
IPhone: 4% of market, 50% of profit - kirpekar
http://tech.fortune.cnn.com/2010/10/30/iphone-4-of-market-50-of-profit/?hpt=T2
======
mjfern
Apple's profitability with its iPhone business is partly a function of its
vertical integration and its industry power. Consider that Apple controls the
key inputs for the iPhone (e.g., the A4 system on a chip and iOS), owns
important distribution channels (e.g., the Apple Stores), and exercises
substantial power over complements (e.g., AT&T and apps via the App Store). In
short, Apple creates substantial customer value with the iPhone, and due to
its vertical integration and industry power is able to appropriate much of the
value that is created (in the form of profits).

A second key reason for its profitability is Apple's low cost structure. With
economies of scale and scope (consider that many components are shared across
the iPod, iPhone, iPad, etc), learning curve advantages, relationships with
key suppliers (Samsung) and contractors (Foxconn), and so on, Apple is able to
drive down the unit costs of the iPhone and thus drive up its margins.

~~~
sbaqai
I think this is a great example of Apple's "design strategy" being completely
end-to-end.

They don't just focus on the tiniest details of industrial design; the
aluminum chassis, the battery layout, the screws, friction coefficients on the
trackpad, etc.. they have also designed their entire supply chain with the
same attention to detail.

There was a post on HN a while ago about Apple's patent on a new headphone
jack design - they redesigned what is pretty much a commoditized component
(and never seen by the customer), to unlock more value in the form of greater
maneuverability and internal space. I imagine the supply chain is also very
commoditized, and Apple is the kind of company to take that process apart and
refine it in the same way, to unlock value in the form of greater margins.

EDIT: Another area where their attention to detail is apparent is their
manufacturing tolerances. They've pretty much perfected the art of physically
manufacturing precision components. I've not been able to find another
product, luxury or otherwise, that comes close to the fit and finish of
Apple's devices - and thats including things like rolexes, ferraris, etc.

~~~
lotusleaf1987
To add another example of Apple's details of industrial design, Apple makes
two keyboards from the space they stamp out for the iMac's screen. Apple is
very efficient.

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flgb
People focus on Steve Jobs and Apple's design and marketing prowess. However,
Tim Cook and Apple's supply chain management and operating excellence is just
as important a part of their success.

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Herring
I am shocked the copy-everything-apple-does-a-year-late-and-compete-on-price
business model isn't very profitable.

~~~
tjogin
I think it's because those who try to do that don't realize the full spectrum
of things that Apple does right, seeing only the most superficial fraction of
it.

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brudgers
I see the graphics. I see the app store affiliate links. I do not see the
source for the data upon which the graphics are based listed.

~~~
charlief
It is underneath the charts: "Source: Asymco"

[http://www.asymco.com/2010/09/21/can-android-change-the-
prof...](http://www.asymco.com/2010/09/21/can-android-change-the-profit-share-
of-phone-vendors/)

~~~
brudgers
Asymco prepared the graphic, they did not collect the original data upon which
it is based.

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wouterinho
Does this include Apple's revenue share deals with the operators or is it just
phone sales?

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guynamedloren
This dead-simple analysis just goes to show you that market share is not
nearly as important as so many make it out to be.

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JofArnold
This is my biggest question (and I'd love thoughts from HN people on it); if
Android is mostly seen on handsets with very small margins that compete on
price with almost identical features... who's paying for the R&D to keep up
with Apple's innovations?

That question assumes that innovation is important in the smartphone sector.
That may not be the case I guess.

I'm just trying to understand the end situation as best I can as like a number
of startups our future heavily depends on smartphones.

~~~
ergo98
Apple is responsible for shockingly little of the innovation in the smartphone
field.

They didn't create their processor (though they managed to brand it and fool a
lot of people for a while). They didn't create the GPU.

They didn't create the "Retina display" or their memory or their touchscreen
sensor.

They are a software company that other companies -- like LG and Samsung --
supply with hardware.

The electronics market has traditionally been a very low margin industry
(which is good for consumers). Apple has managed a pretty remarkable game of
finding a very profitable niche and exploiting it as it exploded, with them in
a leadership position, however it is not sustainable, which Apple realizes.

And it is simply _perverse_ seeing people actually bragging on behalf of Apple
about the fact that they are rolling in cash.

~~~
Hoff
Then why not connect all those thoughts together? If it was so easy and if the
hardware was so widely available and if the stuff here is a commodity and if
user interface design and fit and finish was so easy, then why is Apple the
bunch that is rolling in cash, and not looking like roadkill?

From what I've encountered with many of the low-margin commodity products,
various manufacturers reach the "it works and meets our minimal specs, ship
it" stage, and we get lids and covers and doors and other pieces that don't
fit or quickly break and fall off, software and firmware incompatibility or
crashes, fuzzy displays, sloppy switch mechanisms, user interfaces that are
somewhere between truly bizarre and purely inscrutable, and related, well,
dreck.

And for the consumers, a low-margin business means plug-compatible race-to-
the-bottom no-name interchangeable and irrelevant product vendors, too.

Sure. There's a market for dreck. But as you've noticed, it doesn't pay well.

~~~
ergo98
>Then why not connect all those thoughts together? If it was so easy

Who are you responding to? I didn't say it was "easy". I further said that
Apple is a software company, not a hardware company. They do software well.

Their hardware superiority is 90% myth, 10% reality. There were excellent
Windows Mobile devices with high resolution displays, better processors, more
RAM, and on and on, long before Apple brought that "innovation".

You could directly attribute the fact that Apple _isn't_ responsible for most
of that hardware R&D for their high profit margins. They know to buy the
cutting edge from the rest of the industry, put some software on it, and
they've got a product.

Apple puts some great software on it and made a well integrated device. Their
only innovation is in software. In hardware they're not much more than a VAR.

>From what I've encountered with many of the low-margin commodity products

I like the addition of the editorialized "commodity" there.

However your core point is utter nonsense. Almost every bit of extremely high
quality electronics hardware you can buy in the industry, from ultra-high end
LED televisions to audio equipment to high performance routers to digital
cameras, came from a company making _very_ low margins, yet managing to yield
a very respectable billion or so in profit.

Apple has a short time where they essentially could go to the bank on the
backs of a cult-like following. That isn't a scalable business model, which is
exactly why Apple is warning about reduced margins going forward.

~~~
snom370
Sure, they buy a lot of components off the shelf. But they are extremely
involved in the design and manufacturing process of their products, and often
work with the manufacturers to push the manufacturing technology forward to
meet their design goals (machine milling is nothing new, but machine milling a
$999 laptop requires quite a bit of innovation).

Unlike many other companies, Apple _doesn't_ just take various technologies
and piece them together to make a product. And they do a lot of core
technologies in-house, which is why they've bought companies like FingerWorks
and PA Sami.

The interview with Jony Ive in the Objectified movie
(<http://www.youtube.com/watch?v=t0fe800C2CU>) shows some of the thought
process that is involved in Apples hardware design process.

By your logic, other PC/mobile manufacturers should have similar profit
margins to Apple, but they don't. Now, the usual answer is that Apple has a
"cult-like following" that will pay a higher price for "more or less the same
hardware in a different box".

A better explanation, given that the "cult following" has only increased the
last few years, is that Apple manages to make more appealing products by being
extremely involved in _both_ hardware and software, leaving other companies to
compete by sticking together commodity components. Apple did not say that they
expected decreased profit margins because they would have to slash their
prices, what they did warn was that their forthcoming products would have
higher hardware costs. But of course, time will show.

~~~
ergo98
"By your logic, other PC/mobile manufacturers should have similar profit
margins to Apple, but they don't. "

How you could you possibly extrapolate that, attributing it to me?

I propose no such thing. Electronics is a low margin arena, and this is great
for consumers. High margin companies like Monster cater, arguably, to suckers.

So when someone makes a lot of margin in electronics they're usually serving
the sucker market, or they're offering something other than electronics. Apple
puts good software on otherwise vanilla hardware, and that's what their
differentiation is. It's how they get their margin.

There's a cert cult essence to Apple that makes it impossible to discuss their
products. The number of faults in their devices is legendary, and there is
that telling moment of truth: When a new anointed device comes out, suddenly
there's a mass realization that the last device really was kind of shoddy (see
the 3GS when the 4 came out).

There just isn't anything special about them. There really isn't. Motorola has
made any number of brilliantly engineered products...but it's just Motorola so
who cares, right?

~~~
snom370
You wrote:

"You could directly attribute the fact that Apple isn't responsible for most
of that hardware R&D for their high profit margins. They know to buy the
cutting edge from the rest of the industry, put some software on it, and
they've got a product."

I read this to mean that Apples high margins were primarily due to their
offloading their hardware business to others. And I only pointed out that this
is only _partly_ responsible for Apples high margins. But I see that I've read
you incorrectly.

I never heard anyone say that the 3GS was shoddy when the iPhone 4 came out.
Even before the iPhone 4 was released, everyone agreed that the screen
resolution, camera etc. was a generation or two behind, and most reviewers had
started recommending other phones with more features.

Like I said, some people "get" or appreciate Apples product design, and some
don't. The fact that you're say that there's nothing special about their
products shows that you don't. There's nothing wrong with that, just as
there's nothing wrong with me not wearing designer clothing and being unable
to tell the difference betewen a generic and a designer suit.

But as you say, it makes it impossible to discuss their products. Which is why
this discussion is pointless :)

If Apples advantage was something very measurable, for instance if all their
laptops had 20GHz processors and 256GB RAM, it would be obvious to everyone,
including their competitors, why they were able to make so much money with
such a small market share.

But it's difficult to quantify what "good product design" is. I can give
countless examples of small details that Apples designers have thought about
that other laptop makers haven't, but this is simply irrelevant to people who
don't appreciate that. Similarly, a BMW owner could point to lots of small
features and details that they like about their car, but others simply see an
overpriced car with high maintenance costs.

Still, unlike Monster cables, you can point to many features or details that
you simply don't get with other cars that still do the job of transporting
people. The question is simply whether someone is willing (and able) to pay
for the added design, features, and comfort.

I think that Apples success shows that there are enough people who _do_ care
about it, and I think that's a big reason for their high profit margins.

Finally, I think you'll see that Motorola has won a lot of praise and
attention for some of their better designed products, even though Apple is the
current media darling.

------
sliverstorm
All this tells me is what I already knew- Apple products are priced with a
very large profit margin included. They are the only ones who've been able to
get away with it.

(I think it's safe to surmise that when one company is making 25x the profit
as other manufacturers per device, it's not because they have figured out how
to manufacture product more efficiently)

~~~
ptomato
And yet, oddly, similar phones (see: android devices) are not priced
significantly less.

~~~
sliverstorm
But do android device makers get the same cut from the carrier as Apple?
Notice an unlocked iPhone 4 is ~$750, and Apple probably gets a little more
out of it when they sell with a contract (otherwise wouldn't they just sell
unlocked phones with no particular carrier association?)

~~~
apl

      otherwise wouldn't they just sell unlocked phones with no particular carrier association?
    

No, not necessarily. Apple will sell more iPhones on one carrier priced at
200$ (+ subsidy) than iPhones that work on all carriers for 750$. So I suspect
that AT&T doesn't even pay close to the actual price difference.

