It is Economics 101. The best business model involves strong sales and high profit margins. Sadly, the combination almost never happens. Apple (AAPL) almost got there in the past quarter, writes Jon Markman.
The Cupertino, Calif., iPhone-maker reported third-quarter financial results that show its plan to remake itself as a luxury brand is paying off.
Investors should cheer and sit back. This could last a while.
The big story in the numbers was iPhone average selling prices. A year ago when CEO Tim Cook unveiled the $1,000 iPhone X, many financial analysts scoffed at the chutzpah. Pushing a near-20% price increase, in the face of flat worldwide smartphone sales, seemed crazy.
Apple managers had another agenda. They were continuing the campaign to move the brand further upscale. After the $10,000 gold smartwatch, a grand for a state-of-the-art iPhone would seem like a bargain for Apple devotees.
In the third quarter, Apple sold 41.3 million iPhones. Average selling prices rallied from $693 to $724. Sales soared to $53 billion, up 17%, year-over-year.
Services revenues are growing fast, too. In the quarter, category sales reached a record $9.55 billion. Apple Music, iTunes, iCloud, Apple Pay, Apple Care and the App Store are benefiting handsomely from the size of the Apple ecosystem installed base, and the fact that the company has a reputation for making very fragile products.
It is a great luxury business, championed by iPhone, and limited only by how much customers are willing to pay for Apple products and services.
In July, Apple began shipping its latest MacBook Pro laptop. The super thin aluminum unibody is packed with the latest Intel core i9 processor, Apple’s T2 chip for Touch ID, disk encryption, audio and video processing, and digital assistant functionality. Fully loaded, the price tag is $6,699.
Apple is selling a laptop at a 40% premium to a comparable Dell. Let that sink in.
By all accounts, that product has real issues with the keyboard and heat throttling, a process that kills computing power because its nifty new microprocessor gets hot enough to cook scrambled eggs.
Despite this, all signs point to another successful product launch. Apple power users have been clamoring for more powerful mobile computers for years. A secondary use as a hotplate is a bonus, I suppose.
This is not a knock on Apple. The company earned the loyalty of its customers by building hardware consumers fawn over. For many immersed in the ecosystem, Apple products represent the entire category.
One Plus, a fast-growing Chinese smartphone company, recently released a device that is arguably superior to the iPhone X, for about half the price.
Oppo, its sister company, builds a smartphone with an edge-to-edge screen, a gorgeous curved glass body, and a motorized pop-up camera that that is straight out of science fiction movies.
These companies are innovating with impressive hardware. But they have almost no chance of stealing Apple customers. They are not even on the radar.
And that is the true power of Apple’s business. It does not matter what competitors produce because Apple customers are not going anywhere, even when company products are inferior.
Apple is building a business in the mold of big European luxury brands, only bigger. Most of those brands must manufacture scarcity to maintain brand allure.
For decades, Ferrari (RACE) has restricted production, often requiring that customers place orders one year in advance of delivery. Even under the ownership of Fiat, a mass-market manufacturer, the company continues to limit supply.
Its new supercar, the Ferrari Sergio, is so exclusive potential customers need an invitation for the right to buy one.
By contrast, Apple sells tens of millions of iPhones every quarter.
As a tech company, I still believe Apple is thoroughly depressing. The company is not innovating, and when it does push the envelope, software fails, keyboards stick and thin light aluminum cases smolder red.
However, as a business, the company is moving units and raising prices. Only a fool would argue with that.
Best wishes,
Jon D. Markman
P.S. I’ll be speaking at the San Francisco Money Show in August. It will be a great show, with all sorts of experts sharing their insights. You can find more about that incredible conference y clicking here. I hope to see you there!
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