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  (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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RE: ...
By NoSpinHere on 9/28/2010 7:13:03 AM , Rating: 2
DevGru is right on target here guys. A key component of Apple’s continued success as noted in the article, is Apple must hold on to its market share. IPhone users or users of other Apple products (I’ll get to the latter later) get a serious dose of greed and arrogance from Apple. Apple employs “force-buy” tactics with its customers because it is a pioneer in developing new products and technology, and enjoys success at the onset because it is typically the only game in town for years thereafter, depending on the product. The on-target message in the article is - brand loyalty is key for Apple, and this is where Apple is extremely vulnerable evidenced by what’s happening now in the smart phone market. Android phones are currently taking major market share from Apple’s IPhone. Case in Point: I bought one of Google's products and experienced its customer service when using one of its Android smart phones: Six months ago I switched from an IPhone to a T-Mobile Android driven smart phone. On top of its superior Android OS (relative to Apple's IOS), Google advertises through its phone distributors (e.g. T-Mobile) “We don't forget about you”, apparently taking a stab at Apple, and they proved it with me firsthand. When a new version of Android’s OS was unveiled, Google made available an OS update for all existing Android phone users and did not force us to buy a new phone; my smart phone is now even faster than before. Conversely with the IPhone, if you want to take advantage of new technology or upgrades to the IOS, you are forced to buy a new phone. I mentioned other Apple products earlier. Well, I have been an Itunes customer since inception of the IPod Mini (say 8 years ago?) but have no loyalty to Apple or its Itunes music service. Apple’s motto clearly must be "Money first and to hell with customer service". If you import any non-Itunes song, the track skips (by Itunes' design of course), forcing you to ditch the song and buy it from Itunes. Even a simple task like changing a battery in an IPod is not allowed, forcing customers to buy yet another IPod. Some Itunes updates wipe out your playlists; for me, these were developed over years and I can’t tell you the anger I felt. “Back up your playlists” you say? Itunes backup feature forces you to use disks instead of an external hard drive or the likes. Recent industry news stated that Google will soon unveil a new music service to compete with Itunes. I hope to be Google's first customer when it hits the market, and will gladly trash my IPod and delete Itunes from my hard drive. Apple brand loyalty - it doesn’t exist in the market. People are tired of being taken advantage of.


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