How Apple able to turn huge profits from hardware despite the challenges of the industry

How Apple able to turn huge profits from hardware despite the challenges of the industry

As of 2024, Apple made a ranked third in global market value, the company brings in approximately $391 billion in annual earnings. of course, that's before expenses. Once you factor in costs like R&D, employee compensation, materials, and manufacturing, the company nets $93.7 billion, reflecting an impressive 24% profit margin.

Apple Revenue Showing Graph image Credit: Artistic Impression

Where does this massive income originate ?

A big chunk of it and the most straightforward answer comes from hardware sales.

Apple Various Products image Credit: Artistic Impression

Historically, Apple built their entire business on selling consumer products like the Mac, iPod, Apple Watch, and AirPods. By far the most successful has been the iPhone, which accounts for about 51% of Apples's  revenue. Then comes Mac with 8%, iPad with 7%, and a category Apple calls "Wearables , Home, and Accessories including the Apple Watch, AirPods, and HomePod which accounts for 9% revenue.

Apple Revenue Showing Graph Pie image Credit: Artistic Impression

Yet , the major challenge with hardware lies in turning a profit. This is almost every consumer facing company has struggled with. In fact, many products are sold at cost or even at a loss, meaning the company may lose money on every sale they make.

There are some popular examples of this PlaysStation  and Xbox consoles, Amazon Kindle e-readers , and HP printers. These are often sold at low prices sometimes at a loss to undercut the competition and grow the user base.

So if these companies aren't making money on hardware, then what's the point of selling ?

In almost every case, profit is made when customers use the product. What's the point of PlayStation without buying a few games? A kindle is the perfect device for buying Amazon eBooks.

An HP printer can't print anything without $40 worth of the ink cartridges. So by selling hardware as cheap as possible, companies capture customers who are then forces to pay for high margin add-ons up to 70%profit in the case of HP's ink.

HP Company's Cartridge Showing image Credit: HP Creative Commons

In fact, Apple did something similar but in reverse. In 2003, they used the iTunes Music Store, which was initially not profitable, to drive sales of the iPod Apple's most profitable product at the time. iTunes eventually went on to generate a profit about three years later. The idea of using a loss leader intentionally selling a product below cost to draw in buyers highlights just how fiercely competitive the consumer tech market really is.

Apple iPod image Credit: Apple Creative Commons

Tim Cook himself said this when describing Steve Jobs brilliance, While speaking to the Wall Street Journal, Tim Cook reflected,

Steve had a completely unique approach to being a CEO, I really admired that vision, especially at a time when most companies were shifting their focus toward the enterprises market. His goal was to shift Apple's focus back to everyday customers. - Tim Cook 

It was a smart move, especially considering the company's situation at the time, nobody was doing that. Back then, the common belief was that selling directly to consumers wasn't profitable and for most hardware companies, that assumptions turned out to be night.  

There Wasn't much to differentiate a Compaq from an IBM, from an HP, from a Dell. They were all just being rectangle boxes of tech with a keyboard and mouse that ran a copy of Windows nothing exciting just functional. Customers just bought the cheapest one driving down prices and shrinking profit margins.

Selling to business, on the other hand, meant offering custom solutions for specific needs. Companies found they could raise more pricing and wonder more customer staying rates. 

So how could Apple make money seling to customers when other companies couldn't? 

The answer product differentiation. most PC manufactures built hardware as cheaply as possible using off-the-shelf components. They weren't retailers so they sold their computers at wholesale prices to Best Buy or MicroCenter, who would then sell at a markup. Apple wanted to avoid all of this.

Showing Electronics Retailer Shop image Credit: Internet Creative Commons

Instead of boring rectangle boxes, Apple designed striking, unique looking machines. Instead of licensing Windows, they built their own macOS, optimized for their hardware. and Instead relying on third party retailers, Apple opened its own stores with free technical support and knowledge associates who could help potential switchers. All of these created a premium end to end experience unmatched by other companies. 

Showing Apple Retailer Shop image Credit: Apple Creative Commons

While Apple made a considerable amount of revenue from this business model, other low cost PC makers like Dell and HP actually made more. IN 2005, Apple made almost $49 billion and HP made $86 billion. why? because cheap PCs were good enough for most people. They were noisy, buggy, and slow but they could browse the internet, use email, and run word or excel. that was enough. not to mention, you could play games not even available on Mac.

While Apple made Back then, Apple products were seen as a luxury something nice looking for people willing to pay more. that may seem like a oversimplification today, but 20 years ago, we only had computers, music players, and cell phones. the iPod was popular, but the benefits of using it on a Mac instead of a PC were minimal. iTunes was available for both platforms, so users got a similar experience.

Today, tech products play a much larger role in our lives watches, TVs, tablets, even cars. if these devices don't work together seamlessly, it creates constant friction. So When you stick with Apple devices like having an iPhone, Apple TV, and Mac everything just works better together but with fewer issues but smoother experience. This ecosystem makes sense today than ever before. that led two key things

Apple became more popular by delivering the best optimized ecosystem  

The company's ability to increase prices stemmed from the higher percived value of its products and services.

While Apple made That's why Apple has been able to turn huge profits from hardware despite the challenges of the industry. but it's not the only way Apple makes money.

By 2016, hardware sales began to slow. Apple had reached market saturation. Almost everyone who wanted an iPhone or Mac already had one. that meant they were stuck selling to the existing base instead of acquiring customers switching from Android or Windows.

In 2016, Apple still made $217 billion but that was 8% less than 2015. and Shareholders expect growth year after year. So, Tim Cook had to come up with new way to make money and that came in the form of services, announced in 2019 and 2020.

New Offerings includes

• Apple News Plus
• Apple Card
• Apple Arcade
• Apple TV Plus
• Apple  fitness plus

While Apple made They were added to the roster alongside Apple Music and iCloud.

So, What did that mean for people for Apple's bottom line ? lets say it paid off big time.

Apple Revenue Showing Graph image Credit: Artistic Impression

Since the launch of Apple Music in 2015, Apple's company's services division revenue has been exploit grow soaring from $20 billion to a massive impressive $96 billion by annual revenue 2024. 

Today, services account for 25% of the company's total earnings, surpassing the combined revenue of the iPod, Mac , AirPods, Apple watch , and HomePod.

Apple Revenue Showing Graph Pie image Credit: Artistic Impression

What's even crazier is the profit margin ?

Hardware margins are around 35%. But services ? they bring in 74% profit margins. that's because services don't scale like physical products. Apple TV+ doesn't cost 10x more t run just because you have 10x more users. But sure making  more brings  per unit down but building 1 million of anything  costs a lot than making. that's why services are so profitable.
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Apple Benefits from services in other ways too like locking users into the ecosystem.

In the early iPod days, you could easily switch devices because your music came from  CDs. But Once the iTunes Store launched, songs could only be played on iPods. that meant switching to a Zune or another player meant losing your entire library.

While Apple Pattern continues with Apple News+, fitness+, Apple pay , and Apple Arcade all of which are locked into the Apple ecosystem. So if you ever to an Android devices, you're saying goodbye to your wallet app and saved cards , News stories , downloaded arcade games. 

While Apple made Another key differences recurring revenue.

While Apple made iTunes was one time purchase. Today, we rent our content like Apple music and TV+ cancel the monthly payment and you're locked out of everything. and they are already hiked the prices.

While Apple made Similar price hikes have happened across other services and likely will continue.

So, Apple's Services category has not only bought in more revenue and profit, but it also helps keep users into Apple's world wile charging monthly  subscription fees forever.

That's Where Apple's money comes from. and that's exactly why they're raking in so much money.

 

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