Falling #2 Samsung is the reason Apple is nearing 90% of all global smartphone profits

According to Strategy Analytics, global smartphone operating profit reached US$21 billion in Q4 2014. The Android operating system captured a record-low 11 percent global smartphone profit share during the quarter. In contrast, Apple iOS took a record-high 89 percent profit share. Apple iOS captured a record-high 89 percent profit share, up from 71 percent in Q4 2013.

Android mobile OS has 81.5% of the smartphone market in 2014, according to IDC. Apple’s iOS has a 14.8% share.

IHS teardown shows the Apple iPhone costs $649 unlocked and cost just $200 to manufacture. The 32GB Samsung Galaxy S5 launched at $650 unlocked and cost $256 to manufacture.

Credit Suisse estimates that after development, marketing, and shipping costs are factored in, the 16GB iPhone 6 costs $350.60 to produce while Apple receives $599 on its retail price of $649, giving it a gross profit margin of 41.5%.

Last quarter, profit at Samsung’s y reported a 64 percent drop in fourth-quarter operating profit for its IT and Mobile Communications division, which includes smartphones. Between the fourth quarters of 2013 and 2014, Samsung’s global market share fell from 30% to 20%.

As much as Xiaomi may talk about Apple, it really has Samsung in its crosshairs. That’s because Apple has two key advantages over Samsung in the fight against Xiaomi: more brand cachet and a differentiated hardware/software ecosystem.

1. Xiaomi didn’t have a big hurdle to convince Samsung users to consider Xiaomi phones.
2. it could significantly under-price Samsung, particularly for high-end devices.
3. Xiaomi phones were compatible with Samsung devices, minimizing switching costs.

To win customers away from Apple, Xiaomi needs to convince them to give up any iOS apps they may have purchased and deal with a potentially clunky process of migrating other data from their old iPhones. It’s not impossible — especially for people who don’t own any other Apple products — but it’s still an uphill battle.

If Xiaomi or another android smartphone maker can achieve dominance as the number one Android smartphone maker, then they would be able to generate profits. Another path to profitability would be establishing another luxury segment. This might involve having separate brands much like Honda has the Acura brand in cars.

SOURCES – Cnet, Strategy Analytics, Creidt Suisse, IHS, Motley Fool