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Apple's grand unifying strategy: high profit margins

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'Surprise and delight' in order to sell more expensive stuff

It’s easy to get lost in Apple’s torrent of disparate announcements yesterday and miss the common purpose to them all. But there was indeed a shared, unifying strategy at play, and that was the pursuit and maintenance of high profit margins. Viewed through the unemotional prism of "how much money do I make from every unit sold?," there’s a perfect congruence between the diversity of new Watch bands, the content-focused reboot of the Apple TV, and the launch of the large and expensive iPad Pro. Apple isn’t here to sell the most of anything; its overarching goal is simply to generate the greatest possible profit. It's a beguilingly simple approach to a very difficult and complex market.

When tech companies are confronted with stagnating sales, as Apple has been with the iPad in recent times, they usually look to stimulate demand by cutting prices or adding features and enhancements at the existing price. In other words, they erode their profit margin — the amount made per unit sold — in the hope of producing a larger absolute profit through a greater volume of sales. That’s how most price wars get started, whether you’re talking about big-screen TVs, Android smartphones, or even RAM sticks for your motherboard. Each of these price competitions has been a boon for the consumer, making more and better options available at ever-reducing prices, but they’ve been devastating to most of their participants. That might be why Apple resolutely refuses to engage in them.

Stagnating iPad sales have forced a reaction from Apple, which is going upmarket

Apple’s answer to iPad stagnation has been to go further upmarket. Instead of slashing iPad prices to counter competition from Samsung and the rest of the Android hordes, Apple is stepping into a higher price bracket and equipping the iPad Pro to become its first 2-in-1 device. It will clash with competent opposition from Microsoft’s Surface Pro and even from Apple’s own MacBook range, but that’s the competition that Tim Cook and company want to be in. Cook has already said he’s unafraid of cannibalizing the Mac business, and he sees the iPad as a bigger threat to Windows PCs anyway. It’s no accident that Phil Schiller compared the new A9X processor of the iPad Pro to portable PCs, claiming that it’s faster than 80 percent of those that shipped over the last year.

apple watch

The Apple Watch partnership with Hermès is an obvious evolution for Apple as well. Nothing maintains profit margins better than the intangible, unquantifiable quality of prestige. That’s how Beats by Dre headphones continue to do so well, despite not having a clear-cut performance advantage. Yes, we’re still talking about technology products, but the way we shop for them has evolved far beyond the pursuit of mere functionality, and Apple is capitalizing on the attractions of the shopping experience that are cheap for the manufacturer to generate yet still valuable to the consumer. Like fancy watch straps and custom Hermès watch faces.

That’s also a big reason for why Apple Stores open iPhone launch days with rapturous applause for the first people in line, and why Apple tends to be generous with its device replacement schemes. Like luxury stores and hotels, Apple includes a few extra customer service perks knowing very well that they’ll pay off in encouraging people to spend lavishly on its goods, expecting more of the same high quality service. It’s a calculated, thoughtful system for maintaining the highest possible price-to-cost ratio across all of Apple’s products.

The only colorful iPhones you can get today are also the most expensive ones

The 16GB entry-level iPhone 6S has stirred plenty of discontent recently, but it too makes perfect sense when viewed through an accountant’s eyes. Apple’s selling iPhones at an unprecedented rate and, for today at least, doesn’t need to incentivize people to want a new iPhone. So of course it will keep its cheapest handset at least a little bit hamstrung, in order to stimulate sales of its higher-priced variants. If Apple makes more money per 64GB iPhone than per 16GB iPhone, why would it genuflect to our desires for an ideal iPhone that splits the difference? Further evidence of Apple’s constant nudging of shoppers toward more expensive options comes from the choice of colors now available: as of today, only the new iPhone 6S family can be bought in gold (or the new rose gold variation), leaving the iPhone 6 and 6 Plus with only monochromatic paint jobs. With the plastic iPhone 5C quietly discontinued, the only colorful iPhones you can get today are the shiny, happy, and most expensive new ones.

iphone 6s

Most of Apple’s profits today come from iPhone sales, which the company has always stressed are the result of designing the whole user experience, not just the hardware. Apple has spent this year developing its software and services to lock yet more users inside the iOS ecosystem and entice them to keep buying iDevices. Apple Music builds on Apple’s iCloud and iTunes Match subscription services to become the company’s biggest new venture into the entertainment business since the introduction of the iTunes music store over a decade earlier. This week, the Apple TV is getting a major overhaul that places games and apps front and center, and content deals for original and exclusive programming for it have been rumored throughout the summer.

Apple is tightening its grip and control over the entire iOS user experience

The Apple News app on iOS 9 also gives Apple an enhanced position in the mobile publishing (and advertising) space, and it synergizes beautifully — from Apple’s perspective — with the new ad-blocking feature coming to Safari. Publishers struggling to monetize their content in Apple’s mobile browser will be induced to participate in Apple News, where they’ll have to use iAd, Apple’s advertising platform. It all amounts to more control for Apple over how things look and function, and, importantly, how money flows from consumer to content provider.

Even though software has the potential for vastly higher profit margins than hardware, Apple doesn’t strictly need any of its services to generate significant revenue of their own. Apple Pay is entirely free to users, provided they have purchased a compatible Apple Watch, iPhone, or iPad. So long as Apple’s services buttress the world’s most profitable product range, Apple will be happy.

A time will eventually come when the iPhone’s incredible popularity will subside. Like the iPod before it, the iPhone has reached iconic status, but it too shall be superseded, or at least commodified like every other smartphone. Adding unique features like 3D Touch is one way to retard progress toward such a fate, but Apple is also working on diversifying its range with this year’s Watch and iPad Pro introductions. They, along with a major new subscription service in Apple Music, may indicate that Apple is in transition, but it really isn’t. It’s the same old, boringly successful Apple, whose only philosophy is profit. That abiding principle has taken Apple so far, and it will be the thing that steers its future course, whether it involves more phones, tablets, laptops, watches, or even cars.