Take a bite of Apple

From a standing start in 2007, the company now has 19 per cent of the smartphone market, replicating its dominance of the mobile music market built up since it launched iPods a decade ago - 275 million iPods have now been sold, and 10 billion songs downloaded from its iTunes service. The excitement about a new version of the world's most coveted smartphone is expected to translate into an 18 per cent increase in its handset shipments in 2012, a hefty jump considering Apple is on course to virtually double sales to 75m units in 2011.

And, with the iPad launched in 2010, Apple has proved many doubters wrong by finally cracking the market for tablet computers. Around 30m iPads have been sold since launch and, such has been their popularity, they have put a serious dent in sales of conventional notebook computers. Competitors have rushed out rival machines. Even so, iPad still has 80 per cent share of the tablet market.

Apple's ups and downs since it was founded in the 1970s are well-known and it's fair to say that its periods of greatest success have come when co-founder Steve Jobs was at the helm. The shares in the company dropped 5 per cent earlier this year on news that, after years of ill-health, he was to step down from his role as chief executive*.

We think those concerns have been overplayed. Mr Jobs remains chairman, a clear succession plan is in place and Apple's technological might, its marketing brilliance, and its die-hard fanbase will allow it to fend off competitors and maintain the prices that currently generate operating profit margins of over 33 per cent.

Of course, competitive threats shouldn't be written off. Amazon has launched its own tablet, the Kindle Fire, which will be sold at half the price of the iPad and is likely to appeal to many consumers. Then there is the uncompromising way Apple deals with its customers and partners, and the zealous litigiousness with which it defends its market position.

Google, for one, is fighting back, recently purchasing Motorola Mobility and its 25,000 strong patent portfolio to defend its Android system against an unrelenting legal barrage from Apple. Android is by far the most serious competitive threat to the iPhone and its iOS operating system, and its low costs means it's the default choice of manufacturers looking to compete with Apple's products - collectively, Android phones have an approximate 40 per cent share of the market.

But, while many people buy Android-based devices, research by Nielsen suggests it's the iPhone they covet - another recent survey shows that in the UK, two in five mobile users plan to buy the new iPhone, which would suggest that its share is set to climb higher still. Network operators are falling over themselves to carry the phone, too, because Apple users not only spend more on data downloads, but they don't expect the phones to be subsidised either. iPhone gained 42 operators in the latest quarter alone, driving a 142 per cent increase in its sales to a record 20.3m.

Such market dominance has translated into a huge cash pile and earnings growth averaging 60 per cent a year since 2006. That's likely to continue because, despite their growing popularity, smart devices have a small proportion of the market for mobile phones. So they should continue gaining share over the next decade, particularly in markets like China where Apple, in the words of new chief executive Tim Cook, is "just scratching the surface". It has just one operator deal in the country, with China Unicom, which has 180m subscribers versus China Mobile's 600m.

* This article was sent for print publication before the news of Steve Jobs' passing, which was announced overnight Wednesday, 5 October 2011. However, that development does not alter our investment case. You can read a separate post about Mr Jobs and his achievements here.