“Apple’s introduction of its latest iPhone today perfectly illustrates the company’s route to corporate dominance: generating huge profit by selling high-margin, high-value-added hardware, with the iPhone’s Average Selling Price at a whopping $600,” said Steve Mather, principal analyst, wireless, for iSuppli. “The company makes the majority of its profit on sales of hardware. This approach defies the often-cited route to success used by many technology companies of selling hardware at low margins and cashing in on revenue generated by high-profit software.”
As shown by iSuppli’s Teardown Analysis service, Apple commands hardware gross margins in the range of 50 percent on the iPhone, in comparison to 20 percent to 40 percent for competitive products.
“These high margins are the product of the company’s unique approach to product design and Intellectual Property (IP),” Mather said. “So far, competitors’ responses to the iPhone have been lookalike, brute-force solutions that throw money at expensive features. This yields a higher Bill of Materials (BOM) and generates lower profits—but still doesn’t provide the same quality of user experience as Apple’s products.”
The benefits of Apple’s high-margin hardware strategy recently have manifested themselves in the company’s titanic market capitalization. At a level of $234 billion, Apple’s capitalization exceeded that of Microsoft Corp., making Apple the largest technology company in the world based on this measure. In fact, among all types of companies worldwide, Apple’s market capitalization is second only to oil giant Exxon Mobil.
Meanwhile, Apple now holds a cash reserve of $23 billion, giving the company a massive war chest.
“To put this into perspective, Apple could buy more than half of Nokia or all of Motorola just with its cash reserves—not that we actually expect the company to consider that,” Mather said.
While many companies have developed smart phones to compete with the iPhone based on assembling increasingly expensive subsystems, Apple has taken a unique approach.
“Apple’s path to differentiation involves purchasing building blocks, and then adding its system IP,” Mather said.
For instance, Apple employs a touch controller Integrated Circuit (IC) from Broadcom Corp., but combines it with its own touch system architecture. In another example, Apple’s fingerprints are all over the new A4 processor used in the iPad. However, the A4 started with building blocks made by Samsung Electronics. A third example is that Apple chose to build around Infineon Technologies’ baseband IC, rather than choosing a more encompassing Snapdragon solution from Qualcomm.
Apple’s Lucky Star
“The stars have aligned for Apple,” Mather said. “The company’s hardware and design vision perfectly matches the demand for improving utility of the Internet.”
Mather said the only company capable of directly challenging Apple’s prominence is Google Inc. Nonetheless, with the vast size of the market opportunity in the mobile world, iSuppli expects the two companies to profitably coexist.
“iSuppli expects Apple’s lead to extend,” Mather added. “There are a variety of initiatives under way that convince us Apple will offensively extend the gap relative to its peers, rather than simply defensively extend the time until others catch up.”