Could Apple become the world's biggest handset maker?

Mike Dano

It's no secret that Apple (NASDAQ:AAPL) is doing well in the smartphone market. The iPhone vendor became the world's largest smartphone maker in the fourth quarter of last year due to the massive success of its iPhone 4S launch. In the first quarter, Apple lost that position to Samsung, according to analyst estimates, mainly due to Samsung's continued strength with its Galaxy line of Android phones.

But that's for smartphones only. In the wider "handset" market (which includes sales of any kind of cell phone, from $15 to $600, covering smartphones and feature phones), Samsung is now the undisputed leader. The South Korean vendor in the first quarter unseated Nokia (NYSE:NOK) from the top spot with its strong sales of both feature phones and smartphones. Samsung shipped 93.8 million handsets in the first quarter of this year compared with Nokia's 82.7 million, according to estimates from IDC.

But here's the interesting thing: Apple is now the world's third largest handset vendor (feature phones and smartphones), second only to Samsung and Nokia. Apple's rise to the No. 3 slot reflects the growing importance of smartphones in the handset industry. According to research from ABI, the world's smartphone vendors shipped a combined 56 million smartphones in the first quarter of 2010--a far cry from the 262 million feature phones sold during the period. But skip ahead to the fourth quarter of 2011 and the world's smartphone vendors shipped a combined 155 million smartphones. Meantime, shipments of "non smartphones" remained relatively static at 270 million in the fourth quarter of 2011. ABI's Michael Morgan predicts that, industry-wide, smartphone shipments will eclipse shipments of feature phones by 2016.

Thus, it's not hard to imagine Apple passing Nokia in terms of overall "handset" shipments sometime in the next year or so, mainly due to the fact that Nokia's overall shipment numbers are declining dramatically but also because Apple's iPhone sales jump every time the company releases a new iPhone model.

So if Apple becomes the world's second largest handset vendor sometime in the next year or so, does that mean the company could eventually pass Samsung to become the world's biggest maker of cell phones, smart or not?

"They're going to need another trick" to get to the No. 1 position, said ABI's Morgan.

Apple has obviously done well during its handful of years in the handset industry. The company's first quarter of iPhone sales in 2007 totaled just 270,000 units. Those figures have been rising every year though with each new iPhone model--Apple sold an astounding 37 million iPhones during the final quarter of last year. Apple expects its quarterly smartphone shipments to slow in the coming months, but the company's iPhone shipments likely will jump again when it releases its next iPhone iteration.

But the gap between Samsung's overall handset shipment numbers and Apple's overall iPhone shipment numbers is spacious. Samsung shipped 93.8 million handsets in the first quarter while Apple shipped 35.1 million, according to IDC's estimates.

Morgan said a number of factors would have to fall into place for Apple to pass Samsung in overall handset shipments--and, if it does ever happen, it won't happen anytime soon.

Most importantly, Samsung sells phones at all price points, from cheap, calling-only phones in emerging markets to ultra-high-end Android devices in established smartphones. Thus, the company has a much wider potential customer base. Apple, famously, targets mainly the high end of the market, and its only attempt to head toward the other end is its strategy of lowering the prices on older iPhone models and keeping them on store shelves. Even then, though, Apple's cheapest iPhone runs at about $450 (carrier subsidies bring that price down to $0 with a postpaid service contract).

In order to break into emerging markets where prepaid rules and every dollar counts, Apple would have to build a much cheaper device. Though rumors of an iPhone nano persist, Apple to date appears unwilling to make this play for volumes and market share.

Interestingly, Morgan also predicted that smartphone growth in established markets like the United States and Europe will slow in the coming quarters, after years of frenetic growth. Most users who want smartphones now or will soon have them, which could cut into overall sales of smartphones.

Morgan also pointed out that Samsung has worked to hedge its position so that it can respond to market transitions more quickly. The company primarily supports Android, but has also dabbled in Windows Phone and other platforms. Moreover, Samsung is working to "own the stack," such that it has control over components such as screens and application processors. This, Morgan said, will allow Samsung to quickly meet mobile users' fickle tastes.

"Samsung has done a great job to hedge that risk," Morgan said. "They're very well set up to hold on for a while."

Apple, on the other hand, is completely invested in its iOS platform and may not be able to move as nimbly as Samsung.

"In a sense they [Apple] face a lot more risk," Morgan said, noting that Apple's business isn't as broad as Samsung's. With only one iPhone released per year, a miss could jeopardize a year of sales. However: "They [Apple] can miss and still have enough cash to fully maintain operations until another [iPhone model] is released." Apple counts a cash hoard of close to $55 billion--even after the $45 billion Apple plans to spend over three years on a dividend and share buyback program.

So how could Apple pass Samsung? The company could target the lower end of the market with a less expensive product. Apple could also develop new services such as free, FaceTime-style VoIP calling or inexpensive data plans through an Apple MVNO service that would drive additional users to its platform. Or Samsung could get tripped up--like LG, Motorola and others have been--thereby leaving the door open for Apple to reach the No. 1 handset vendor position.

Most likely, all of these factors and more would have to conspire to push Apple past Samsung.

To be clear, Apple already commands the most envious position in the world's handset market: It is the globe's most profitable handset maker, smartphone or no. Apple's quarterly profits exceed those of all other cell phone companies. Despite that, Apple isn't the largest maker of cell phones. But with Nokia on the down slope, the path to that No. 1 position is only blocked by one company.

"It's increasingly looking like it's going to be a Samsung-Apple battle," Morgan said. +Mike Dano