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Windows generates less than a third the profit of iOS + OS X

May 3, ’11 10:31 PM
Author Categories Financial

While a lot of the credit for Apple’s success is rightfully assigned to the iOS franchises, the OS X business has more than quadrupled in five years. This has happened without drastic price fluctuations. Neither holds for the overall PC industry which has seen both volume and sales decline while prices have eroded along with profitability. On top of that, growth has nearly evaporated.

Even with this success, as a percent of total value created, the Mac accounts for a mere 13% of Apple’s profit. Including software as part of the OS X franchise implies that OS X is enabling about 20% of Apple’s profits.

iOS, on the other hand, is accounting for more than 75%. These two platforms combined amount to 96% of Apple’s profits (up from 50% four years ago).

That’s $9.8 billion from integrated platform-based devices. One can be very confident that this profit would be negligible without the software differentiation only Apple can offer.

So $10 billion is a lot of profit to obtain from a business enabled by operating system platform software. How can we get a handle on this size? How big is this? We could compare this with another operating system business: Microsoft Windows.

Microsoft’s Windows and Windows Live Division obtained sales of $4.445 billion in the last quarter with an operating income of $2.764 billion.

So although Windows earned about twice what the Mac earned[1], iOS and OS X together enable 3.5 times the profits of Windows.

The end of an era is the end of growth in one dominant business model. The PC era was epitomized by the concentration of profits in a dominant operating system vendor. That growth has slowed if not ended. The post-PC era is being kicked off by a new business model where profits are being concentrated in a hardware+software+service integrator.

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  1. Or you could read this as: The Mac generates half the profits of Windows while iOS devices generate 2.3x Windows profits.
  • Halex_Pereira

    Wouldn't it be fairer to combine the profits of other PC makers (HP, Dell, Lenovo, Asus…) to Microsoft's, to measure the numbers of hardware AND software as in Apple's model?

    • asymco

      Yes it would. I am looking for this data.

      • http://twitter.com/mariomui @mariomui

        Thats a huge undertaking. wouldnt it be easier to split apple into two virtual companies and ass sign them different margins based on the Microsoft model? So the math would be – Apple Revenue vs Apple virtual hardware division.

        Of course the numbers for the virtual apple hardware division would be extremely fuzzy. You could always give it the same margins Hp has.

      • Hamranhansenhansen

        No. Microsoft is the anomaly, not Apple. Pretending that hardware and software are separate things is the anomaly. They are both just bits. There is no hardware without software and vice versa. Microsoft has exploited this fiction to maximize profits and minimize liability, but it is BS. Apple passing them in profits marls the renunciation of that BS.

        So if you want a complete picture, you add Microsoft to HP, you don't split Apple in 2.

      • airmanchairman

        A confusing though interesting spectacle.

        Wouldn't you also have to factor in all the 3rd party accessories vendor's profits to Apple's side of the equation?

    • Rob Scott

      That would be fair but it's not necessary. The biggest myth has been that the only way to succeed is for Apple to licence its OS, the reality is that the integrated approach is just better if the goal is to make money.

    • Hamranhansenhansen

      That profit is basically a rounding error.

      • http://twitter.com/Info_Dave @Info_Dave

        Horace will have to do a tremendous amount of work to gather the profits of all the PC hardware manufacturers, and will arrive at basically the same conclusion. For every PC manufacturer that eked out a profit, there is one that lost money.

  • TheOtherGeoff

    Halex, It's an interesting 'total' discusion, but it's probably fairer to compare profit margins of the 'OS vendor' It used to be that all the profit was in the OS… you literally just build one version then copied it 100Million times, and it's up to the HW vendors (who are forced to race to the bottom in margin for competitive advantage). Now it appears that HW+SW creates a profit synergy that is superior to the Commodity Licensed OS built separately from with the commodity specced HW (and sold through yet another players retail channel). iOS and OSX (and to a lesser extent RIM) show that owning the integration of HW and SW provides a compelling profit margin.

  • http://twitter.com/MtnMikeBall @MtnMikeBall

    Horace, you said "These two platforms combined amount to 96% of Apple’s profits (up from 50% four years ago)."

    This sentence just doesn't make much sense to me. iOS didn't have any profits 4 years ago. The first iPhone wasn't release until June 2007. So, 4 years ago there was only Mac and iPod product lines.

    If I'm reading this right, you're simply saying 4 years ago the Mac was responsible for 50% of apple's profits.

    • asymco

      That's right, you can see that in the chart. Most of the other 50% was from the iPod before it became a platform product.

  • http://www.noisetech-software.com/Perspectives.html Steven Noyes

    Horace,

    Have you read this write up by Michael Mace?
    http://mobileopportunity.blogspot.com/2010/10/wha…

    I find it interesting because he looks at the "death" of platforms being eroding price and volume. And then you stated:

    "Neither holds for the overall PC industry which has seen both volume and sales decline while prices have eroded along with profitability."

    When combined, I am wondering if we really are starting to see the decline of the 20 year old "PC" guard and transitioning to a whole new method of computing.

  • Roger

    Horace, does your Windows and Windows Live numbers include Windows Server business? I think it should.

    • asymco

      Perhaps. The problem with the server group is that it includes much more than OS sales. One could argue that it's a "Windows-enabled" business, but then so is all of Microsoft to a degree. As a whole Apple did generate more profit than Microsoft last quarter.

      • Ted_T

        The biggest Windows enabled business is MS Office, although presumably MS doesn't break out Mac vs. Windows Office sales. Nonetheless, if you are counting Mac software sales you really can't avoid counting Office. And realistically MS subsidizes its Windows price via Office, just as Apple subsidizes OS X pricing via hardware.

      • http://twitter.com/Info_Dave @Info_Dave

        Perhaps you can make a case for Server, but keep in mind that Apple is basically exiting the 'conventional' server business. Office is another matter, as it has become the flagship of Microsoft's revenue and profit stream. That could be more interesting.

  • Ajay

    As others have pointed out, a fair comparison should include profit of hardware companies as well.

    Apple tight integration allows rapid innovations that can’t be matched by Windows or Android models, which are constrained to create software for lowest common demonitor.

    In hindsight, Nokia SHOULD have picked up Palm and ported QT over to offer native toolchain. Nokia has got the worst of both worlds by going to bed with MS. MS will try to retain third party phone makers to keep the windows like licensing model alive. As the major or only licensee Nokia will be squeezed to extract profits for Windows Mobile division, without which Nokia is now as good as dead in waters.

    • Hamranhansenhansen

      I couldn't believe it when Nokia didn't buy Palm. Nokia had hardware and no software and was old school phones, and (the new) Palm was software without hardware and very new school, a total iPhone rip-off. It looked very much like Apple/NeXT. And Nokia would have gotten the Silicon Valley office they wanted.

      Nokia lost billions in market cap since they save $1 billion by not buying Palm.

      • http://twitter.com/Info_Dave @Info_Dave

        So does HP have a chance?

        I would love to see WebOS in the mix.

  • http://twitter.com/gassee @gassee

    Horacde writes: The post-PC era is being kicked off by a new business model where profits are being concentrated in a hardware+software+service integrator.

    That's where the History Repeats Itself "thinkers" fail to Think Different. JLG

    • Hamranhansenhansen

      Plus ça change …

  • Walt French

    @Horace, thanks for excellent insights as always.

    I suspect when you go thru the trouble to tease out how much HP makes after you subtract out printer cartridges, and ditto for another dozen manufacturers, you'll have something like the stark conclusion that Apple makes about as much money on PCs as the rest of them put together.

    This is probably a bit weaker than for tablets, where Apple makes more money than the whole industry (including itself): there's no way that RIM+Moto+Sammy+Nook+… can show any positive earnings impact.

    This is where the growth story gets interesting: to enjoy anything close to its recent growth rates of earnings, Apple has to utterly re-define these markets, convincing more and more people to trade up from their $599 computers to an $1199 iMac. They HAVE been doing this, and if their cloud/integration efforts proceed roughly as I imagine/hope, they can continue to do so for several years.

    But not forever. Eventually, they will have taken such a large share of the upsellable market that they will not gain share numbers without cutting margins. At that point, they will have had to have discovered whole new industries to conquer, as they have so ably done of late. Apple's business is technological disruption; it is Shiva, the Destroyer.

    • Hamranhansenhansen

      I think the proposition for the $599 Windows PC user is to trade for a $599 iPad. This decade, iPad is taking low-end Windows sales, just like the Mac took high-end Windows sales over the past decade. I think what we see in the Mac right now is just honest growth, not stolen from Windows.

      • http://twitter.com/Info_Dave @Info_Dave

        Once again, I agree with you. I'm sure you remember the metric that 91% of the computers sold over $1000 were Macs, that was back in 2010. Now the iPad has caused netbook maker Acer to see year over year growth to be 42%, 21%, 7%, -15%, -16% in the last 5 quarters.

        Just today I read about the rumor of a Mac tablet at Gizmodo. Not iOS based, Mac based. That would close the gap considerably. If Apple pulls this off, we should all begin to worry

  • mortjac

    It didn't help that Microsoft has sold the triple number of Windows 7 copies compared to the number of devices sold by Apple.

    Selling software alone, is apparently not so cute anymore…

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  • timnash

    As the iPad displaces Windows in homes, education and certain business niches like healthcare and sales and marketing, we will see further erosion of Windows sales in the USA, Western Europe and other developed economies. So soon it will be good to have something else to compare iOS / OS X to.

    Horace: have you looked at comparing sales-to-date of Apple's product ranges to total sales of products that filled the same niche in previous generations? For some time I tracked iPod sales-to-date against total Walkman sales to give an idea of likely peak, but the launch of iPhone and iPod Touch made this less useful.

  • Hamranhansenhansen

    > iOS + OS X

    This should read "iOS + Mac OS," or just "OS X." Both iOS and Mac OS run on the OS X core. They are both like a layer cake where the bottom 3 layers are the same, and the top layer is different. One has a mouse-based user interface and application interface, and one has a touch-based user interface and application interface.

    So it is very much an OS X versus Windows question. The fact that OS X can present 2 entirely different user and app interfaces is a strength. The fact that OS X can scale from iPod touch to Mac Pro is a strength, and changing interfaces is a feature of that scaling.

    • ludachrs

      @Hamranhansenhansen Do you have a blog or site?
      ludachrs

    • asymco

      Technically you're right but I'm using Apple's branding.

    • davel

      Yes. Of course you are right.

      But at it's core OSX is NextStep which is Unix.

      Unix has always been flexible this way with the ability to swap the UI without affecting the core.

      What I don't know is the Apple core. The Mac interface built on top of NextStep that handles the all the screen and printer graphic elements. There may be significant differences in OSX and iOS for this.

    • ayedee

      This is not quite accurate. iOS and Mac OS X are diverging more than most people think. Only the very lowest layer is highly common, although even in that layer there are some areas of significant difference. The key here is not that they are the "same", but that they mutually benefit each other and feed into each other over time.

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  • Nargg

    Isn't the difference closer to 1/2 than 1/3??? I guess math is really a bad subject on this web site.

    • asymco

      No it isn't. Windows created operating income of $2.764 billion. iOS and OS X together created operating $9.8 billion (my estimate). The ratio is 0.28:1. It's closer to 1/4 than to 1/3 but I was feeling generous.

      You may be mixing sales and profits.

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  • http://twitter.com/khamer @khamer

    Now we just need the numbers of sales for each, so we can accurately figure out that Apple's margin on iOS devices is 3.5 times as huge as Windows.

    And I agree strongly with Halex; Windows is the platform only, Apple's margins are bound to be higher since they are getting both the hardware and software margins.

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  • two_ears_good

    It is Mac OS X, not OS X and definitely not OSX. Consult an authoritative source, such as Apple.

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