How well is apple doing

How Apple Makes Money

Apple’s biggest revenue sources are the iPhone and the Americas

Apple Inc. (AAPL) is a global technology company that designs, manufactures, and sells smartphones, personal computers, tablets, wearables, and accessories. Some of its main products include the iPhone, the Mac line of personal computers and laptops, iPad, Apple Watch, and Apple TV. The company also has a fast-growing services business that includes its iCloud cloud service, and its digital content streaming services such as Apple Music and Apple TV+, the latter launched in November 2019.

Apple faces numerous competitors including smartphone manufacturers Samsung Electronics Co. Ltd. (005930) and LG Electronics Inc. (066570), computer manufacturers Lenovo Group Ltd. (0992) and Dell Technologies Inc. (DELL), streaming-content providers Spotify Technology S.A. (SPOT) and Netflix Inc. (NFLX), and other technology companies like Microsoft Corp. (MSFT), Alphabet Inc. (GOOGL), and Amazon.com Inc. (AMZN).

Key Takeaways

• Apple sells smartphones, personal computers, tablets, wearables and accessories, and services.
• iPhones are Apple’s biggest source of revenue by product, and the Americas is the largest revenue generator among its geographic regions.
• Apple’s services business generates the highest gross margins.
• Apple recently acquired classical music streaming service Primephonic.
• Apple announced changes to its ecosystem that will allow developers to offer payment options to users of their apps outside of the App Store.

Apple’s Financials

Apple posted net income of $21.7 billion on revenue of $81.4 billion in Q3 of its 2021 fiscal year (FY), the three-month period that ended June 26, 2021. Apple refers to revenue as net sales in its financial reports. Both net income and revenue rose compared to the year-ago quarter. Net income grew 93.2% as revenue climbed 36.4%.

Both Apple’s Products and Services businesses grew during the quarter. Revenue for the Products business rose 37.4% compared to the year-ago quarter, comprising about 79% of Apple’s total revenue. Among its products, iPhones comprised 49% of total revenue; Macs (10%); iPads (9%); and Wearables, Home and Accessories (11%). Services revenue grew 32.9% compared to the same quarter a year ago, comprising 21% of Apple’s total revenue.

Apple has mounted a major corporate strategy to reduce its dependence on lower-margin hardware products, which face slowing growth, while accelerating the growth of its Services business, which has higher margins and a more predictable, recurring revenue stream. Apple has introduced many new services in recent years, including Apple Arcade, Apple TV+, Apple News+, and Apple Card. The company now offers many of its services in one simple plan called Apple One.

The high margins in Apple’s Services business have continued to rise. Gross margin as a percentage of sales was 69.8% in Q3 FY 2021. Its annual gross margin in FY 2020 was 66.0% compared to 63.7% in FY 2019 and 60.8% in FY 2018. Gross margin as a percentage of sales for Products was 36.0% in Q3 FY 2021. It was 31.5% in FY 2020, down from 32.2% in FY 2019 and from 34.4% in FY 2018.

Apple’s Business Segments

Apple provides a breakdown of revenue and operating income for the following geographical segments: Americas; Europe; Greater China; Japan; and the Rest of Asia Pacific.

While the U.S. is still the dominant market, Asia is rapidly catching up. In Q3 FY 2021, markets in China, Japan, and Asia Pacific contributed 36% of operating income and 33% of revenue. That makes the Asia region dramatically more important than Europe to Apple for growth and profits.

Americas

The Americas segment includes both North and South America. Revenue grew 32.8% in Q3 FY 2021 to $35.9 billion, comprising about 44% of Apple’s total revenue. Operating income grew 62.0% to $12.9 billion, comprising about 41% of the operating income for all segments.

Europe

The Europe segment includes European countries, as well as India, the Middle East, and Africa. Revenue grew 33.7% in Q3 FY 2021 to $18.9 billion, comprising about 23% of Apple’s total revenue. Operating income grew 60% to $7.1 billion, comprising about 23% of combined operating income for all segments.

Greater China

The Greater China segment includes mainland China, Hong Kong, and Taiwan. Revenue rose 58.2% in Q3 FY 2021 to $14.8 billion, comprising about 18% of Apple’s total revenue. Operating income rose 84.6% to $6.3 billion, comprising about 20% of the combined operating income for all segments.

Japan

Revenue for the segment rose 30.2% in Q3 FY 2021 to $6.5 billion, comprising about 8% of Apple’s total revenue. Operating income rose 43.4% to $3.0 billion, comprising about 10% of the combined operating income for all segments.

Rest of Asia Pacific

The Rest of the Asia Pacific segment includes Australia and those Asian countries not included in the company’s other reportable geographic segments. Revenue for the segment grew 28.5% in Q3 FY 2021 to $5.4 billion, comprising about 7% of Apple’s total revenue. Operating income grew 54.0% to $2.1 billion, comprising about 7% of the combined operating income for all segments.

A note to readers that the combined operating income used in the segment breakdowns above and in the pie charts was $31.5 billion in Q3 FY 2021. To arrive at Apple’s lower, reported consolidated operating income of $24.1 billion for the quarter, Apple makes deductions for research and development expenses and other corporate expenses.

Apple’s Recent Developments

On Aug. 30, 2021, Apple announced that it has acquired Primephonic, a classical music streaming service. Financial terms of the transaction were not disclosed.

On Aug. 26, 2021, Apple announced that developers will be able to share purchase options with users of their apps outside of Apple’s ecosystem. The change, which comes as part of a proposed settlement of a class-action lawsuit, will make it easier for Apple’s customers to use forms of payment other than the App Store.

How Apple Reports Diversity and Inclusiveness

As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of Apple and its commitment to diversity, inclusiveness, and social responsibility. We examined the data Apple releases to show you how it reports the diversity of its board and workforce to help readers make educated purchasing and investing decisions.

Below is a table of potential diversity measurements. It shows whether Apple discloses its data about the diversity of its board of directors, C-Suite, general management, and employees overall, as is marked with a ✔. It also shows whether Apple breaks down those reports to reveal the diversity of itself by race, gender, ability, veteran status, and membership in the LGBTQ+ community.

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How Did Apple Get So Big?

The Story Behind Apple’s Success

On August 2, 2018, Apple made history by becoming the first publicly traded U.S. company to be valued at $1 trillion, as measured by market capitalization.   In August of 2020, the company broke records again by becoming the first U.S. company to reach a $2 trillion market cap.   Apple (AAPL) hovered just below that level as of early October 2020.

Since 2010, Apple has been one of the most valuable companies in the world.   It stayed at or near the top for many years after that.   The reason Apple is so highly valued is simple on the surface: the company makes popular products with generous margins. However, a curious reader who digs a little deeper will find mistakes, overthrown CEOs, and much more. In this article, we’ll look at the story behind Apple’s success.

Key Takeaways

• Steve Jobs and Steve Wozniak co-founded Apple in 1977, introducing first the Apple I and then the Apple II.
• Apple went public in 1980, but Jobs eventually left—only to triumphantly return several years later.
• Apple’s success lies in a strategic vision that transcended simple desktop computing to include mobile devices and wearables.
• Both performance and design are key drivers of the Apple brand and its ongoing success.

From Apple I to Steve Jobs 2.0

Understanding why Apple became so successful requires looking back at its origins and history. From the first Apple computer (the Apple I, which was just a motherboard without a monitor or keyboard) to the latest iWatch, here is a brief overview of the chronology of Apple’s innovative products.

Apple, founded by Steve Jobs and Steve Wozniak, started out in the business of kit computers with the Apple I.   This initial production run is popular as a collectible now. However, it will mainly be remembered for helping the company get enough capital to build the Apple II in 1977—the same year Apple officially incorporated.   Wozniak primarily built both these computers, and Jobs handled the marketing side. 

The Apple II drove the company’s revenue until the mid-1980s, despite the hardware remaining largely the same. Apple attempted updates like the Apple III and the Apple Lisa, but these failed to catch on commercially. Although the Apple II was still selling, Apple as a company was in trouble when the 1980s began.

The 1984 release of the Macintosh was a leap forward for Apple. However, in the intervening years between the Apple II and the Macintosh, IBM had caught up. Disappointing revenues from the Macintosh and internal struggles for control led to Apple’s board dismissing Jobs in favor of John Sculley (some sources say Jobs decided to leave). 

In any case, Jobs worked on NeXT Inc. after leaving Apple. Under Sculley, Apple started growing its product lines.

Sculley served as Apple’s CEO until 1993.   During those years, Apple enjoyed strong growth. It created new products, including laser printers, Macintosh Portable, PowerBooks, the Newton, and much more. Apple products continued to sell at a premium, so the margins were generous for Apple and led to strong financial results. During the same period, however, cheaper computers running Windows were serving a far larger middle market, while Windows also benefited from powerful Intel processors. By comparison, Apple seemed to be stalling.

Two CEOs, Michael Spindler and Gil Amelio, failed to turn the tide against the relentless spread of systems running Microsoft operating systems.   Microsoft’s new operating system, Windows, was becoming the industry standard, and the Apple Macintosh was showing signs of age. Amelio eventually set about addressing some of these issues by buying NeXT Inc.—the company run by none other than Apple founder Steve Jobs.

The Second Chance CEO

From the Macintosh onward, Apple has either been a reflection of or a reaction to Steve Jobs. In the Macintosh, Apple was trying to create a machine that made computing simple and enjoyable. In particular, Jobs was out to create a user experience that would convince everyone to buy a Mac.

Jobs believed a truly revolutionary product couldn’t depend on customers’ needs and wants. He thought customers could not understand the value of a product until they were actually using it. Unfortunately, Jobs was ahead of his time in 1985—precisely 12 years ahead of his time.

When Jobs overthrew Amelio and took Apple’s reins once more in 1997, the hardware had caught up to his vision for all things digital. He launched the iMac with a strong marketing campaign featuring the «Think Different» slogan. Although Jobs is often given credit for spending the money and time on marketing, excellent marketing and branding have always been key to Apple’s growth. The real difference between the iMac and all the products preceding it was the beauty and design.

It was not a tower and monitor setup like every other PC on the market. The iMac almost looked like a racer’s helmet photographed at speed, a colorful blur sweeping back from the screen. In 1998, the iMac was the most aesthetically pleasing machine on the market. It was the computer no one knew they wanted until they saw it. It was elegant and, thanks to the OS upgrade, it was user-friendly.

The iEcosystem

The iMac was just the start as Apple released a string of hit products that reflected the new focus on elegance and user experience. These included the iBook, the iPod, the iPhone, the MacBook Air, and the iPad. The iPod became the category killer in MP3 players, and the iPhone essentially launched and then dominated the smartphone market. The iPad then somehow convinced millions of people that they needed yet another screen to consume content.

All these devices were perceived as being better in quality—and certainly in design—than competing products. Jobs was relentless on design and indoctrinated the entire culture of Apple into the art of design.

The other point he brought Apple back to in his second tenure is the ease of use. After a few minutes of using the wheel on an iPod or tapping icons on an iPad, these new forms of control became part of the simplicity that makes Apple appealing. Now every product update from Apple is anticipated by the media and the general public, in addition to the fans that the company had from the start.

More importantly, all of these products moved Apple into a new business model of creating a tight ecosystem of hardware, software, and content. Apple didn’t create iTunes to be a simple program for users to transfer MP3s onto iPods, as was the case with many other manufacturers’ offerings. Instead, the company attacked the concept of an album by breaking them into songs that would be sold individually at a fraction of the whole album’s price.

The same process took place with software. Many popular computer functions could be done on Apple’s mobile devices using stripped-down apps—available, of course, on Apple’s App Store.

Being the first big mover into many of these markets, Apple built the stadium and set the rules for the game. When you pay for books, movies, apps, or music on an Apple device, Apple gets a cut. Of course, this business doesn’t generate as much revenue as selling an iPhone or an iPad, where the markup is much more generous.

That said, it is the content you buy through Apple that locks many people into buying Apple again when their i-devices get old. So the content part of the ecosystem pays off for Apple in the short-term and the long-term. Once you migrate to Apple because of the design or the simplicity, it is the integration with your content that keeps you there.

The Post-Jobs Era

Steve Jobs died in 2011 of pancreatic cancer.   Serving as CEO until shortly before his death, Steve Jobs turned the reins of the company over to Tim Cook.   The post-Jobs era at Apple has nonetheless been a success by most measures. Apple continued to be the dominant tech company in both market share and stock price.

Some analysts feel that without Jobs as the creative force, Apple has become solely iterative in its tech releases rather than transformative. The major release of the post-Jobs era has been the Apple Watch. The firm also created Apple TV devices and launched the Apple TV+ streaming video-on-demand service to go with it.

In the absence of a groundbreaking new product, Apple is heavily reliant on the iPhone’s production cycle to power its financial success. Critics say that without Steve Jobs at the helm, Apple has lost its innovative edge in recent years and is riding on its brand to drive sales.

The company still produced some of the best products with the most integrated ecosystem. However, the gap between Apple and competitors like Samsung and Google was no longer as pronounced as it once was. Indeed, companies like Samsung were increasingly poised to take the lead when it comes to product innovation in some categories.

Apple in the 20s

Apple’s market capitalization reached new highs in 2020, as the company enjoyed some successes and set new goals for the future. The company’s revenue from wearable technology, such as the Apple Watch, set new records. Apple’s revenue from services also rose to record highs during the 2020 crisis, as contactless payment options like Apple Pay became more popular.

Apple also announced two major changes to the Mac in 2020. First, Apple is transitioning the Mac away from Intel processors to its own custom-designed chips. Apple’s new processors are based on the ones used in iPhones and iPads, making them more energy-efficient. The new chips have the potential to give Apple’s laptops longer battery life and more processing power than PCs.

Secondly, Apple is changing the macOS so that developers can make iOS and iPadOS apps run on the Mac without modifications. That will dramatically expand the number of apps available on the Mac and make it more competitive with PCs.

The Bottom Line

There is a fairly good chance that you are reading this article either on an Apple device or with one near you. Maybe you are doing it on a MacBook Air while listening to an iPod touch and occasionally glancing at the newest Apple Watch for alerts from your iPhone. The reason behind that—and behind Apple’s success—is that its devices are beautiful to look at and a pleasure to use. That’s why the company has such a powerful brand and lofty stock valuation.

The marketing helps, and the media and fan frenzy never hurt. However, it is the quality of the products that drive Apple’s success. Add to this the iEcosystem that makes it much easier to stay with Apple than try something new, and you have a company with what Warren Buffett called an economic moat. It should not be surprising that Buffett invested heavily in Apple.

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