How Apple Makes So Much Money

0:00 Today, Apple's the third most valuable company in the world, generating about $391 billion in revenue in fiscal year 2024. But that's total revenue. If you subtract their costs, like research and development, employee salaries, materials, and manufacturing, they're left with 93.7 billion, which is a 24% profit margin. But where does all that money come from? Well, the largest and most obvious source is hardware sales. Historically, Apple built their entire business on selling consumer products like the Mac, iPod, iPhone, Apple Watch, and AirPods. But by far the most successful has been iPhone, which accounts for about 51% of Apple's revenue. Then Mac with 8%, iPad with 7%,

0:45 and finally an other category that Apple calls wearables, home, and accessories, which includes Apple Watch, AirPods, and HomePod that account for 9% of revenue. But there's one problem with hardware. Achieving profitability. This is something almost every consumer-facing company has struggled with. In fact, many products are sold at cost or even at a loss. Meaning the company may lose money on every sale they make. And there are some popular examples of this like PlayStation and Xbox consoles, Amazon Kindle e-readers, and HP printers. They all tend to be sold at relatively low prices, sometimes at a loss, in an effort to undercut the competition and grow the user base. But if these companies aren't making money on hardware, then what's the point of selling it? Well, in almost every case,

1:32 profit is made when customers use the product. Because what's the point of a PlayStation without buying a few games? And a Kindle just happens to be the perfect device for buying Amazon ebooks, while an HP printer can't print anything without $40 worth of ink cartridges. So, by selling hardware as cheap as possible, companies can capture customers who are then forced to pay for highly profitable items, up to about 70% in the case of HP's ink cartridges. In fact, Apple themselves did something like this, except in reverse. In 2003, they used the iTunes music store, which was initially not profitable, to drive sales of iPod, which was Apple's most profitable product at the time. Now, iTunes eventually went on to generate a profit about 3 years later. But this

2:19 concept of a loss leader, or a product sold at a loss in order to attract customers, proves just how cutthroat the consumer hardware industry can be. In fact, Tim Cook said this himself when describing the strategic brilliance of Steve Jobs. In an interview with the Wall Street Journal, Cook said, "Steve was a very different kind of CEO. He was focused on products, products, and products. I loved that vision in an environment where everyone was going to an enterprise kind of company. He wanted to refocus Apple on consumers." And it was brilliant because at the time, nobody was doing that. Everybody thought you can't make any money selling to consumers. And for many computer hardware companies, that was true. There wasn't much to differentiate a compact from an IBM, from a HP, from a Dell.

3:05 There were all boxes of technology with a keyboard and mouse that ran Windows. That meant customers just bought the cheapest one, driving down prices and shrinking profit margins. On the other hand, selling to businesses meant offering custom solutions for specific needs, allowing computer companies to charge more and enjoy higher customer retention rates. So, how could Apple make money selling to consumers when other companies couldn't? Well, it was because of their product differentiation. Most PC manufacturers built hardware as cheap as possible, using off-the-shelf components and assembling them into a big beige box where you'd plug in a keyboard, mouse, and display. They weren't software companies, so they licensed the Windows operating system from Microsoft. And they weren't retailers, so they sold

3:52 their computers at wholesale prices to Best Buy or MicroEnter, who'd sell them to customers at a higher retail price. This created issues that Apple wanted to avoid. Instead of boring beige boxes, their computers would feature striking designs that looked completely different from anything else on the market. Instead of using the same operating system as everyone else, Apple would create their own optimized for the hardware it ran on. And instead of allowing thirdparty retailers to sell their products, which they did try for a few years without much success, they would create their own stores with free technical support that would reassure customers thinking about switching to Apple and knowledgeable associates that could make suitable recommendations to customers. All these factors delivered a

4:37 premium end-to-end experience that was unmatched by any other company. And while Apple made a considerable amount of revenue from this business model, other lowerc cost PC manufacturers like Dell and HP actually made more. For example, in 2005, Apple made almost 14 billion while Dell made 49 billion and HP made 86 billion. And the reason for that has to do with the inherent value of computers back then. The simple fact was that cheap PCs were good enough for most people. They may have been noisy, ugly, buggy, and slow, but for using the internet, email, and productivity apps like Word or Excel, cheap PCs got the job done. Not to mention, you could play games that weren't even available on the

5:22 Mac. Back then, Apple products were seen by most consumers as a luxury for people who wanted to pay more for something that looked nicer. And while that may seem like an oversimplification today, you have to remember that things were a lot different 20 years ago. Back then, all we really had were computers, music players, and cell phones. And while iPods were a popular device, users didn't gain many benefits by using it with a Mac instead of a PC. Since iTunes, the software used to manage iPod, was available on Mac and PC. So, users on both platforms were getting more or less the same experience. But today, tech products play a much larger role in our lives. From our watches to our TVs to our tablets to our cars, if the experience between all these devices don't work well, it can cause serious

6:09 frustrations throughout the day. That means having an Apple TV, Apple Watch, iPhone, and MacBook delivers a smoother user experience with as few hiccups and inconsistencies as possible. So, customers enjoy far more benefits being in Apple's ecosystem today than 20 years ago. This resulted in two things. First, Apple became more popular since they've historically been the best at optimizing their products, platforms, and app ecosystem. And second, they've been able to raise prices since the value they deliver customers is higher than ever before. That's why Apple's been able to turn such a huge profit from selling hardware to consumers despite it being one of the most difficult industries to make money. But it's not the only way Apple makes money. When hardware sales

6:56 began to slow in 2016, Apple recognized they were reaching market saturation since basically everyone who wanted an iPhone or Mac had already bought one. That meant they were stuck selling to their existing user base instead of acquiring new customers who were switching from Android or Windows. Now, you might think, well, Apple still made $217 billion in 2016, so who cares if it's 8% less than 2015? But shareholders expect the value of their stock to increase every year, which is unlikely to happen if Apple doesn't continue to grow. So their CEO Tim Cook had to come up with a new way to make money, which came in the form of new services revealed in 2019 and 2020. They were Apple News Plus, Apple Card, Apple

7:42 Arcade, Apple TV Plus, and Apple Fitness Plus. They joined Apple's existing services like Apple Music and iCloud Plus. But how much extra money did Apple actually make from all this? Well, a lot. Since the launch of Apple Music in 2015, Apple's services went from 20 billion a year to 96 billion by 2024, making it one of their fastest growing segments ever. It represents 25% of Apple's total revenue, which is more than the iPod, Mac, AirPods, Apple Watch, and HomePod combined. But what's even crazier is the profit margin. Remember when I told you it's hard for companies to profit from hardware? Well, the opposite is true for services because the cost of something like Apple

8:27 TV Plus doesn't scale the same way as an iPhone. For example, it doesn't really matter if 100,000 people use Apple TV Plus compared to a million. It still costs Apple about the same to provide the service. Whereas making a million iPhones would cost Apple about 10 times more than making a 100,000. This dramatic difference in cost has allowed Apple to make a 74% profit margin from services, which is more than double the 35% margin they make from hardware. But there are other ways Apple benefits from services, like locking customers into their ecosystem. Back in the early days of iPod, before the iTunes music store, customers could switch between music players pretty easily. Since our songs are on CDs, we could transfer them to any device we wanted. But starting with

9:14 the iTunes music store, there was a shift toward ecosystem lock. When we bought an album on iTunes, it could only be transferred to an iPod. So users thought twice before switching to something like the Zoom since they'd lose a good chunk of their music library in the process. Today, the same applies to several of Apple's services. Apple News Plus, Fitness Plus, Apple Pay, and Apple Arcade are only available on Apple devices. So switching to Android would mean losing all the cards in your wallet app, all your saved news stories, all your downloaded arcade games, and all your favorite workouts. But there's still another way Apple benefits from these modern services that they didn't with iTunes. Recurring payments. When you bought music from iTunes, you paid

9:59 once and that was it. You owned that music forever. But today, we don't own music. We rent it. And that means you have to keep paying Apple Music's monthly subscription fee if you want to keep your music library. And that's giving Apple a lot of power since there's no guarantee their services will remain affordable. In 2019, Apple TV Plus was initially $4.99 a month until 2022 when they raised it by 40% to $6.99, then raised it again a year later by 43% to $9.99. Price hikes like these have also happened to Apple Music, Apple Arcade, and Apple News Plus, and chances are they'll continue to happen. So, Apple's services category has not only made them more revenue and significantly more profit, but also helped keep users

10:46 locked into Apple's ecosystem while having to pay endless monthly subscription fees. So, that covers where all of Apple's money comes from and how they're able to make so much of it. This is Greg with Apple Explained. Thanks for watching till the end and I'll see you in the next video.