A tech company just broke the record for highest quarterly profit ever recorded, and it did it by selling a supposed commodity product: a smartphone. Apple’s $18 billion profit over the last three months of 2014 was driven primarily by growing iPhone sales, which accounted for more than two-thirds of the company’s $74.6 billion in revenue. At a time when smartphones are being dismissed as undifferentiated slabs of composite materials, Apple’s making more money from the hardware it sells than it ever has before, and the average price of every iPhone sold has actually risen.
With iPads and Macs counted alongside the iPhone, Apple sold 101 million devices in the last quarter, and once you factor in iPods, the Apple TV, and peripherals like Beats headphones, 93.5 percent of all its revenue came from hardware sales. That ratio somewhat masks the value of Apple’s software ecosystem — the diversity and quality of iOS apps are big attractions for people who never want to feel like they’re missing out — but it also illustrates the central importance of devices to Apple’s bottom line. While the company relies on a unique combination of hardware, software, and after-sales support to win over customers, it is almost entirely through the sale of physical things that it "cashes out" the goodwill it accrues.
There's substance underpinning all the hype
There’s no denying, of course, that some of the iPhone sales euphoria is pure, unadulterated hype. Did you get the new iPhone? Why, was it because you couldn’t afford it? It’s actually the size of a useful smartphone now! But even with all the anticipation that had built up, even with its excellent app ecosystem and prestigious reputation, the iPhone wouldn’t have sold as well as it did without being a really good piece of hardware. For all the people who complained about their new iPhones bending, there were many more praising the svelte design, the gently curved sides, the brilliant display, the effortless camera, and the reliable Touch ID fingerprint sensor. Apple also wouldn’t have achieved its present record of iPhone sales without having a history of good iPhone designs, with its older iPhone 5S and 5C reportedly still selling well around the world. It’s just a habit of doing more things right than wrong, which has stimulated Apple’s loyal following and provided a consistent development platform for Apple’s equally loyal app developers. It’s a virtuous circle that every other tech company would dearly love to emulate.
Making premium phones is hard, but clearly not impossible
The common platitude expressed by smartphone makers is that profit margins are razor-thin, and meaningful differentiation from the competition is becoming nigh-on impossible. That’s driven them to focus on delivering the highest specs for a given price, which is a strategy Samsung pursued to its great benefit for years before being outmaneuvered by even cheaper Chinese competitors. But Apple’s sales numbers show that there’s plenty of room left in the market for premium-priced devices with a superior design and user experience. The iPhone’s not alone in that category, either, as HTC’s all-aluminum One M7 was its best designed and its best selling phone before the introduction of the One M8.
As vast and sophisticated as the mobile tech industry may have become, in the end it still relies on some very basic ways for making money. You can either sell hardware, like Apple’s doing, or sell ads, which account for roughly the same proportion of Google’s regular income. Netflix and Amazon’s Kindle store have found success as cross-platform services, but spending on mobile software is unlikely to ever match that of the old days when we paid for Windows, Office, and Photoshop on the desktop. It’s easier to sell things that a person can touch and interact with physically. This is why HTC is diversifying into selling weird cameras, why LG and Samsung keep churning out new smartwatches in search of a perfect formula, and why everyone at CES earlier this month had a wearable of some kind to show off. And in spite of their lamentations about tough competition, HTC, LG, and Lenovo are all generating profits from their smartphone operations, and Samsung’s recent sales decline hasn’t been enough to put the Korean company on the wrong side of the ledger. None of these manufacturers have a profit driver of the caliber of the iPhone, but they’re running sustainable businesses even while relying almost wholly on Google’s Android software.
Hardware companies are selling software, software companies are selling hardware
Apple’s historic quarter has been a good reminder of the importance of physical things to the profitability of tech companies. Even the companies that are more concerned with building other sources of revenue — like Google seeking more platforms to display ads and Amazon trying to sell you anything at any time or place — find themselves inevitably drawn into the hardware game. Microsoft wanted the best possible showcase for a touch-friendly Windows, so it built the Surface tablets. Facebook also wanted to be the first thing you see when you turn on your phone, so it tried to do something similar. Building great hardware alone is no guarantee of success — just look at Nokia — but people aren’t standing in days-long lines for iCloud or Apple Pay. Apple’s remarkable numbers start with great hardware, and in all likelihood, they always will.