In the past two years, Japan has emerged as Apple’s fastest-growing region, far outpacing its home market and the booming economies of Greater China and the rest of Asia. Japan is also home to Apple’s biggest profit margins, and the only one of Apple’s five regions where operating profit grew in the past fiscal year.
That is surprising because Japan isn’t most companies’ idea of a growth market. It has labored through two decades of economic malaise, and is saddled with a shrinking, aging population. Moreover, domestic firms that pride themselves on consumer electronics have kept foreign competitors at bay for decades.
This is one of the key errors most observers – including, in the past, myself – make when considering Apple’s growth prospects. It’s assumed without question that growth is only available in developing nations, or among those without smartphones.
Conventional iPhone wisdom is that the iPhone has tapped out developed markets and must go low cost
This is the completely wrong frame for understanding the iPhone. It’s not that the iPhone has fully penetrated developed countries, leaving the rest – we’re not talking about a Pampers or Pepsi here, or some other consumer packaged good. Rather, the iPhone is an affordable luxury item; the percentage of the population to which it is affordable just happens to differ market-by-market.
The iPhone targets the high-end in all markets, not just developed markets.
With this framing, it’s obvious that the iPhone would be successful in Japan. Japan remains one of the richest countries in the world, which means a whole bunch of the population falls above the “affordable luxury line.”
It’s not so much that the iPhone has saturated the American-style [which includes Japan] and European-style markets, and ought to focus on the Asian-style one; rather, the iPhone has saturated the high end in all three markets – the high end just varies in accessibility ($200 for American-style, $650 for Asian-style). And, if you accept that the iPhone is in roughly the same competitive position in all three markets – that the difference in market share is due to inherent structure of the market – then it’s not at all obvious Apple should focus on the SE Asia-style market. In fact, it’s obvious they shouldn’t.
While any discussion about the iPhone touches on subsidies, the subsidies themselves – and the degree to which the iPhone is accessible – are much more a function of the underlying economy. Countries to the left are more service-oriented, and have higher purchasing power. There is much higher credit-card penetration, and, generally speaking, greater respect for copyright. All of these factors make the left side of that chart much more attractive to Apple. Apple’s ecosystem and overall value prop is certainly the highest in the United States for all of the factors just listed, and the value-add of their ecosystem roughly tracks the same left-to-right listing of countries in the chart above.
Substitute “Japan” for “United States,” and everything in that sentence holds (except for some limitations on media services, such as iTunes Radio).
The current state of the Japan market also demonstrates the power of the iPhone vis a vis the carriers. While I understand and respect the argument that the iPhone is a boon to carriers in that it drives ARPU, an even greater factor is carrier fear of losing customers. From the WSJ:
As the last major Japanese operator to offer the iPhone, DoCoMo is aggressively discounting new models to lure users from competitors, while offering incentives to entice existing subscribers to switch from other phones.
DoCoMo’s entry into the market has prompted KDDI Corp. and SoftBank Corp., Japan’s second- and third-largest carriers respectively, to counter with iPhone discounts of their own. All three companies now offer the standard iPhone 5S at no upfront cost to consumers.
The carriers see the iPhone as a strategic threat because Apple owns the customer relationship; the carrier is reduced to a utility. Therefore the leading carriers do not carry the iPhone
Customers strongly prefer the iPhone; in fact, they prefer it so much that they switch carriers to get the iPhone (something that is very difficult and rare). Second-and-third place carriers add the iPhone in order to steal customers from the leader
The leading carrier is forced to choose between losing the customer relationship to Apple or losing the customer completely
The fact that iPhone users are fabulously profitable makes this situation (and the associated subsidies) tolerable.
To put it in theoretical terms, the Bargaining Power of Buyers (i.e. wireless consumers) drives iPhone carrier adoption:
The power of buyers in the US market. This applies equally well to NTT DoCoMo. Click the image for the original article.
In this view, instead of carriers hiring the iPhone to attract high use/high revenue wireless buyers, the lack of iPhone repels wireless buyers and drives them to rival carriers, forcing the holdouts to give in to Apple’s demands.
Finally, and most tellingly, Apple is doing with the iPhone in Japan exactly what they said they would do when they introduced the 5S and 5C. After the iPhone presentation I wrote::
This attitude and emphasis on higher-order differentiation – the experience of using an iPhone – dominated the entire keynote and the presentation of features, with particularly emphasis throughout on the interplay between software and hardware…
That assuredness and self-confidence was on full display in this presentation. This was Apple, confidently, and without a glimmer of doubt, declaring that the iPhone is special, that it’s worth paying for, and that people all over the world will do just that.
And so it is in Japan:
“Apple’s brand is just overwhelming here,” said Eiji Mori, a Tokyo-based analyst at BCN Inc. “It’s not about specifications. It’s not about rationale. It’s about owning an iPhone.”
So to recount: understanding the iPhone market, consumer preference, and Apple’s explicit iPhone strategy all suggest that the iPhone would be a huge hit in Japan. I guess the only surprise is that the WSJ is, well, surprised.
