Apple's iPhone: The most profitable product in history

Soaring sales have given the tech giant its most lucrative trading quarter ever. Oscar Williams-Grut reports on the genesis of the world's favourite handset

Oscar Williams-Grut
Thursday 29 January 2015 01:52 GMT
The profit margin on an iPhone 6 could be as high as 69 per cent
The profit margin on an iPhone 6 could be as high as 69 per cent

According to one estimate, Apple spent $150m developing the iPhone. In the final three months of 2014 alone Apple sold 74.4 million iPhones, worth $51.1bn . That $150m surely now ranks as one of the best product investments ever.

The phenomenal sales figures, which surpassed Wall Street’s expectations, helped Apple to record the most profitable quarter of any public company, ever. The company made a profit of $18bn (£12bn), surpassing the $15.9bn oil giant ExxonMobil made in the second quarter of 2012.

“There are very few products that have boosted the financials of a company in the way that the iPhone has for Apple,” says Ian Fogg, head of mobile at research firm IHS.

Much has been written about the innovation of the iPhone, but less attention has been paid to just how profitable it is.

Apple’s profit margin in the last quarter was 40 per cent, but IHS estimates the margin on an iPhone 6 could be as high as 69 per cent. That percentage is unusually high and especially notable considering that many of the innovations that made the original iPhone such a must-have item now come as standard on cheaper, rival phones.

Richard Holway, the chairman of research firm TechMarketView, says part of the reason is its premium brand. “It’s a bit like having a designer label,” he says. “Right back to the launch of the Mac in 1984, Apple has been a fashion icon as well as being very good on the technological side. What people want is the cachet that comes with having an Apple product.”

Like most Apple success stories, the iPhone can trace its roots back to Steve Jobs. Shortly after the first iPod was released in 2002, Jobs began thinking about an Apple phone and in 2005 he personally negotiated a partnership with mobile network AT&T, then known as Cingular, to develop the product. Jobs put Jony Ive, the designer of the iPod and MacBook, in charge of the look of the handset, which was dubbed Project Purple internally.

Since its debut in 2007 the iPhone has become both a cultural and economic phenomenon, replacing Blackberry as the most ubiquitous smart phone. The latest market that Apple has set its sights on conquering is China, where the iPhone launched in 2012. The cheaper iPhone 5c was developed in part to appeal to the Chinese market, but it is the latest 6 and 6Plus models that have driven Apple’s sales in the last quarter.

“Although Apple don’t split out product-specific revenue for China, we can see overall revenue rocketed and that’s almost certainly because of the effect of the iPhone 6 and 6 Plus,” Mr Fogg says.

The latest iterations of the handset have been such a hit due to their bigger screens. So-called phablets – phones that approach the size and power of tablets – are popular in emerging markets, where people prefer to buy one device instead of two.

“When I went to China a few years ago I was amazed by the size of the smartphones people were using,” Mr Holway recalls. “A lot of that’s do to with reading Chinese characters on the screen and things like that. Apple at that stage had one of the smallest smartphones on the market, but the launch of the iPhone 6 and particularly the 6 Plus has just blown China away.”

The runaway success of the new plus-sized handsets may have come at the expense of the iPad, with sales of the tablet falling by 18 per cent in the quarter. Marina Koytcheva, director of forecasting at CCS Insight, cautions against reading too much into this, however, saying: “The tablet market overall has been in decline, so Apple is really following the trend. If people are buying an iPhone 6 Plus instead of an iPad mini, Apple is actually better off. The iPhones command much higher margins.”

The question for both investors and Apple’s management is where can the company go from here? Are these levels of sales, profits and growth sustainable?

“They are now very dependent on one product range, which they’ve never really been before,” Mr Holway says. “The iPhone is all-dominant within the company. That certainly makes them more vulnerable.”

Apple is set to launch its watch product in April, but Holway believes that it will take “a lot longer to be a hit than most pundits suggest”. The Cupertino-based firm must pay close attention to its iPhone engine-room to make sure its share price doesn’t suffer a nasty bump. “What we’ve seen in the mobile market is companies can sustain market leadership for some time, but no previous leaders have managed to do so indefinitely,” Mr Fogg says. “Motorola, Sony Ericsson and Nokia used to be market leaders, now they’re not in the top ranks. Apple has to keep innovating.”

However, analysts agree that despite the high stakes Apple still looks as though it has headroom, as well as plenty of firepower to back it up. “People will always need phones and people in developing countries will always want them too,” Mr Holway says. “Don’t forget, there are huge marketplaces such as India, the middle classes in China and Brazil. You’d be a very brave man to suggest the demise of Apple.”

Thinking big: Other key innovations

Jumbo jet

Boeing’s four-engined 747, dubbed the Queen of the Skies, entered commercial service in 1970 and halved the cost of flying single passengers. Boeing expected to sell only 400 jets before it became obsolete but the 1,500th aircraft was built last July. Boeing had a 20 per cent estimated profit margin on each plane at one point.

Sony Walkman

“Don’t you think a stereo cassette player that you can listen to while walking around is a good idea?” asked Masaru Ibuka, the Sony co-founder. He was right, and in 1979, the Japanese firm introduced the Sony Walkman TPS-L2, a 14oz portable cassette player. Some 200 million Walkman devices were eventually sold worldwide.

Xerox photocopier

In 1959 the Xerox Corporation introduced the Xerox 914, an automatic commercial plain-paper copier. The machine was so popular that photocopying became known as “Xeroxing”. The 914, which was called the “the most successful single product of all time” by Fortune, had a reported 70 per cent gross profit margin.

Microsoft Windows

The graphical user interface for Microsoft’s MS-DOS computer operating system was released in 1985. Today, Windows software still powers about 80 per cent of the world’s desktop and laptop computers, and each program sold is estimated to offer a 60 per cent profit margin for the American technology giant.

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