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Apple iThrone

2015-01-30 06:52:34

Apple reigns supreme when it comes to making money, but now faces even greater

expectations

Jan 31st 2015 | SAN FRANCISCO

NEVER before has so much money been made by a single firm in such a short

period of time. On January 27th Tim Cook, the boss of Apple, announced that it

had made $18 billion in its latest fiscal quarter, which ran almost to the end

of December 2014. That beats the previous record of $15.9 billion reported by

ExxonMobil, an oil company, in 2012, according to S&P Dow Jones Indices.

Apple s telephone-number-sized profit stemmed largely from sales of its hugely

popular iPhone, which accounted for over two-thirds of its $74.6 billion

revenue. Chief executives rarely admit to being dumbfounded by their companies

performance, but Mr Cook said it was hard to comprehend the extent of the

interest in Apple s products. He noted that, on average, 34,000 iPhones were

bought every hour of every day during the latest quarter. That added up to

74.5m phones, way more than market-watchers had expected.

Apple is the world s largest company by market capitalisation as well as its

most profitable. Strikingly, it has risen to greatness using a rather

old-fashioned business model: selling highly desirable objects at fat gross

margins, which hit almost 40% in the latest quarter. The tech industry has

spawned numerous software-based firms, such as Google and Facebook, that don t

have to worry about shifting goods around, yet they make much less than the

Colossus of Cupertino. Amazon handles lots of physical goods, but loses money.

Another thing that sets Apple apart from the tech pack is its success in

conquering China. While rivals have been frustrated there, Apple has just

become the largest force in China s smartphone market measured by units

shipped, according to Canalys, a market-research firm. Apple s revenue from the

Greater China region, which includes Taiwan and Hong Kong, soared 70%, to just

over $16 billion.

Any setback in China could hurt Apple. The company s overall dependence on the

iPhone is another risk. But these are early days for the iPhone 6, Apple s

latest device, whose bigger screen takes the firm into the phablet category

of larger phones that are wildly popular with customers. Some iBulls also point

out that Apple s share of the smartphone market is small compared with devices

using Google s Android operating system (see chart). So it has plenty of room

to grow.

If it is still to reduce its dependence on iPhones, Apple will need new

money-spinning gizmos. Mr Cook said this week that its much-ballyhooed

smartwatch will go on sale in April. Tim Bajarin of Creative Strategies, a

consulting firm, thinks Apple could sell 22m-24m in the first 12 months after

the launch, producing billions of dollars of new revenue. Sanford C. Bernstein,

a research firm, reckons the watches will have a higher-than-average gross

margin, which bodes well for profits.

Apple should be able to make more money from software and services, too. The

firm s online store of software apps had its busiest-ever day on January 1st

and the introduction of a smart watch will lead to another app feeding frenzy.

Apple profits by taking a chunk of the money developers make from app sales and

in-app purchases. By binding customers into its ecosystem of hardware and

software plus services such as Apple Pay, a contactless-payment system, the

firm also makes it more likely they will stay with it when they upgrade their

gadgets.

This still leaves the company with a headache other firms would die to have:

its Croesus-like mountain of cash, which now stands at $178 billion a figure

that is greater than the market capitalisations of information-technology

giants such as Intel and IBM. Apple, which has already spent billions of

dollars on share buy-backs, will revisit its plans to return money to

shareholders and discuss them in April. Mr Cook can expect plenty of calls from

activist investors before then, no doubt from their shiny new iPhones.