Apple Profit Dip Shows iPhone Maker Isn't Immune to Market Forces

NEWS ANALYSIS: Apple's slightly lower reported profit margins should come as no surprise when the company is selling into a market with significant competition from other smartphones with lower prices and greater perceived value.

It's important to note at the beginning that Apple is not in any financial distress. The company enjoyed profit margins that are the envy of the tech industry, and sales that appear to be heading for the stratosphere.

The only people who are disappointed at Apple's quarterly results are those who live in some sort of fantasy world in which profits, margins and stock prices keep rising indefinitely. Most companies would do anything to have a 37 percent gross margin.

Of course that fantasy world is called Wall Street, and it's populated by analysts who apparently never studied economics in school and seem to think that the business world exists as they want it to be (which means making themselves and their employers even richer than they already are) instead of as it really is.

The facts of Apple's economic existence are that the company has moved into a new world in which there are credible competitors in the smartphone market and one in which Apple has to focus very closely on market share.

This is a different world from the one that the company originally inhabited since the early 1980s in which Apple focused on selling very high-quality products at relatively low volume with marketing that emphasized exclusivity. That worked for a long time, with some notable ups and downs, until Apple decided to define the smartphone market with the iPhone. But now Apple finds it has to fight for market share and they can't do that and retain exclusivity.

Making matters worse, Apple has continued to seek the upper end of its markets so that it can maximize its profit margin. The fact is that there's more profit in a $600 phone than in a $200 phone. As long as you are satisfied with the limited market that implies, then you can keep your margins up. But when you have to deal with competition that delivers a product with the same or better perceived value, such as the Samsung Galaxy S 4 smartphone or the Note 3 tablet, then something has to give.

The same thing was true in the land of personal computers in which Apple found itself competing with dozens of companies building low-cost Windows computers and offering features—touch screens for example—that you can't get with Apple computers. As a result of such competition, Apple is finding out that they either have to lower their prices, as it has done with its computers, or try to compete on value, which Apple is trying to do with phones.

Wayne Rash

Wayne Rash

Wayne Rash is a freelance writer and editor with a 35 year history covering technology. He’s a frequent speaker on business, technology issues and enterprise computing. He covers Washington and...