Print 54 comment(s) - last by Globemaster.. on Oct 3 at 11:04 PM

  (Source: Art of the iPhone)
Cupertino electronics maker is profiting off its loyal customers open wallets

Research by fund market analysts Canaccord Genuity gave Apple, Inc. stock (AAPL) a "buy" rating and a price target of $356 per share.  What's more interesting, though is the details behind the recommendation.

The Cupertino, California-based electronics maker has an impressive profit margin compared to its competitors.  While this was a pretty commonly known fact, the analysts offer some intriguing numbers that reveal just how amazing Apple's profit margin is.

Apple in the first half of 2010 sold 17 million mobile handsets.  Samsung, LG, and Nokia sold 400 million handsets (this figure includes all phones, not just smartphones).  And other manufacturers sold 190 million handsets.  That means Apple produced roughly 2.8 percent of the mobile units sold in the first half of the year.

However, it made 39 percent of the mobile handset industry's total profit, while Samsung, Nokia, and LG posted a 32 percent cut of the total profit, and the remaining companies made a 29 percent cut.

Producing only roughly 3 percent of your industry's products, but making close to 40 percent of your industry's profit is virtually unheard of in any business.  But that's precisely what Apple is doing with the iPhone.

So why is the iPhone so profitable?  The answer is complex.  To start, because many customers are so enamored with the phone, AT&T has reportedly given Apple an extremely lucrative contract to grow its subscribers numbers.  Thus Apple makes much more pure profit per phone.

Apple also tends to feature slightly inferior hardware to its top-of-the line Android competitors.  For example, it tends to have a smaller screen, lacks a microSD expansion slot, etc.  And Apple is extremely aggressive in negotiating its manufacturing prices, pushing companies like Foxconn to deliver higher volumes at lower prices.

At the end of the day, Apple may make as much as $400 USD in profit -- or more -- off each iPhone.  By contrast Android smartphones tend to have much smaller margins.

What that means is that Apple should have plenty of cash on hand to invest in growing its business and improving its hardware to bring the fight to Android.  On the flip side, Google has a similarly lucrative market -- internet advertising – in which it remains virtually unchallenged.  Thus Google, too has a vast cash flow and the resources to make the fight in the smartphone operating system market a fierce one for the foreseeable future.

Of course, if these numbers are true, what they also mean is that Apple doesn't really 
need to win the smartphone war.  It merely needs to hang onto its current market share and keep raking in cash from its loyal customers.

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The saying is...
By Motoman on 9/24/2010 9:52:26 AM , Rating: 4
..."a fool and his money are soon parted."

Might need to embellish that a bit to describe the horrendous markup the fool pays while parting from his money.

RE: The saying is...
By guacamojo on 9/24/10, Rating: -1
RE: The saying is...
By tng on 9/24/2010 12:13:24 PM , Rating: 2
Well yes he is calling them fools in a larger sense.

How would you describe someone who buys of phone that is tied to a network that is of lower quality than others for a price that is much higher than comparable phone that have better hardware?

There is only on word to describe this, Fashion.

The iphone is a new fashion, much like that watch or the designer clothes.

RE: The saying is...
By guacamojo on 9/24/2010 1:38:44 PM , Rating: 2
The iphone is a new fashion, much like that watch or the designer clothes.

Well said. I'd guess that fashion plays a major role in Apple's profit margin.

It might be reasonable to guess that the typical iPhone customer is probably more fashion-conscious (and hence more willing to pay a premium for fashion) than those who think it foolish to pay a premium for a technically-inferior phone.

These customers see a value there, beyond the speed rating of the processor or the resolution of the camera. Maybe they like the UI. Maybe they like the sales and support experience. Or maybe, like many have said, because it has an Apple on it.

I still think that it's arrogant to label someone a fool for placing a value on fashion.

An aside: maybe I should have said "dang" arrogant in my previous posting to avoid the -1? Or are people really convinced that fashion-consciousness = foolishness?
How would you describe someone who buys of phone that is tied to a network that is of lower quality than others for a price that is much higher than comparable phone that have better hardware?

IIRC, AT&T is the second-largest carrier in the U.S. I'm a Verizon customer myself, but I'd hardly say that being exclusive to AT&T is that much of a detriment. How many people voluntarily get T-Mobile or Sprint phones?

As far as hardware goes, most people probably don't care about the processor speed or camera resolution of their phone. It it sluggish? Does it take lousy pictures? If not, then it's not a detriment.

Since you asked me, I wouldn't describe these people as anything other than iPhone owners. The few I know have different reasons for buying, and none of them are particularly foolish. Style was a factor for some, but not all of them.

RE: The saying is...
By Globemaster on 9/26/2010 9:53:31 AM , Rating: 2
May be true for some, but not for me. I bought the first MP3 player sold at retail in the US, then I bought the Creative Jukebox back in like 2000? and stayed with Creative, just because I hated Apple's business model and the DRM.

Over the years, however, I got busier at work to the point where I was up to 13 hour days last year and with 2 kids now, didn't have time to manage all the complexity. The Creative stuff didn't "just work" and I was using it with Napster which only gave 30 day licenses on the music. So, when I traveled overseas to remote places with no internet, my music would stop playing on an arbitrary day of the month.

Anyway, I finally decided to try a Nano with the Nike+ for running in Dec 09. It was so unbelievably easy to use. Now, without the DRM, I have far less issues with iTunes anyway, but I still buy from Amazon most of the time (although I have to admit I like .aac better than .mp3). Anyway, in 10 months, we now have a nano, touch, 3gs, 4, ipad and Macbook. Granted, I put 8 Gb RAM in myself and use a VM for Windows 7 so I can play my lower graphic Steam windows only games, but it's really pretty sweet. Everything works, everything syncs and I've used the iphones 1000x more already this year for smartphone tasks than I did with 10 years of Symbian and Windows phones. Also, when I travel on short trips, it's much easier to put my macbook in my laptop than my 11 pound Sager with its Q9650, 3x HDDs and 2 pound power supply, although my Sager is obviously my choice for gaming.

Now, I'm not completely to the dark side - I just built a Windows 7 desktop with AMD 3xCore from Newegg parts last weekend for my mother in-law, so the technophobe argument doesn't work on me. I also tri-boot XP-32, 7-64 and Ubuntu on my Sager. I just have discovered that if you use a hammer for everything, everything gets nailed and if you use a screwdriver, everything gets screwed. So, I use the appropriate tool for the task and happily switch back and forth between products and companies.

RE: The saying is...
By robinthakur on 9/27/2010 10:11:41 AM , Rating: 2
Clearly nobody has replied because you don't fit into their preferred smug/stupid stereotype of people who buy Apple. I am similar to you, although I bought the second iteration of the iPod onwards. I would only change from iPod/iPhone etc if they started becoming difficult to use, breaking constantly or the support was terrible, but honestly, neither has happened in my direct personal experience.

I still use Windows 7 at home, and build my own pc hardware, but for things like a phone or MP3 player, you do just want it to work consistenly. In fact, I would say that if Apple users do encounter issues they tend to scream about it more because they just aren't as used to coming across them as their pc brethren and they are less likely to fault find because they view the device as an appliance, not as a technical plaything. I like Apple for their industrial design and the way they approach each software feature, not first from a technical perspective but from a usability one. Most of the comments on here reflect the fact that this is a technical news site full of technically savvy users and are not representative of the general population. If it were everybody would be buying Zune HD's and Archos tablets...

It reminds me of when I built my Windows home media centre pc. It was technically brilliant when it worked, but due to issues with it waking up but not waking the screen (and numerous other problems) nobody apart from me in the household could work out how to use it consistently and it was swiftly disposed of for a less technically capable solution which delivered a better overall experience.

RE: The saying is...
By Globemaster on 10/3/2010 11:04:48 PM , Rating: 2
Exactly. I don't like Apple's closed ecosystem, but it's better than it used to be and it just works. I'd rather use an open source, but it never seems to work easily. Maybe they'll get there with Android, we'll have to wait and see...

"Mac OS X is like living in a farmhouse in the country with no locks, and Windows is living in a house with bars on the windows in the bad part of town." -- Charlie Miller

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