In an earlier post,i had posted about how the wealth distribution in the smartphone markets is increasingly getting skewed towards Apple with its iPhone.Apple Takes 48% of the Earnings from Smartphone sales globally with only a 3% market share of the smartphones. That compares starkly against Nokia which has 40%+ smartphone share and only 22% of its earnings share.
This post examines the reason why Apple is able to command that kind of margin from the carriers and mass emotional appeal from its consumers, which thus make it one of the most profitable companies.
1. Connecting with the consumer in terms of Tangible emotional experience (Thru Hardware)
An Apple iPhone has a BoM (Bill of Materials cost, production cost) of less than $200. However, it sells at $645 to customers (Carriers) who subsidize it. Very clearly, Apple is able to dip into the service revenues generated by the carriers from higher data usage. By front ending the realization upfront with a $645 price tag (which is 3X the production cost), Apple is able to cover its costs and future risks.
To make this happen, Apple surely has the best hardware which compels people to move to a higher ARPU and do so enthusiastically. (Call that Branding at an emotional level, something Apple does best). There are very few and far between instances when the proposition has been strong enough for consumers to move to higher price points.There are several devices which have data capabilities and yet they are not competing with iPhone on the subliminal emotional levels. That possibly is Apple’s biggest connect with the consumer “want”.
2. Apple earns both ways
Why is Apple more profitable than Microsoft or HP? Why does Apple command one of the highest Market Caps globally?2. The main reason Apple is more profitable than their competitors is Apple makes highly-profitable software and services, not just low-profit hardware. Apple is more profitable than HP and Microsoft because … Apple takes both the HP part of the profit on a PC/Device/Hardware and the Microsoft part of the profit on a PC on the software/OS/Browser, and in some cases, the retail part of the profit. The iOS, iTunes and the Safari browser make up for great experience on the device through stunning software. The mastery over Software precedes Apple’s competence with great devices. Remember it was Apple who made the first Mac OS before Microsoft took it mass.Apple is close on the 250,000 milestone in terms of numbers of apps in its Apps store.
The user walks in with a problem, and Apple provides a solution made up of a combination of hardware, software, online services, support services, training, accessories, and even culture. Apple users pay for that entire package. Apple has its own SOC (system on a chip), battery technology, unibody construction, etc. which give it an edge in portability, battery life and speed.