist in London, got the fast-selling device free.

She consulted Phones4u, a bulk discounter of cellphones and data packages, which offered her a free iPhone 4S and data plan for £2, or $3.20, more than what she had been paying each month. She returned to her operator, O2 U.K., which had been selling the 4S for £99 with the same plan. She told people there about the rival offer.

“They didn’t blink an eye,” Ms. Turner said. “They matched it.”

Apple , the global market leader in smartphones, is enjoying record profits and sales that have transformed it into one of the world’s most valuable companies. But the mobile computing industry it has conquered in just five years is changing rapidly, and nothing, not even Apple’s vaunted brand premium — the ability to charge more than its competitors for premium smartphones — appears guaranteed.

In Britain, for example, the iPhone 4S costs at least £170 more than the Samsung Galaxy S II with a two-year commitment at O2 U.K. At T-Mobile in Germany, the Samsung model costs about €80, or $108, and the 4S €130. In the United States, the difference between the two models at AT&T is at least $50 and as much as $250.

The premium is Apple’s reward as progenitor of the modern smartphone segment: the sum of its software DNA, intuitive user experience, cash-generating universe of applications, cultivated image of hipness and first-mover advantage.

But Apple’s main rivals — Samsung and other sellers of cellphones using the Google Android operating system, like HTC of Taiwan and Huawei and ZTE of China — are making smartphones for much less, and the iPhone is becoming ubiquitous, threatening to dull its cachet.

For now, said T. Michael Walkley, an analyst at Canaccord Genuity in Minneapolis, the iPhone lineup has momentum and Apple, based in Cupertino, California, should be able to pad its lead over its rivals this year.

“But I cannot say with certainty that five years on, Apple will still be on top,” Mr. Walkley said, noting that Apple and HTC did not even make smartphones six years ago. “I assume they will be, but it is difficult to predict anything in this dynamic market.”

Mr. Walkley estimated that Apple had captured 52 percent of all profits in the smartphone industry during 2011, a share he expected would increase to 60 percent this year.

Apple, following its tradition of participating only in its own promotional events, has no formal presence or exhibition stand at the Mobile World Congress, the industry’s largest annual convention, which begins Monday in Barcelona.

An Apple spokesman in London, Alan Hely, said the company had no comment for this article.

Timothy D. Cook, the Apple chief executive, told a Goldman Sachs investment conference this month that Apple would not rest on its laurels after its record fourth quarter, in which it sold 37 million iPhones — 17 million more than it had ever sold in a quarter.

Tongue in cheek, Mr. Cook called the 37 million “pretty good,” drawing laughs, but then put it in stark perspective: “As I see it, that 37 million for last quarter represented 24 percent of the smartphone market. So three out of four people bought something else. And it represented less than 9 percent of the handset market, so 9 out of 10 people are buying something else.

“The smartphone market last year was a half billion units,” he continued. “In 2015, it is projected to be a billion units. When you take it in the context of these numbers, the truth is, this is a jaw-dropping industry. It has enormous opportunities to it. Up against those, the numbers don’t seem so large anymore.”

Carrying the iPhone has benefited operators, who use it to lure new customers. Sprint, the No. 3 U.S. carrier, sold 1.8 million iPhone 4S’s in the fourth quarter, its first sales of Apple models. In that period, the operator added 1.6 million new customers, the biggest such increase in six years.

Deutsche Telekom, France Télécom and Vodafone have also spoken of the positive effect iPhone sales have on their profits. But over time, the iPhone could be undermined by its own success.

“All of a sudden, every teenage girl has an iPhone,” Mr. Walkley said. “The real danger is that Apple becomes so mainstream that there is a breakaway by consumers to something new.”

Apple’s competitors are waiting for that chance, said Mark Newman, the director of mobile research at Informa Telecoms and Media, a research firm in London.

That puts pressure on Apple to continue innovating with each new iPhone. Mr. Newman said that Siri, the Apple voice-activated command function introduced with the iPhone 4S, had been an incremental improvement, not a paradigm change.

“Apple is focused on defending the high end of the market and that is becoming harder to do each year,” he said. “Competitors, such as the Galaxy from Samsung, are starting to catch up. I think it is inevitable that the margin pressure increases.”

So far, there is no sign of that pressure at Apple, which continues to derive more than 40 percent operating profit from the sale of each smartphone, Mr. Walkley estimated.

In 2011, Apple became the world’s largest buyer of semiconductors, according to Gartner. It displaced LG of Korea as the No. 3 maker of mobile phones by volume, trailing only Nokia and Samsung. Apple narrowed the lead held by Android, the free operating system developed by Google. By December, 44.5 percent of all U.S. smartphone buyers were choosing iPhones, up from just 25.1 percent in October. The proportion choosing for Android fell to 46.9 percent from 61.6 percent, according to Nielsen.

Patrick Rémy, the vice president of devices at France Télécom in Paris, said he saw no sign of the Apple brand’s diminishing. On the contrary, Mr. Rémy said, Apple and Samsung have the financial resources to invest in the marketing, image and innovation that are needed to stay a step ahead of the competition.

“We are not seeing any major part of these brands declining,” Mr. Rémy said.

But competition, especially from lower-priced rivals, is not standing still.

By 2016, more than half of all smartphones sold will cost less than $300, according to Informa. Last year, 81 percent — most of them iPhones — cost more than $300. The proportion costing less than $200, which currently makes up 5 percent of the global market, is expected to increase almost fivefold, to 24 percent, by 2016.

It is unclear what effect a proliferation of low-priced smartphones will have on Apple’s niche. But Shao Yang, the marketing director for mobile devices at Huawei — the Chinese maker of mobile networking equipment which has set a goal of being among the world’s top three cellphone makers by 2015 — said consumers would be able to obtain superior performance for less in the future.

“I think currently the biggest trend is not the price, but the capability,” Mr. Shao said. “There is a competition in capability. The function of the phone will change very fast.”

Huawei, based in Shenzhen, sold 20 million smartphones last year, up from 3.1 million in 2010. Huawei sold about half of its smartphones in China for between $150 and $200. Its biggest foreign market is the United States, where Huawei in January presented the Ascend P1 S, calling it the thinnest smartphone at 6.65 millimeters, or 0.26 inch.

The P1 S will not start selling until April and Huawei has not released the price. But Mr. Shao said it would cost less than an iPhone. “Smartphones are going to become cheaper and cheaper,” he said.

Apple, despite the higher prices of the 4S, is not unrepresented in the low-price smartphone segment. The iPhone 3, a predecessor, is being given away with a £16.50 plan at O2 U.K., while the iPhone 4 is free with a £36 plan.

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