Minority Report: iPhone puts the 'smart' in smartphone

Apple's latest earnings report shows the iPhone is selling better than expected. Seb Janacek ponders the smartphone's brilliant performance.

Apple reported another stellar quarter in its earnings call last week. There was a solid rise in Mac sales year on year and a slight decline in iPod sales for the same time period.

However, as has been the case in recent quarters, it's been the iPhone that has turned Apple into Wall Street's darling, outperforming the company's own traditionally conservative estimates and beating a path through the pervasive economic gloom.

Apple announced revenues of $8.34bn and a net quarterly profit of $1.23bn compared to revenue of $7.46bn and net quarterly profit of $1.07bn in the year-ago quarter.

It was the iPhone sales that really caught the eye. In line with US subscription accounting practices, iPhone sales are reported across eight quarters. The adjusted figures released by the company resulted in quarterly sales of $9.74bn and profit of $1.94bn.

The 3GS was launched in the middle of the reporting quarter and promptly sold a million units in its first weekend. In three months, Apple shifted 5.2 million iPhones, a staggering 626 per cent unit growth over the year-ago quarter.

There was an even more impressive statistic reported in the Wall Street Journal last week.

Based on data provided by Deutsche Bank analyst Brian Modoff, while Apple's overall share of the mobile handset market in 2008 was a shade more than one per cent, it accounted for 20 per cent of the industry's total operating profit.

The numbers are incredible. RIM, the BlackBerry maker, is in a similar position. It only represents around two per cent of the market share but garners approximately 15 per cent of profit.

The Journal suggests this represents a move away from hardware specs and towards content and user experience.

It also represents Apple's success in bringing its high-margin business model to a new market.

Many scoffed when Apple first entered the mobile phone fray, arguing that it would be a little fish in a big sea. They were right but it only goes to prove the old adage that it's not how much you've got, it's what you do with it.

Apple has a minority share of the computer market yet its profits continue to defeat downward PC market trends and economic turmoil.

Now, Apple also has a minority share of the phone market and this is very clearly not a problem for the company, its investors and its finances.

What is significant is that the smartphone segment of mobile handsets is still small (around 13 per cent) but growing. Of that 13 per cent, Apple and RIM command a 32 per cent share. In other words, the two are leading players in a growing and high-margin market segment.

The two companies are putting the 'smart' in smartphone. RIM has an established user base in the corporate space. Apple has the edge on user experience and - thanks to its its dominant application store and 100,000-strong developer community - the lead on content

To paraphrase former Orange boss Hans Snook: the future's bright, the future's Apple.