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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.”