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Apple announces more record breaking profits, yawns obnoxiously

  • $12bn profits on $39bn revenue
  • Apple sitting on $110 billion in cash
  • What next?
Written by Adam Wajnberg

The first quarter of 2011 is behind us, and the results are in: For anyone in the world who designs, manufactures and sells products, Apple owns you.

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Between Jan 1 and March 30, Apple sold 35 million iPhones and 12 million iPads. Consider a few caveats here regarding those two products – the iPhone has only been available on more than one network in the US for less than a year. The iPad is a product category that didn’t exist less than 2 years ago, and starts at $500. Mac PCs (including Macbook laptops) enjoyed a slight rise in sales, while iPod sales tanked – but with the iPod Touch essentially being an iPhone with no phone, most people have converted to the full experience by now.

These insane figures have added an additional $11 billion to Apple’s enormous money pile, on $39bn in revenue. That means Apple makes around 28 cents in profit for every dollar they earn – a ratio that almost no-one can even approach. iOS, Apple’s still untouchable mobile operating system, is now sitting on 365 million devices in the wild. That’s a lot of people locked into an ecosystem that allows for the easy purchase of apps, games, music, movies, tv shows, books  and an often overlooked catalogue of tremendous free content. Who would want to leave?

Not many. Android is now sitting on about 50% of smartphones, compared to 30% for iOS – but the thinking there is that many Android users are natives, not converts from iOS. Android’s model is to pop up on handsets ranging from the <$200 range all the way up to $800+. And apart from Samsung, handset manufacturers are failing to capture the fervent audience that Apple enjoys.

Meanwhile, Apple takes in 70% of the overall market for apps and online content. That means that iOS users on average spend over twice as much on digital content than counterparts using Android, Windows Phone or a BlackBerry. As an iOS user, who can re-grab any already paid for content with each new device, why would you want to pay for all that stuff again on a new platform?

Much press has been given to the deplorable, extreme-stress conditions that Apple’s Chinese workers are subjected to. It does seem callous for a company to rake in ridiculous profits while the people building their products are committing suicide in a bid to escape their fate. In response, Apple CEO Tim Cook (and before him, the late Steve Jobs) have both expressed regret over not being able to build their devices in the United States, given Apple’s status as an American champion. But apart from the fact that every company uses the same Chinese workforce to build products to keep down costs, there’s a much more practical reason – It’s far easier to actually build the devices in China.

China’s industrial corridors enjoy the type of synergy that American cities once enjoyed – the makers of tiny components are centralized into the same district, allowing for quick turn arounds. In the moden United States (and for that matter, in many ultra-developed economies) manufacturing power has decentralized thanks to generous tax breaks offered in far-flung locations. If an iPhone was being built tomorrow in Michigan, many other components might be being built in Florida. Or Mexico. Changing an order would be subjected to all sorts of legal restrictions that would slow down the works. In China, you would have a dozen different vendors, all equipped and ready to roll whenever you needed it.

But if this issue is the fly in Apple’s orchard, then the other manufacturers are failing to take advantage. Not a single other manufacturer is trying to promote job growth in struggling first world economies with failing manufacturing sectors, or introducing conspicuously humane working conditions on their own supply lines. Instead, they’re attempting to chip away at Apple with whiz-bang gadgets that misses the point entirely – Apple’s products have sold to hundreds of millions of people, and there aren’t hundreds of millions of people who know what a Tegra 3 processor is. Apple has successfully sold their wares on their benefits, while making sure the features are still fantastic.

Where to from here?

Apple has been holding still for about two years now, since the release of the iPad. Everything since then has been tweaks and modifications to their stellar lineup. They’re about due to offer something big and new again. The pick is on an Apple TV set, but what could they offer that’s really revolutionary?

A good step right now is into services. With everyone stepping up to the plate in the hardware game, it might be up to Apple to take things forward a bit. Cloud computing isn’t working for them, with first-to-market providers like Dropbox still trumping them in “it-just-works” cache. In fact, acquiring Dropbox was one of Jobs’ last wishlist items, which surely must have been a big boost for the people at Dropbox.

The next thing might be the digital wallet idea that some (Google) have tried to crack, but haven’t succeeded in. Apple could buy PayPal tomorrow (if eBay were selling) and develop it, or they could create a portal for buying real-world items through iTunes. NFC (Near Field Communications) has yet to be implemented well in the western world, but the idea of waving an iPhone in front of a till and taking your groceries home is more than tempting – it’s one of those things that seems so naturally a good idea that it’s a little frustrating we don’t have it yet.

The other possibility is content creation. Hollywood has started to look like a big casino, with massive bets made on blockbusters based on existing properties. Making a $300 million dollar movie requires a $600 million take to just break even (box office returns are split with distributors), which is just crazy. With so many entertainment options available, how long can Hollywood expect people to continue paying $20 to see a flick? Moreover, entertainment has largely tipped towards the lowest common denominator, with only subscription Pay TV like HBO still maintaining some quality.

Apple can be accused of hard nosed business tactics, a lack of ethics in their supply chain and a draconian grip on how their customers use their products – but they can’t be accused of having no class. Apple has enough money and access to creative talent to provide an alternative to the current system. When you factor in Apple’s close relationship with Disney, their means of distribution, Sony’s decline ($6bn loss in the last quarter, 10,000 jobs shed) and their typically enervating relationship with most existing content providers, it’s another idea that seems inevitable. Consider also that the podcasting world is quickly becoming the go-to place for comedians and educational content providers, and the equation starts to become more evident.

Any suggestion that Apple is winning their customers with naught but slick marketing campaigns have to be laughed off at this point. Apple is winning their market with a relative lack of anti-trust tactics. If the economic battle in a developed world is between the innovators and the rent seekers, few could accuse Apple of being in the latter camp.

But companies do have a habit of getting lazy once on top and using ever more nasty tactics to stay there. Apple seems canny enough to focus on what they do best, and let the rest fall into place. If they manage to continue to innovate, we could look back one day at their current dominance as the beginning of something much bigger.


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