iOS enables 71% of Apple's profits. Platform products power 93% of gross margin

As the highly profitable iPhone makes up an increasingly larger proportion of Apple’s sales, the overall gross margin would be expected to grow.

Sure enough that’s what’s been happening.

The gross margin percent, which measures the direct or variable costs of production vs. price, shows a healthy rise in the last five years from slightly below 30% to around 40%. The Operating Margin, which also includes the overhead or fixed costs like R&D and SG&A, shows a similar rise, reaching about 30%.

Margin expansion while sales quadruple is a good indicator that a company is producing real value not just trading sales volume for profit.

Focusing attention on individual product lines, it’s clear that the iPhone is the largest component of sales and of profits. We don’t have specific product line-item gross margins from management, but we can estimate a figure for the iPhone by several means.

First, we can work out roughly what every other product line’s margin is due to their longer histories. (Mac and iPod have reliable profitability estimates). What’s left can be deduced to make up the iPhone’s margin.

Alternatively, we can get estimates of the bill of materials and add in some of the other direct expenses like manufacturing, warranties, shipping and incidentals to get an estimate of the cost of production.

These methods allow me to guess at a margin for the iPhone of about 50% for the last quarter. Based on these inputs we can plot the gross margins for the entire company’s product lines:

Overall, gross margins have reached over $10.3 billion in the quarter, increasing 543% from five years ago and 61% from a year ago.

That’s great, but by knowing product line profitability we can get a better feel how the company changed strategically.

In the following chart I show the percent of gross profit captured by each product line.

What we can observe is that at the end of 2005, OS X based products made up nearly half the profits. The rest was mostly the iPod, which was not a software platform product.

A short five years later, OS X products which, although having grown in volume, made up only 22% of total margin. The rest was mostly iPhone but with significant contributions from iPad and iPod. What’s most important to note is that the non-OS X profits are almost all powered by iOS.

iOS powers about 70% of Apple’s current gross profits. Combined with OS X, 93% of profits are from platform products.

So again the question about Apple being a software, hardware or media company comes back. Perhaps, those categories are not relevant. Perhaps Apple is a platform company.

  • dchu220

    "Margin expansion while sales quadruple is a good indicator that a company is producing real value not just trading sales volume for profit"

    Is it also an indicator that we are still in the early stages of growth? Apple doesn't seem to be feeling any downward price pressure.

    • arvleo

      agree…you would expect margins to come down to for iOS products as android gains more traction. iPhone introduction on Verizon, should be a decent indicator of things to come.

  • "Is it also an indicator that we are still in the early stages of growth?" This is a really important question. My tentative answer is "Probably yes." but I would like to know what Horace thinks.

    • asymco

      The expansion in margins is primarily due to the iPhone growing as a percent of total sales mix at Apple. The iPhone's margin has not moved appreciably higher though it has not dropped either.

      I would agree that the market is still very young in smartphones. The generation of smartphones enabled by touch interfaces is indeed very young by any standard.

      • Narayanan

        But if the smartphone market age is a factor, then Androids should also hold their prices and margins, which we know is not happening. The competitive pressure and the race to come out with a new model every three months will extract a toll on the margins.

        Apple is holding the pricing and margins primarily due to its value proposition. People are willing to pay the price for the value they perceive. This further increases the demand and reduces any pricing or margin pressure.

        In short, for what the iPhone is offering it is priced to perfection.

      • g3user1usa48

        I honestly don't see how those companies building Android smartphones can keep pace with one another. There's only so many features they can offer. They'll have to start changing colors and shapes and then it's "I'm gonna have to cut prices and quality to survive." I can hardly keep track of the number of Android smartphones that have been released in the last six months. Maybe 50 or so. That's a highly competitive market.

        Those Android smartphone vendors think they're beating the crap out of Apple but basically they just beating each other to death. They have to constantly keep retooling and changing production lines for each model. It must be expensive as hell. I believe users are seeing a benefit but certainly not the lower-tier vendors that have poorly-selling smartphones.

  • " Perhaps Apple is a platform company."

    I think it depends on what the meaning of "is" is. (I like this, it has a ring to it).

    For me, Apple uses a platform strategy to drive purchases of hardware. If "is" in your statement refers to strategy then I agree with the statement. If "is" refers to the products which generate the revenue then its clearly a hardware company using a platform strategy to drive hardware sales.

  • John W

    Does the “software” segment include profit from the Mac App Store and/or the iOS App Store? Or are they grouped under Mac and iOS, respectively? What happens to the software segment as consumers increasingly buy Apple software (iWork, Aperture, etc) through the App Store(s)?

  • Hiz

    I don't understand what is meant by "Platform". Do you mean OS or Systems Integration (hardware, firmware and software? Also, how do you quantify the iTunes effect on sales and/or margins? Would you consider iTunes a platform or an application?

  • davel

    I agree.
    "Perhaps, those categories are not relevant. Perhaps Apple is a platform company."
    It is a platform company. As you have exhaustively illustrated with your series on integrated vs modular systems/companies.

    Apple has always been vertically integrated. In the Macs ( and Lisa I think ) the software was in part on silicon. This was for performance reasons.

    Apple has always taken advantage of the hardware/software link. They have always cared about interface and it has always been a central part of their products.

    These are all touchy feely issues that most people ignore and dismiss but that many appreciate.

    Getting back to the point, Apple is both a hardware and a software company. That is rare. Most companies are either or.

  • Eric D.

    The iPod Touch is very much an iOS platform! And at over $2 billion in sales, it would actually push your numbers even higher.

  • capnbob66

    I think (if I am interpreting Horace correctly), that this new definition of platform provider as opposed to HW or SW vendor or even systems integrator is needed.
    The fascinating thing about Apple is that their value proposition that consumers pay so much for is the full platform which I might define as: (parentheses is how I think Apple does it)
    1) Hardware – (beautifully designed, expertly manufactured/distributed)
    2) Firmware/OS (elegant, simple, effective UI/UX)
    3) Key application software (enable users to execute key use cases in style of above (e.g iLife/iWork/Apps))
    4) Ability to acquire content (media and apps – easily and safely through a curated experience)
    5) Payment services (iTunes a/c + soon to be NFC)
    6) Sales & Service (tightly manage superior customer experience)
    7) Monetization of 3rd parties (iTunes/AppStores, iAds, Dev relations, etc.)
    If that is a platform, no-one else does all those things and it seems that no-one does any of them individually better than Apple. MS has its enormous legacy position but is not executing particularly well in the "platform" stakes as defined above [Mostly lacks 1) and poor at 4)-7)]. One could easily matrix up a chart and see where they key manufacturers lie against the 7 criteria. A lot of these criteria are in the Jonny Ive/Steve Jobs axis.
    Of course, there are key capabilities outside "the platform" that are also required to be as hyper-successful as Apple is – many of which Tim Cook brings. Excellence in:
    a) Procurement (strategic sourcing, lock in economies, lock out competitors, etc.)
    b) Contracting (with HW suppliers but also Record labels, movie studios, etc.)
    c) Supply chain (component supply, manufacturing in volume, global distribution of millions of units, etc.)
    d) Manufacturing-savvy design (minimize HW platforms, innovate (e.g. unibody), maximize econ of scale – e.g. flash, screens, chips, MBs, etc.)
    are all key success factors too. Few people do any of these as well as Apple too.

  • 21tiger

    "I like our strategy. I like it alot."

  • "So again the question about Apple being a software, hardware or media company comes back. Perhaps, those categories are not relevant. Perhaps Apple is a platform company."
    I'd say it's an appliance company.
    Jobs' dream in funding Apple, funding NeXT, and then resurrecting Apple, has always been about becoming a great industrial captain making great electronic devices that everybody would want to buy, like everybody wants to buy household appliances, considering them essential products for the quality of their day to day life. That's it.

    Hardware, software, advertising, media, retail, cloud, platforms… that's just what it takes for creating this dream of digital appliances.

  • YouWho

    I am amazed how small the music and peripherals components are in Apple's profits.

    I would in particular like to see Apple invest more resources into broadening their line of Mac and iOS peripherals.
    With the introduction of a $99 AppleTV, I'm left wondering why the much more basic Airport Express is also $99.
    I would like to see it more competitively priced at $69.
    The router market seems like one Apple could dominate with better hardware/software integration.

    Bluetooth Numeric Keypad!
    iPod Hi Fi speakers!
    iSight HD!

    • capnbob66

      At Apple margins, there's low sales in it for any of those products, at low prices there's no margin in it. Apple won't do them differently to their current model. There is nothing to differentiate them from most other manufacturers.
      Routers – there are several that match the AEBS in features now and are cheaper.
      Someone just released a matching and interlocking bluetooth numberpad, there are speakers from everyone – from cheap to Bose/Klipsch and almost all laptops have cameras these days.
      There is nothing meaningful to be made in any of these markets.

  • James

    It's pretty clear the iPad is the next iPhone.

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