Desirability, and how Apple has made itself crunch-proof
APPLE LIVES on cream – the very top of the market. Researcher IDC says its largerscreened iPhone has pushed Samsung aside to hold a majority of the more expensive end of the market — devices costing more than $650. But it’s not just the phone cream that it has grabbed. After 30 years in the personal computer market, Apple has just recorded a historic sales high of 5.7 million Macs in a quarter. Like Stella Artois, Apple positions itself as reassuringly expensive; it is a top-end brand in markets that have mainly been commoditised, with profits drained from all but a few. Apple intends to remain one of the few.
Apple does not break out profits from phones, tablets or laptops, but industry estimates suggest operating margins of at least 28% for the iPhone, on its average price of $670.
South Korea’s Samsung has just announced operating margins in its mobile division of 9%. Apple makes more than three times as much profit from iPhones as Samsung does from its mobiles. And the two companies account for all the profit there is in smartphones — LG, Sony, HTC, Microsoft and BlackBerry are all losing money. (China’s fastgrowing Huawei, the third-biggest maker, has not announced any results.)
Similarly, in personal computers, Apple’s Macs have an average selling price of $1,205; most PCs sell for half that or less. At those prices, and with an estimated 18% operating margin, Apple made two-thirds of the $1.8 billion profit made by the six biggest manufacturers in the second quarter of the year, but sold only 7% of the machines.
What is the secret? Advertising? Design? Lots of companies make products that look like Apple’s, and advertise them as heftily (in Samsung’s case, more so). It clearly goes deeper than that. Apple’s biggest stumble in the smartphone market was with the iPhone 5C, the “cheaper” device introduced in 2013 along with the pricier, fingerprint-reading 5S.
Though the 5C was just the previous year’s iPhone 5 in a plastic casing, it was clearly a cheaper option. Ben Thompson, who owns and runs consultancy Stratechery, says: “To buy a 5C was to show that you couldn’t afford a better one.”
That need to be the desirable brand has prompted Apple to offer a $10,000 edition of its Watch. For a company that originally talked about making the “computer for the rest of us”, it seems odd to see it making a smartwatch for the 1%. Yet pricing is not a resistance point for Apple’s keenest buyers, and the Watch, despite its $350 starting price, is far outselling much cheaper devices.
Thompson says that the iPhone in particular is here to stay – with more than 400 million in use worldwide. “Smartphones are the most important products in people’s lives, which means that the willingness to pay for the ‘best’ is higher than it is for just about anything else. The smartphone budget is likely to be the last to be cut in any sort of economic tightening.” And most iPhone users upgrade to another iPhone, he points out.
Overall, Apple may have wormed its way into the “affordable luxury” sector – taking its place alongside scotch whisky and nail polish in the pantheon of recession-proof items. In the end, it is not the price tag; it is how the product makes the owner feel.
“Across the board, our goal is to make the best in the categories we choose to compete in,” said Phil Schiller, Apple’s marketing chief, in an interview last week. “It’s what we’re doing and it’s reflected in customers choosing our products over anyone else’s. So I do think people are showing with their choice that they do value quality and beauty of the hardware, and that is not diminishing.”
SMART, BEAUTIFUL AND RELATIVELY PRICEY, APPLE PRODUCTS MAKE THE COMPANY HUGE PROFITS. IT WAS JUST A CASE OF CRACKING THE DESIRABILITY CODE