Profit share is a stupid metric, and you should feel bad for using it.

A quarterly ritual of the past year or two has been the articles calling people’s attention again and again to the fact that Apple and Samsung have about 70% and about 31%, respectively, of the “profit share” of the smartphone market.  That is, if you count up not the gross sales, but only the profit of the smartphone sales, then it’s something like Apple has 70% of it, Samsung has about 31% of it, and a variety of other manufacturers run basically break even or a minor loss.

Is it possible that profit share is an enormously valuable analytic tool for understanding a market, and before people felt the need to make Apple look better than it is, we were all missing out?

No.  It’s not possible.  Profit share is a ridiculous metric.

Now, profit is of course an important part of a business.  The fact that Apple is immensely profitable is a huge asset to its business.

Market Share is also an important part of a business.

But profit share is by no means the great taste of profit with the less filling of market share.  What profit share says is that if Research in Motion just stopped operations and left the market, because they run a loss, Apple and Samsung would be worse off than they are now (that is, their profit shares would fall).  Why?  In what way is that a real thing?  How is the existence of people who want to buy Blackberries an asset to Apple and Samsung?

If Microsoft or Google decide to seize a bunch of market share — and succeed in doing so — by selling a ton of phones at a huge loss, the logic of profit share says that this is a good thing for Apple and Samsung.

If one of Apple’s or Samsung’s competitors has an unconventional business model that involves a loss-leader handset and then are ridiculously profitable in secondary sales (the Kindle model, but applied to phone), profit share would have it that Apple and Samsung are making out by bandits.

Profit share is a stupid, made-up statistic that has no explanatory power in the market.  Apple has high profit margins, and this is important.  Samsung has high unit sales, and this is also important.  The fact that their competitors are seizing market share at the cost of profit has precisely no benefit to Apple or Samsung.

Disclosure:  I own Apple stock.


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