How does Apple produce some of the devices in a device category but make most of the profits?
This is an excellent question.
I will (hopefully correctly) extrapolate this query to:
“How is it possible for Apple to accrue ~92% of the profit dollars available in the smart-phone market segment while only penetrating ~15% of the share in that market.”
There is a stark contrast between the business models of the top 5 Mobile Operating System creators in the context of the smart-phone . Within this small group of companies we see alliance, convergence, duplicity, defection and even abandonment. But first, lets look at how the different hardware platforms impact the pot of money, created by consumer expenditure, on smartphones.
**The formula for $**
Apple does many things. It hasn’t always been that way, but as the market landscape changes…in the context of players, operators, influencers and technology…Apple has to take on more and more responsibility to ensure their #1 publicly stated metric remains high.
That metric is CustomerSat. It isn’t just a metric and statistic…it is a culture.
In this culture, Apple has cultivated a customer/user base of consumers.
- Nothing is free.
- Nothing goes on sale.
There are promotions and there are tiered levels of services where the entry-level demonstrates the benefits, but Apple doesn’t give anything away for free. This culture of consumers buy on value, experience and emotion. These are all perceptive ideals and are not easy for a consumer device OEM to control, but as long as that OEM has a line on the CustomerSat level and a good grasp on the reality of that line, small shifts in the angle of the rudder can ensure that they keep going in the right direction.
There are many variables that impact CustomerSat on Apple products and many have still not been enveloped into the EcoSystem. But it is this focus: Customer Satisfaction, that keeps the profits high. I’ll show you some of the things that Apple does to maintain a high profitability, but the focus will always be on that single culture based metric of CustomerSat.
Some of these things won’t be directly apparent at first…but connect some dots and the genius behind the program becomes very clear.
- Silicon Logic Strategy
- Supply Chain Prowess
- Commitment to Direction
* Managing Brand Encumbrance
- Integration Granularity
- Engineering and Design
- User Experience Superiority
- Understanding their Customer
- The is Different factor
These are factors that impact the profit margin of OEM’s that design, engineer manufacture and sell consumer devices. Some of these factors do not affect other OEM’s that Apple has to compete with directly but are considered competition…Google for example.
Supply chain management and logistics, augmented revenue streams from a growing entertainment binary distribution of media, Apples strategy on memory…not only in the procurement but also the design-in strategy in all of their devices.
This is how a war footing is established. Control on the trend on industrial design and the build materials. When Apple procures, they do it in volumes that allow them to dictate the price they are going to pay, or they will simply procure exclusively from another source…even an existing entity who might be competitor at the assembly level, but also fabs silicon logic components
The aim-small miss small concept can be applied here because Apple manages costs and projects profits beginning at the component level of the device…not at the device level in itself.
Component cost on the bill-of-materials is never an indicator on what the cost of that device really is. Many analysts attempt to project per-device profit by using the piece-part component cost on a BOM, tally that up for every line item and smile as they get their profit-per-device metric completely WRONG.
Apple doesn’t pay anywhere near close to what the BOM price is because they don’t procure at the piece-part level.
When they wanted sapphire, Apple bought the sapphire company, a building and then funded the operation to be the largest sapphire grower on the planet. While it may not have gone as planned, it shows that Apple never half-asses anything.
When they want memory, they weave it into as much of their engineering designs as possible and then buy all of the stock that everyone has to the point they are the worlds largest Flash-ram chip distributor. The profitability is already huge before they place the chip on the board. By the time the assembly hits the shelves, the devices are priced in tiered segments that are discriminated by the amount of memory that is soldered on to the logic board.
When they need logistics transport for holiday and product release shipping they buy airline exclusivity months in advance. No one gets billed for out-of-stock items. Apple doesn’t get paid till your order ships.
And most of all, they do it because their customer likes it, expects it and almost demands it because they are so used to it.
And Apple is happy to oblige their well-heeled customers who buy their hardware platforms. The iPhone, the iPad and the iPod Touch. These platforms are the delivery method for which Apple deploys its services and entertainment products. Applications, music and video binaries, warranty and repair services like AppleCare+. Not only to the consumer business segment, but to Enterprise customers as well.
This is why Apple will usually bend over backwards to get a replacement back to the user at the AppleStore when the a possible refurbished replacement situation is devoid of abuse or neglect. iDevices that are broken don’t sell apps games and music.
Market share vs. Profit
Canaccord Genuity, a capital market wealth management and brokerage company, completed an analysis on smart-phone OEM (Original Equipment Manufacturer or ‘The guys who make things’) market share captured and discriminated that metric against how much profit the OEM’s captured. More simply put:
For every 100 smartphones sold globally, how many were made by manufacturer ‘X’
For every 100 pennies of smart-phone profit available, how many were earned by manufacturer ‘X’
According to Canaccord research, Apples global Marketshare in the smartphone-space is:
I take that to mean that out of every 100 smartphones sold across the planet, almost 15 of those are iPhones. That ain’t too shabby considering Apple only sells 1 phone, albeit in a couple-three/four flavors. And if you take into account that there are ~1,000 smart-phone brands…some would say they are looking pretty good.
There are a few of the factors that drive the smart-phone market share metric:
* Business model
* Strategic objectives
A comprehensive analysis is much more granular, but for the sake of simplicity I’ll focus on these and discuss the impact in the second segment.
According to their analysts, Canaccord placed Apples capture of smart-phone
Operating Income (profits) at:
Operating income is a measure of profitability, usually tallied by subtracting expenses from revenue before interest and taxes have been incorporated into the earnings equation.
For the sake of simplicity, I take this as: For every 100 pennies of profit available in the smartphone-space, 92 of those pennies went to Apple.
So, Apples 15/100 phones sold, grabbed 92/100 cents earned.
From this, we can extrapolate that the remaining 8 pennies are to be split between the following competing hardware OEM’s:
* Lenovo (Motorola)
* Pan tech
* One plus
* And the other ~987 or so device builders
If I haven’t lost your interest, you might be thinking this is all about scoreboard. Well, it’s not. There is an impact to you as a smart-phone user/consumer, in the areas of:
Investment: How much your next smart-phone is going to cost.
Support: How long your handset will continue to be viable in getting software updates.
Life-cycle: How often you will need to buy a new phone if you prefer exclusivity to the brand you currently have.
Security: How focused is and at what priority does your OEM place on your security while operating a smartphone on the public IP (The Internets)
Privacy: Depending on the business model, companies that provide data services, web services and devices will compromise your privacy (AT&T, Google, Lenovo) so they can make a profit.
Apple is unique, as it is the only company that exclusively deploys its own Operating System (iOS) on its own smartphone hardware platform (iPhone)
Samsung deploys Googles Android on some of its smartphones, but also has its own Operating Systems (Tizen) that it deploys on other hardware models and it’s wearable line, and (BADA) which is all but dead.
Microsoft, with its acquisition of Nokia, deploys Windows Mobile on its own hardware, but also licenses its operating system to other hardware platforms like LG, Xiaomi etc.
Blackberry has shifted from the exclusivity of deploying its own operating system, BB10, on its own hardware platforms…to deploying Google Android on platforms like Priv and upcoming Vienna.
Like Google Android, there are other mobile operating systems without dedicated hardware platforms trying to gain some smart-phone traction. These include:
* Firefox OS (Mozilla)
* Sailfish (Jolla)
* Ubuntu Touch
Then there are OEM’s who build custom firmware (ROM) packages for specific hardware platforms based on the Android mobile operating system which Google acquired from Andy Rubens Android INC. These include:
* MIUI (Xiaomi)
* Cyanogenmod (Cyanogen)
The data in this overview is far from all-inclusive, but should give you an idea of the current state of the market and identifies the influencers in the mobile landscape as it pertains to smartphones.