How Does Apple Make Money?

The cliché about business models is you either want to be the lowest cost player or the premium player. If you aren’t one of these then you spend your days getting sand kicked in your  face. You do not make any money.

Apple very much spends its time kicking sand in other people’s face.

However this is not necessarily happening the way you think.

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Image source: rphoto

The bargain

The 32GB iPhone 6S is actually priced to you at close to the same price as it costs them to get it in your pocket.

Let’s talk about the economics of the iPhone as it relates to the 6S. I’m going to use an average selling price (ASP) of $700. This is a combination of the prices on the 6S of $649 for 32GB, $749 for 64GB and $849 for 128GB.

The $700 breaks up as follows: $240 for the components and assembly, $120 other Foxconn costs including equipment, $15 Foxconn profits, $20 in royalties, $105 in Apple operating expenditures (opex), and $40 in reported US corporation tax. This leaves a net income of $160 per iPhone. Crazy huh.

Foxconn is the company Apple uses to manufacture its products. That $240 is the number you see in news articles about the component cost of the iPhone. I’m assuming this, i.e. one third, is why many people think Apple is ripping you off. But immediately that is excluding the cost of the machines used in the manufacture of the iPhone. It’s excluding the need to pay the guys who designed the thing and the advertisements they’ve successfully played on TV to persuade you how amazing it is.

The basic 32GB iPhone costs more than $540 to make. My averages have hidden where Apple make most of the profit.

The profit

When you jump to 64GB or 128GB, essential to store all your apps and music, that is almost pure profit – I mean literally 85 cents on the dollar. Probably three quarters of the $160 of net profit per phone is coming from that storage on the two higher end models.

Designers cost money. Programmers cost money. Equipment costs money. Telling people how great something is costs money. And at the end of it the basic, 32GB iPhone is being sold to you damn near cost.

Apple’s profits are totally separate. They come from a powerful brand and marginally superior product that means consumers are blind to how similar the leading android phones are to the iPhone. This leads to people over paying for storage space!

Bizarrely painful as it sounds the basic iPhone is a bargain.

If you want cheaper than that switch to Android – they’re paying less to engineers, spending less on advertising and making less profits.

So to the numbers. In the fiscal year to September 2015 Apple sold 230m iPhones, 55m iPads, 20m Macs and 5m Watches. Two thirds of its revenues came from iPhones. Most of the profit on these are from the memory upgrades. Apple have the world’s most valuable brand and excellent product status. Because of their scale, they are also cost advantaged in manufacturing phones and negotiating with partners.

Recently there have been concerns about too many phones sitting unsold at retailers. Basically this is where things get interesting. I’ll try update Apple once we get some clarity on how big their problems are.

Image: Robert Photography / Sangudo

Want to know what Facebook is really after? Head here to find out more.


 

I’m working on a piece on Apple Pay…until then maybe I can interest you in American Express and an intro into how the credit card ecosystem works?

Yuen Lo

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