INTRO: Apple is infamous for being the premium tech
company with insanely thick profit margins.
Many would compare Apple to designer brands like Gucci and Louis Vuitton that have gross
margins well over 50%.
And when you see products like a $1000 monitor stand and $700 Apple wheels, it’s not surprising
that Apple has such an image.
But in reality, Apple has some of the lowest margins in the tech industry.
Now, don’t get me wrong here, Apple still makes boatloads of money with annual earnings
of $111.85 billion which is the third highest in the world.
But the thing to keep in mind is that Apple also has revenue to match coming in at $365
billion per year which is the 4th highest in the world.
In terms of margin though, Apple’s net margin has hovered at just above 20% for most of
the past decade, and it wasn’t till the past 12 months that it upticked to 25% mostly
due to their services.
On the other hand, Google has a net margin of 30%, Nvidia has a net margin of 32%, Facebook
has a net margin of 36%, and Microsoft has a net margin of 38.5%.
And none of these guys hold a candle to Visa who boasts a net margin of 51%.
Yet, the only company that gets hate for overpricing their products is Apple.
So, here’s how much Apple actually makes from their products and why their overpriced
brand image is really all just marketing.
COST OF IPHONE: The number one reason Apple doesn’t have
net margins as high as the other top tech companies is because they’re the only one
that’s mostly a hardware business.
They’re the only ones that have to design a physical product, source materials, work
with manufacturers, package their products, run physical apple stores, work with retailers,
ship their products, and so on and so forth.
I don’t think I need to explain why hardware businesses are far less profitable than software
businesses.
But then how much exactly does Apple make from their iPhones and Macbooks?
Well, luckily for us, Apple is a public company meaning that they post all of their financials
on a quarterly basis.
And if we take a look at their most recent quarterly report, we’ll see that Apple pulled
in $65 billion in revenue.
Out of this, $38.9 billion was from iPhones, $9.2 billion was from Macs, $8.3 billion was
from iPads, and $8.8 billion was from accessories and other devices.
As you can see, iPhone sales account for about 60% of Apple’s entire product revenue.
And iPhones are basically the middle of the road in terms of price.
So, we’ll base our analysis on the iPhone.
Apple’s most popular iPhone every year is likely the standard iPhone.
This year, that happens to be the iPhone 13 which comes in at $800.
With all of that out of the day, let’s look at Apple’s first expense which is the cost
of sales.
Cost of sales is the amount of money Apple has to spend to produce their products.
Last quarter, this came in at $42.79 billion or 65.7% of their product revenue.
Normalizing this data to the iPhone 13, we get $526 per phone.
So, if you’re able to pick up an iPhone 13 for $200 off from a carrier or retailer,
you’re getting the phone for pretty close to cost of production.
Something else to keep in mind is that the cost of production isn’t the only expense.
The next expense on the list is research and development.
Last quarter, R&D came in at $5.772 billion, but Apple doesn’t list out how much of this
is for their products and how much of this is for their services like Apple music.
With cost of sales, 89% of the cost of sales went towards the products.
And it’s likely a similar case with R&D.
I think we’d agree that the vast majority of Apple’s R&D is spent on designing their
products and designing software that is directly linked to their products like iOS, Face ID,
Touch ID, and so on.
So, I think 89% is a reasonable estimate, but to estimate conservatively, we’ll call
it 75%.
This means that Apple roughly spends $4.329 billion per quarter on product related R&D.
That works out to 6.6% of product revenue or $53 per iPhone 13.
Moving on, we have selling, general, and administrative expenses.
This includes marketing, the cost to run their stores, patents, licenses, and basically everything
else involved in running Apple.
Last quarter, this came out to $5.616 billion.
If we assume a 75/25 split again between products and services, we get $4.212 billion per quarter.
That works out to 6.5% of their product revenue and $52 per iPhone 13.
And finally, the last expense we have is income taxes.
Last quarter, Apple paid $2.697 billion in income taxes.
Now, for this category, we have to reverse our 75/25 assumption.
Given that Apple’s services business is much more profitable than their products business,
the income tax due to service related revenue is a lot higher than the income tax due to
product related revenue in terms of percentages.
So, if we assume that only 25% of Apple’s tax bill is due to product related profits,
we get $674 million.
As a proportion of their product related revenue, we get 1.07% or about $8 per iPhone 13.
All of this works out to a total of $639 per iPhone 13 leaving Apple with $161 worth of
profit or almost exactly 20%.
If Apple had priced the iPhone 13 at $700, their net margin wouldn’t even be 10%.
So, from a business perspective, I think we’d agree that $750 is really the lowest they
could’ve gone so $800 is pretty fair in my opinion.
Something else to consider is that most of Apple’s iPhone lineup is actually cheaper
than the iPhone 13.
Under the iPhone 13, we have the 13 mini, the 12, the 12 mini, the 11 and the SE.
And all of these likely only have a net margin of 10-15%.
On the other end of the spectrum, we have the 13 pro and the 13 pro max, and those no
doubt have a profit margin of 30-40% if not over 40%.
But, only a very small number of customers buy these products and they know that they’re
paying a big premium.
For the vast majority of iPhone buyers though, it’s really not that bad.
Something else to note is that the vast majority of iPhone buyers aren’t buying at retail
price through the Apple website.
Most people either trade in their phones, get a deal with their carrier, wait for discounts
at retailers, or they buy older generations.
If you’re buying smart, it’s the carrier or retailer that’s footing the $100 to $200
that goes to Apple’s bottom line.
So, the truth is, the average consumer is not overpaying for iPhones.
If that’s the case though, how are there so many alternative options that are way cheaper
than Apple's offerings?
Well, the answer to this is two fold with the first being alternative modes of monetization.
ALTERNATIVE MODES OF MONETIZATION One of the most famous value smartphones out
there is Google’s pixel lineup.
The Google Pixel 6 is comparable to the iPhone 13, but it comes at $200 cheaper at $600.
According to our math, this would leave Google with a negative profit margin of $39.
So, how could that be possible?
Well, there’s no secret to it.
It’s really as simple as that.
Google is selling their phones for no profit if not a loss.
And while that might sound taboo, it’s actually extremely popular within consumer tech.
One of the best examples is gaming consoles.
In May of 2021, Microsoft straight up admitted that they’re selling Xboxes at a loss.
With the Xbox and the pixel series, the money is made after the sale, not during the sale.
The vast majority of Google’s profit still comes from Google.com and their number one
goal with their smartphones is to get you to use Google.com.
Now, Apple does have methods to monetize users after the initial purchase as well, but the
key difference is that all of them are voluntary.
You’re not forced to buy Apple Music or iCloud and you never have to purchase an app
from the app store.
With the Pixel, however, unless you actively avoid Google’s services, they’re gonna
serve you ads, they’re gonna collect your data, and they’re gonna make money.
Now, I’m not trying to get into the morality of this or claim that one mode of monetization
is better than the other.
All I’m trying to illustrate is that with Apple, users have to actively choose to spend
more money for Apple to make more money.
But with Google, users have to actively avoid Google’s services for Google to not make
money.
Considering this, Apple has to make their money upfront while many competitors don’t.
And that’s one of the key reasons for Apple’s inflated prices.
Also, for the record, Google has a higher net margin than Apple, so technically you’re
overpaying more for a Pixel than an iPhone.
It’s just not out of pocket.
HIGHER COST OF BUSINESS The other key reason that Apple products are
oftentimes more expensive than the competition is because they spend more money on all aspects
of their business starting with their employees.
Now, Apple does manufacture their iPhones in China using extremely cheap labor just
like the rest of the competition.
So, it’s not like Apple is a saint, but in terms of white collar workers, Apple pays
them extremely well.
The median compensation at Apple is $159,000, but that’s actually weighed down by retail
employees and customer support.
If we look at departments like business development, communications, product development, sales,
and even HR, the average salaries are above $200,000.
Some of the biggest companies that destroy Apple in terms of value are Xiaomi and Huawei,
but these companies are based in China.
Now, these companies may be excellent employers and they may be paying way above average for
Chinese standards.
I’m not familiar with Chinese salaries, so I can’t tell, but compared to American
standards, the compensation is extremely low.
At Xiaomi for instance, a software engineer earns 216,000 yuan.
While that might sound like a lot, it’s actually only $33,800.
Now, you wanna guess what Apple pays their software engineers?
The minimum Apple pays their software engineers is $162,000, and that number actually goes
up to $768,000 probably for chief engineers.
I think that’s all that needs to be said about employee compensation.
Aside from higher compensation, Apple has expenses that many competitors completely
avoid.
Apple has 515 stores around the world, Google has 1.
Also, Apple is the one that often develops new technologies like fingerprint readers,
Face ID, and wireless headphones.
Of course, they didn’t create these technologies, but they’re the ones that created the form
that we use today.
Competitors often just copy it from Apple which significantly reduces their own R&D
costs.
OVERPRICED PRODUCTS If this is all true, then why in the world
does Apple come out with braindead products like $700 Apple wheels.
Well, the answer is simple, it’s just marketing.
How many people do you think actually buy these ludicrous products?
The answer is no one, and Apple is well aware of that.
They don’t stock these products at their stores, and if you order it online it takes
forever to ship.
The Pro Stand, for example, takes 15 to 17 days to ship to my house.
The iPhone 13, however, which is likely in way more demand can ship to my house tomorrow
for free.
You would think that if I’m buying a $1000 monitor stand with 90% profit margins, I should
get like 1 hour delivery.
But, instead it's over 2 weeks because Apple doesn’t give a crap about these products.
These products are specifically designed to create headlines and to get people to meme
about them and spread the word that Apple is a luxury status brand even though they’re
not.
Now, don’t get me wrong here, Apple makes outstanding products.
But, they’re more like Seiko than Rolex.
They’re marketing, however, would convince you otherwise.
So, don’t fall for the headlines.
Apple does not overprice the vast majority of their products.
The reason their products are more expensive is because they have to make their profit
upfront and their business costs more to run.
At the end of the day though, they only take 10 to 20% to the bottom line when it comes
to their consumer products.
Do you guys still think that Apple products are overpriced?
Comment that down below.
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