apple-business-model

Apple Business Model Analysis 2022

Apple has a business model that is broken down between products and services. Apple generated over $365 billion in revenues in 2021, of which $191.9 came from the iPhone sales, $35.2 came from Mac sales, $38.3 came from accessories and wearables (AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch, and accessories), $31.86 billion came from iPad sales, and $68.4 billion came from services.

Apple’s sales breakdown  2021
iPhone $191.97B
Mac $35.19B
iPad $31.86B
AirPods, Apple TV, Apple Watch, Beats products, HomePod,
iPod touch and accessories
$38.36B
Services (Company’s advertising, AppleCare, cloud, digital content, payment, and other
services)
$68.42B
Total $365.81B
Key Facts  
Founders Steve Jobs, Steve Wozniak, and Ronald Wayne.
Year & Place Founded April 1, 1976, Los Altos, CA.
Initial Business Model Initially, Apple sold primarily computers (Apple II, Apple III). Then Apple shifted to smartphones, with the introduction of the iPhone on June 29, 2007, which became the most important product and business segment for the company.
Year of IPO December 12, 1980.
IPO Price $22
Total Revenues at IPO $117,901,543
Business Model Change
On June 29, 2007, Apple launched the iPhone, which revolutionized the whole business, in 2021, the iPhone generated almost $192 billion in revenue or over 52% of the total company’s revenues
Total Revenues in 2021 $365.8B
Apple Employees 154,000 full-time employees, as of 2021
Revenues per Employee $2,375,435.06
Who owns Apple?
Tom individual investors comprise Art Levinson (chairman of Apple), Tok Cook (CEO of Apple), while top institutional investors The Vanguard Group (7.68%), BlackRock, Inc. (6.47%), and Berkshire Hathaway Inc. / Warren E. Buffett (5.56%)

History of Apple in the early days

When Steve Jobs and Steve Wozniak launched their Apple Inc. back in 1976, the match turned out to be one of the most successful. In the early days, the man acted as a bridge between the two strong personalities, Ronald Wayne.

However, he got out very early from the partnership.

Wozniak and Jobs had known each other a few years earlier, and they had both love for technology and computing, but two very different personalities. On the one hand, Wozniak was highly technical, an engineer by core, and only interested in the technology. But, instead, Jobs was a business person by nature, trying to figure out how technology could be commercialized and marketed to the masses, with his obsession with aesthetics.

Indeed, one of the greatest achievements of Apple has been the ability to make technology adopted at scale, as its devices, once a symbol of “Think Different,” turned into status quo objects and then into a must-have.

In that sense, the story of how Steve Jobs turned Apple upside down is all but linear.

In fact, while the first computer Apple launched was successful, the company’s revenues stalled later on, and that is when Steve Jobs was ousted from the company he had founded. To give a bit of context, in the years before he got ousted, Apple had brought in adult supervision in the hands of John Sculley.

John Sculley was first fascinated by Jobs and joined the company, then he became one of the people that wanted him out as Apple revenues started to slow down significantly. When Steve Jobs had to leave the company that wasn’t on good terms. Jobs sold his stocks and he went on to found NeXT computers and later also invest in Pixar.

How did he get back and turned Apple upside down?

It was the year 1997. Apple was experiencing a sharp sales decline:

apple-sales-decline-1997

Compared to 1996 the company’s net sales decreased by 28% and even more compared to just a couple of years before.

To understand the severity of the crisis, an article from NY Times dated March 28th, 1996 said:

Apple Computer said today that it expected to report a $700 million after-tax loss for its fiscal second quarter, a sign that the nation’s third-largest personal computer maker is in even deeper financial trouble than had previously been recognized. The company said that more than half of the loss it was projecting for the quarter, which ends March 31, would come from write-downs against more than $1 billion in unsold products. An additional 25 percent would be related to restructuring costs, the company said, indicating that another wave of layoffs is imminent.

In its annual report, Apple stated:

Macintosh computer unit sales and peripheral unit sales decreased 27% and 33%, respectively, during 1997, compared with 1996, as a result of a decline in worldwide demand for most of the Company’s product families, which the Company believes was due principally to continued customer concerns regarding the Company’s strategic direction, financial condition and future prospects, and the viability of the Macintosh platform, and to competitive pressures in the marketplace

Apple had lowered its prices on many of its products. So even though the aggregate average revenue didn’t change much it still contributed to the sales decline.

Amelio, which was supposed to be a turnaround master was eventually replaced.

Indeed, Apple swiftly made a move and removed Amelio as CEO, and that is when Steve Jobs joined the company again, after being ousted in 1985.

Steve Jobs and Bill Gates recounted the transition from Amelio back to Jobs:

Jobs was going back to Apple, and it wasn’t cheap for the company. As reported in the 1997 Annual Report:

In February 1997, the Company acquired NeXT. NeXT developed, marketed and supported software that enables customers to implement business applications on the Internet/World Wide Web, intranets and enterprise-wide client/server networks. The acquisition was accounted for as a purchase and, accordingly, the operating results pertaining to NeXT subsequent to the date of acquisition have been included in the Company’s consolidated operating results. The total purchase price, including the fair value of the net liabilities assumed, was $427 million of which $375 million was allocated to purchased in-process research and development and $52 million was allocated to goodwill and other intangible assets. The purchased in-process research and development was charged to operations upon acquisition, and the goodwill and other tangible assets are being amortized on a straight-line basis over two years.

Looking back at the Apple investment in NeXT and given its financial distress, it’s easy to understand that it wasn’t an easy choice. What made Apple go for it?

When Steve Jobs left Apple in 1985, it wasn’t on good terms. As soon as Steve Jobs left the company, he also announced he was going to start a new company, which would become NeXT.

As soon as Jobs made that announcement, Apple followed up with a suit!

To understand the strategic importance of NeXT for Apple as appleinsider.com pointed out

At the time Apple was experiencing a substantial flaw in its software. Many fail to understand that the business success of Apple wasn’t just its hardware and aesthetics, but the software side played a key role.

When Steve Jobs pitched to Apple its NeXTSTEP (the software that powered NeXT computers); he won his way back to Apple.

As pointed out on macworld.com:

Jump back to 1996, when Apple was looking for a replacement OS. Steve Jobs heard of this search and pitched NeXTSTEP to Apple executives. They liked what they saw, and in December of 1996, Apple announced it was purchasing NeXT with the goal of using NeXTSTEP as the foundation of a new Macintosh OS. Along with the announcement came news that Steve Jobs would be taking an advisory role in the company. In a stunning turn of events, the founder was back.

The team from NeXT that Jobs brought to Apple right away tried to adapt the software side from NeXT to the Apple OS. The project took the name of Rhapsody.

Long story short, Adobe (at the time a critical third-party developer for Apple at the time) didn’t support this project until Apple changed its plans. In 1998, Apple started to develop a new graphical interface for Rhapsody, called “Aqua,” which as pointed out by macworld.com during that project “the philosophical shift from Rhapsody to OS X took place.”

The shift to Aqua was critical to winning over the consensus of developers, that were and are a key ingredient to Apple’s success.

When Steve Jobs presented Aqua, the audience was stunned as it showed many new elements of the graphical interface. Apple understood it needed to release it and put it in the hands of as many people as possible.

What did Apple do? As macworld.com pointed out:

Apple set the price of “Mac OS X Public Beta,” as it was called, at $29.95—low enough for anyone could get it if they wanted, but high enough to exclude folks who might not be constructive to the beta testing process. The beta sold through Apple’s online store; the company later offered a $30 discount on the first full release of OS X (v10.0) when it shipped in 2001.

The way the company launched its beta is quite impressive. Rather than release a free version, Apple released its beta with a low price point, yet high enough to exclude those that would not be constructive sufficient to the future development.

However, what mattered was that finally, Apple had won over the consensus of developers, which started to test and report bugs, which made the software grow and improve quickly.

To understand the importance of that development, Apple’s entire software ecosystem has been built on top of that. Not only desktops devices, but also iPhone and iPods devices.

Therefore, Steve Jobs entered again in Apple as Interim CEO never left the company again.

To have a bit of context of the impact that Jobs brought to Apple. In 1998 the company was profitable again. However, Apple would gain momentum in sales again in the 2000s when Apple laid out a strategy that saw the launch of new products that hooked the consumers.

apple-revenues-2002-2004

By 2004 the iPod would be a hit that fueled and got fueled by other music products consisting of iTunes Music Store sales, iPod-related services, and Apple-branded and third-party iPod-related accessories.

It was the fall of 2006 when Apple had been working on the launch of a product that would revolutionize the smartphone market. Steve Jobs had remarked several times there was nothing “smart” to that market. True, these phones had improved a lot compared to previous phones. However, they were still hard to use, not practical and used primarily for business. Not a consumer device.

Steve Jobs would put an end to all that with the launch of the iPhone, which would become a massive commercial success. Still in 2017 iPhone sales accounted for most of Apple’s revenues. The story of the iPhone and how it got to be – from the technological standpoint – has been told many times.

Thus, this time I want to focus on the business story. How Steve Jobs, rather than the greatest visionary we all think, might have been a great deal maker instead. Able to squeeze any industry he set up to disrupt, with deals that took advantage of already established oligopolies, cartels, and centers of power.

How he managed to do that is still a mystery to me. This time I want to focus on the deal that made the iPhone a wild success: the AT&T deal. The iPhone’s success isn’t just about a technological device that innovated and was years ahead of its competitors. This is the story of a tool, primarily subsidized by the carriers industry which without it would have probably never had taken off as he did, and it all starts with one of the most inaccurate predictions of our time, from Steve Ballmer, former Microsoft’s CEO.

Before Steve Jobs with the iPhone changed the rules of the game, the mobile phone industry represented a multi-billion dollar industry where the mobile carriers saw the handsets business as a commodity they could use. While that strategy had paid back in the past to bring in new subscribers, the whole industry needed a shake.

And Apple was ready to give that. One of the first players that understood that the iPhone could be a potential hit – or at least could revitalize their brand was Cingular (later AT&T). In an attempt to be branded as an “innovative company” and steal subscribers from its rivals the time seemed right for Apple‘s deal. Before we get to that point, there is another step of the story to understand here.

As the story goes, Steve Jobs had understood he had to bet on the mobile market by producing its handset, which would be something in the middle between a phone and an iPod. That phone was Rokr, and it was in partnership with Motorola.

When the Rokr came out – noted cultofmac – “In the end, the Rokr E1 proved disastrous. With its cheap plastic design, poor camera, and a 100-song limit, it fell far short of the iPod’s promise of 1,000 songs in your pocket. Designed to make listening to your music easy, and pitched as the “iTunes phone,” it also failed on that front. The Rokr E1 required that users buy songs via iTunes, then transfer them to the device using a cable.

The demo of Steve Jobs on the “iTunes phone” might well be considered the least successful one. Yet those mistakes would set the stage for the iPhone.

The Cingular team was the first to understand a change in the carriers’ business model. Where before handsets providers were a mere commodity used to lock as many new subscribers with cheap phones. There was a chance now to be perceived as an innovator in the space. And what partner would best fit this role than the company that had first disrupted the computer industry and then moved to the music industry?

Steve Jobs made a deal with AT&T, as reported by Wired “in return for five years of exclusivity, roughly 10 percent of iPhone sales in AT&T stores, and a thin slice of Apple’s iTunes revenue, AT&T had granted Jobs unprecedented power.

However, Apple in return got a revenue-share model where it received $10 for every iPhone customer subscribing to an AT&T plan, plus total control over the design, manufacturing, and marketing of the iPhone. That was an unprecedented deal! That was the beginning of the end for the mobile carrier’s dominance over the smartphone companies – or at least Apple.

As of December 31, 2009, AT&T served 85.1 million wireless customers, compared to 77.0 million on December 31, 2008. Part of this staggering growth was also due to iPhone success.

att-iphone-revenues-2008

iphone-sales-2007-09

As Apple introduced its App Store, in 2008, this finally enabled the sales of iPhones, thus creating Apple’s unique feature of hardware, combined with a powerful operating system and a marketplace, to enable third-party to build their own apps, on top of the iPhone. 

This business model, which we give for granted today, was the real revolution of Apple. 

The Trillion-dollar empire

In August 2018, Apple was the first, American company ever to be worth $1 trillion. 

In May 2022, Apple is worth about $2.7 trillion dollars!

To gain a bit of context of how big Apple has become if we take the US GDP figure for 2021 at 23 trillion, this means Apple’s market cap represents over 10% of the total economic output of the wealthiest country on earth.

The Apple business model explained

Apple’s business model is mainly based on the sales of tech products. However, it cannot be understood from that standpoint alone.

Apple is both software and hardware, which is also what made it successful. No doubt the iPhone is an icon of our days. Yet, the iPhone is also a device that works pretty well thanks to its software.

If we look at Apple’s growth for 2021, it was primarily driven by segments such as iPhone and iPad sales, which represented the main revenue drivers in 2021. Followed by the service business (which comprises the advertising business) and wearables/accessories, and Mac.

apple-business-growth-2019-2021

Therefore, as of 2021 Apple has a diversified business model, even though still skewed toward the iPhone.

Apple’s products

Apple sells three main products represent the line of Apple:

  • iPhone.
  • iPad.
  • Mac.
  • Wearables, Home, Accessories Devices.

Apple’s operating systems

Those products are run by Apple Operating systems:

  • iOS.
  • macOS.
  • watchOS.
  • tvOS.

Apple-related services

And supported by a set of related services:

  • Digital Content and Services.
  • iCloud.
  • AppleCare.
  • Apple Pay.
  • Advertising.

Services revenues also have grown fast in the last years and they represented over 18% of the overall revenues in 2021.

The most interesting part is that those revenues carry high profitability for the company, even more than its core products as they follow a platform business model. 

In addition, within the services business, Apple has the advertising service, sold via its store, this tells us that the advertising business (for which we don’t have a breakdown) is growing very rapidly.

Apple as a chip maker!

In November 2020, Apple launched the M1 chip, which would become the main component of its computers. This changed the whole supply chain of the chip industry.

Indeed, the M1 changed the whole architecture of Apple’s computers, making it possible for the company to create a whole line up of products based on these chips:

20220308183133_781517

This move was critical for apple to further complete a process of vertical integration, controlling a key component of its hardware. Indeed, design has been for years the key element of Apple’s competitive advantage.

As the smartphone industry, saturated, Apple moved further up the supply chain, by internalizing the production of chips. This changed the whole industry!

The introduction of Apple’s chips is also critical for the development of the business platform of the future: AR. Indeed, a powerful chip, developed in-house will be a critical component to enable powerful AR devices. 

Apple’s Distribution strategy 

apple-distribution-strategy
In 2021, most of Apple’s sales (64%) came from indirect channels (comprising third-party cellular networks, wholesalers/retailers, and resellers). These channels are critical for sales amplification, scale, and subsidies (to enable the iPhone to be purchased by a larger number of people). While the direct channel represented 36% of the total revenues. Stores are critical for customer experience, to enable to provide the service business, and for branding at scale.

The Company sells its products and resells third-party products in most of its major markets directly to consumers and small and mid-sized businesses through its retail and online stores and its direct sales force.

The Company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers, and value-added resellers.

In 2021, the Company’s net sales through its direct and indirect distribution channels accounted for 36% and 64%, respectively, of total net sales.

Where the indirect channel is critical for amplification and scale. The direct channel is critical for the development of the service business, and as a branding tool at scale, and of course, it also plays a key role in the B2B sales side of the company.

In fact, it’s much easier for Apple to sell to other businesses through its owned stores, as it can provide the necessary support to them, before and after the products’ purchases. 

Inside Apple’s iPhone Economics

how much profit does apple make per iphone
It costs Apple $570 to make an iPhone 13 Pro, and the company sells it at a base price of $999 to $1499.

To understand the economics of Apple, it’s worth looking at the economics of the iPhone. For instance, based on the iPhone 13, Apple might spend about $570 to make it, and it sells it at a base price of $999. 

For a tech product, this is a huge markup, and premium, and Apple is the only company on earth, which is able to do it at such a scale. 

In short, the iPhone, which generated over $191 billion in revenues for the company, in 2021, has done it, at wide margins. And on top of the iPhone Amazon has built various business segments: 

  • App Store: the store of apps enhances the capability of the iPhone, and the reason why Apple is also able to charge a wide premium on the physical product, is also thanks to the apps available on the iPhone (see reverse razor and blade strategy).
  • Service businesson top of the iPhone and the other products’ line up, Apple has managed to build a set of services, offered in its stores (insurance, assistance, education, and more). 
  • Advertising: within the service business the marketplace that Apple has created, also enables Apple to sell mobile advertising, at wide margins. 
  • Marketplace revenue cut: within the App Store, the apps featured, share a cut of the revenues with Apple. Also here, the marketplace has become an incredible source of revenue, at high margins. 
  • Accessories and Wearables: new products like ups, like AirPods and Apple Watch, have become extremely successful. And lately the AirTags as well. Those are all devices that pair seamlessly with the iPhone, thus enabling a smooth experience if you stay within Apple’s ecosystem!

In short, the iPhone isn’t just a hardware product, it served as the basis to develop what I like to call a business platform.

On top of this business platform, comprising hardware, operating system, and a marketplace, Apple has built its success.

business-platform-theory

Apple’s business model recap:

  • Products: the products lines comprise things like iPhone, iPad, Mac, and wearable, home, and accessories devices (Apple Watch, AirPods, and more)
  • Services: the services business comprises primarily: 1. Digital Content Stores and Streaming Services, comprising purchases on the App Store but also subscription services like Apple Music, and Apple TV. 2. Other services comprise AppleCare+ (“AC+”) and the AppleCare Protection Plan, which are fee-based services that extend the coverage of phone support eligibility and hardware repairs. 3. Apple’s Cloud Services (iCloud), 4. Licensing where Apple licenses the use of certain of its intellectual property and provides other related services. And 5. Other services include Apple Arcade™, a game subscription service; Apple Card™, a co-branded credit card; Apple News+, a subscription news and magazine service; and Apple Pay, a cashless payment service.
  • Apple has a diversified business model broken down into products and services.
  • Even though the iPhone sales still represented over 52% of the overall sales for 2021, the company also offers services and subscriptions which are growing substantially.
  • The services business has a high marginality, even higher than the products business of Apple. This makes it interesting for Apple to keep pushing its growth in the coming years, also considering this part comprises the advertising business

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