Apple is now the world's most valuable technology company, according to an
analysis by research company iSuppli. With its market capitalization at $234
billion, Apple has beat out Microsoft for the worldwide No. 2 position, and is
now second only to Exxon Mobil in the overall category. Apple additionally
holds a cash reserve of $23 billion.
At the core of Apple's good fortune, wrote iSuppli analyst Steve Mather on June
7, is its ability to sell high-margin hardware that competitors have had a
tough time duplicating.
"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," Mather said in a statement, referring to Apple
CEO Steve Jobs' June 7 unveiling of the iPhone 4 at Apple's Worldwide
Developers Conference in San Francisco.
"The company makes the majority of its profit on sales of hardware,"
Mather continued. "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."
For example, while many competitors achieve gross margins of 20 to 40 percent
on competing smartphones, Apple's hardware gross margin for the iPhone is said
to be 50 percent.
In June 2009, iSuppli
estimated a BOM (Bill of Materials) of $178.96 for the iPhone 3GS. The
Motorola Droid, by contrast, which Verizon Wireless originally offered for $199
with contract (the current price is the same, though with a buy-one-get-one-free
offer) had an estimated
BOM of $187.75.
"These high margins are the product of [Apple's] unique approach to
product design and intellectual property," Mather said. "So far,
competitors' responses to the iPhone have been look-alike, brute-force
solutions that throw money at expensive features. This yields a higher Bill of
Materials ... and generates lower profits—but still doesn't provide the same
quality of user experience as Apple's products."
Mather further makes an argument that Apple has taken a unique approach to
smartphone building. "Apple's path to differentiation involves purchasing
building blocks, and then adding its system IP [intellectual property],"
Mather said. He offered, as examples, a touch controller IC (integrated circuit)
from Broadcom that Apple combines with its own touch architecture; the iPad's
A4 processor, for which the building blocks are made by Samsung; and the
decision to build on Infineon Technologies' baseband IC, rather than choose
"a more encompassing" Snapdragon
solution from Qualcomm.
"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."
iSuppli said it believes the only company that can potentially challenge Apple
is Google, though it sees plenty of room for the two to profitably coexist in
the mobile ecosystem. Still, Apple will continue to press ahead, iSuppli
predicted, with the competition following behind.
"iSuppli expects Apple's lead to extend," Mather said. "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."
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