Apple published disappointing results for first half of 2012.  Later this year, the company is scheduled to launch the iPhone, possibly as early as next week.  Foreign media outlets were excited to report that some Chinese retailers are already pre-selling Apple’s new smartphone, and we’re sure the product will be popular in China. Meanwhile, broader trends suggest that Apple might continue to lose market share here, for general and particular reasons. Here’s our take. 

Stories about Chinese consumers jousting outside Apple’s Beijing store or Chinese merchants’s iPhone pre-sales are popular among foreign journalists. Still, Apple’s share of China’s smartphone market is considerably lower than in the US, and is likely to decline further over the coming years. This does not mean Apple’s China sales will not grow, but that the iOS ecosystem will be marginalized and become less attractive to developers and partners (such as media companies). In the first quarter of 2012, Apple held under 17% of the local smartphone market, well behind Android’s 67.4% and slightly ahead of “other” operating systems with 15.9%. “Other” mostly means Windows and Nokia’s Symbian, which have since been united under a new alliance. Over the past few months, the iPhone’s market share likely declined further, following the introduction of popular Android devices and the launch of Nokia’s Lumia line.

We are sure the iPhone 5 will be an impressive device. However, it is likely to reach China well after it is launched in other major markets. Meanwhile, cutting edge devices such as Samsung Galaxy S3, HTC One X, and local high end models have been around for months. The new iPhone is not likely to offer markedly better features than what is already available here, apart from possibly 4G/LTE capabilities that are not currently relevant in China. This will not matter much to the company’s hardcore fans, but it will affect buyers who are willing to consider alternative devices. And this is before we consider the fact that a range of excellent smartphones are available in China, often at half or less than the iPhone’s price. Again, it does not mean iPhone sales will not grow, but that they will grow at significantly lower rates than the overall smartphone market here. This, in turn, will leave iSO farther behind Android and possibly behind Nokia-Microsoft as well.

And now for Apple’s exiting users. The iPhone is a great device, but it is only a foot-soldier in Apple’s broader campaign to create an e-Co-system that encompasses digital media sales, location-based services and commerce, and sales of other digital devices. In the US, Apple users are hooked on iTunes, with more and more of their digital media and apps purchased through Apple and stored on the company’s cloud. This not only contributes to Apple’s profitability, but it makes it difficult for the company’s existing customers to switch to a competing ecosystem. In China, however, the vast majority of Apple users do not buy any digital media through iTunes, and apps are generally downloaded for free through alternative (and semi-legal) app stores. In addition, China’s most popular apps and content services – Wechat, Youku, QQ Music – work across all operating systems, even on Symbian. We suspect such apps and services are key drivers of smartphone buying decisions.

If iPhones continue to sell at a premium and sales continue to grow – perhaps market share should be less of a concern. But consider this: Not too long ago, a company called RIM dominated the smartphone market with a product called Blackberry. The product enjoyed a cult following with many clients locked-in through enterprise services. Sales continued to grow, only not as quickly as overall smartphone market. One day, RIM woke up and found it is no longer relevant, mostly since all the best apps were only available for users of other ecosystems. Apple is not RIM and we don’t think developers will stop launching iOS apps anytime soon – iPhone users are early adopters and even as a small minority, they will remain important. But Apple has been popular with early adopters for two decades. The question is whether all the mere mortals who joined the company’s fan club over the past few years will remain on board for long, and whether that club can keep growing at rates commensurate with the overall smartphone market. Our bet is that they won’t and that it can’t. In China, the process might be expedited by the fact that the smartphone market is growing faster and that Apple’s strategic defenses are considerably lower.

…still, only a fool would bet against “God”, but Steve Jobs is dead, and we suspect he is never coming back.