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The value of the OS X monopoly

In January I noted that there were more iPads sold by Apple than PCs from HP, the largest PC vendor in the fourth quarter. Including all tablets, this is the distribution of market shares by units shipped.

Note the different color palettes for Windows and non-Windows.

By the metric of tablets+PC’s Apple appears to be the leading vendor. However, if we consider only the Mac, Apple is still well behind. The historic unit volumes of the two is shown below:

Although Apple has nearly doubled its shipment volumes since 2008, it’s still only one third that of HP. In addition to comparing volumes, we can also measure profitability. In this case HP’s PSG (Personal Systems Group) reports operating profits and we can estimate the same from Apple based on a gross margin estimate and an operating expense estimate (as percent of sales).

The comparison looks like this:

The operating profit for Apple is 2.7 times higher from a third the units. This gap is a result of a vast difference in profitability. HP’s operating margin for PCs is 5% while Apple’s is 21%.

A few days ago I highlighted that Apple’s iPhone yields disproportionate profits because of the way it performs the jobs its hired to do by consumers and operators.

With the Mac the story is that Apple’s OS X is primarily responsible for delivering quadruple hardware margins vis-a-vis the most successful PC vendor.

Both iPhones and Macs are sold as hardware products and the entire econometric analysis of Apple depends on hardware cost structures. This is because hardware lends itself to easy measurement. However, a casual observer would be stumped by a comparison with competitors which cannot come near the profitability Apple enjoys. How can the same bundle of components (admittedly mostly off-the-shelf) be sold at triple the margins?

It comes down to software. Apple has a monopoly on iOS and OS X and charges for it through its hardware. That’s a very valuable monopoly. It’s worth at least $1 billion per quarter.

  • http://www.facebook.com/christian.peel Christian Peel

    “Apple is a software company that sells hardware.”  Who has a reference for this Jobs quote?

    • http://profiles.google.com/larry.davis Larry Davis

      Do you mean: “People who are really serious about software should make their own hardware.”

      That was Alan Kay.

  • Anonymous

    I don’t think the difference in profitability is entirely attributable to OSX. After all, Picasso and the guy on public television painting anonymous mountain landscapes both use the same off-the-shelf components.

    • mrasmith

      Assuming you mean Picasso made more from the same paint then your analogy backs up the article. Yup, Picasso’s the ‘software’ and brand that people are willing to pay much more for. The PBS guy uses the same kind of paint and canvas, he is Windows.

    • http://www.asymco.com Horace Dediu

      How much would you pay for any of the existing Macs if they could only run Windows?

      • Anonymous

        Good question. If my introduction to Windows were through a Mac I might not loathe it so much. Are PC switchers to the Mac only doing so for the OS, or are they also persuaded by the elegance of the hardware design?

      • Anonymous

        Great question.

        Look at the MacBook air, I would likely pay a small premium over a competitor for the design.

        What about the best in class trackpad on the MacBooks? Is it best in class due to great hardware or great software? Or a combination of both?

        Apples great service & support would also lead me to pay a premium over competition, but that service level may suffer if it had to field windows queries all day long.

      • Rudzuna

         How much would one pay for OSX if it ran on a Dell machine? I don’t agree with “It come down to software.” I think its the total package – most people I know who buy iPhones for example do it because its a nice phone and its the trendy thing to do. There’s many aspects working together

  • Anonymous

    I’d agree that selling an OS adds to Apple’s profit. It’s like taking the profit of HP and adding the profit per computer of Microsoft. But I think there’s more to it than that. There’s a synergy between the hardware and the software that’s created when the same company that designs the OS designs the hardware. There’s a level of polish that’s acquired that gives the user a feeling of quality about their purchase. And not coincidentally IMHO, it was Apple that first thoroughly integrated hardware with a touchscreen OS and now a voice activated OS.

    Simply put, they can charge a premium price because they make premium products.

    • Anonymous

      Maybe, Apple’s pricing is not a premium but more reflects the quality of the product. It seems that when other companies build to the same or close to the same standards, the competitive products costs more. If anything, I feel that Apple’s pricing is fair and reflects their quality.

  • Luis Masanti

    I think Sacto_Joe has a valid point that maybe you, Horace, can analyze: compare “Apple’s hard+soft” revenues with “HP’s hard and Microsoft’s soft.”
    Otherwise, it would be comparing “apples to oranges.” (Sorry, pun intended.)

  • Anonymous

    Sorry to quibble, but Apple’s competitive advantage in conventional PCs isn’t entirely software. The hardware, especially laptops, has a high quality design which focuses on values that most vendors ignore, such as noise, size, very responsive input devices, and small touches like backlit keyboards and magsafe connectors. They may be the same ingredients, but Apple is a better cook (haha).

    In fact, there is a community of people who buy Mac computers expressly to run Windows. The group probably isn’t very large, but I think their existence is a testament to the value in the hardware.

    • Anonymous

      Hardware was the main factor for our household to switch to Apple computers. After going through dozens of laptops and 1/2 dozen desktop and tower computers from the likes of Gateway, DELL, Compaq and HP, we finally said enough. Our iMac is 4 years old and has never slowed down, become infected, is quiet and looks timeless. 

      We bought iPads and iPhones to complement our iMac and the integration is extremely easy, that even our 9 year old can establish all types of connections.

      For us, the halo effect started with the iMac. And, we plan to purchase more Apple products, and we personally care less about marketshare. We like the products because it just works and keeps on working.

  • http://gravitationalpull.net/wp/ ampressman

    I wonder how this analysis changes if you add in Microsoft’s share of Windows profits to HP’s PC sales? Now that would be interesting. Software has historically had much higher margins than hardware.

    Just kind of guesstimating from the chart above, it looks like HP las about an 18% share of the Windows PC market (13/74). Microsoft’s Windows division had a $2.9 billion operating profit in Q4 at a 60% operating margin, so that adds some $500 million to a combined hardware/software bottom line, or about double what HP got itself. Apple still has double the margin even with MSFT thrown in!

    • http://www.asymco.com Horace Dediu

      You can get an idea of Microsoft’s operating income from Windows here: http://www.asymco.com/2012/02/13/the-worlds-biggest-startup/ The value of Windows operating income was $2.6 billion in Q4. The total of Windows + HP would thus be worth about $3.1 billion, higher than Apple’s $1.4 billion Mac profits. However iPad alone is worth a lot more than Windows.

  • Anonymous

    “Monopoly”? You mean that Apple owns os x and doesn’t share it with other companies. They hardly have a monopoly in operating systems.

    • Chris

      You can only buy an iOS product from one company (Apple), that is in some sense a monopoly.

      • Anonymous

        Not in the English sense of the word, no. That idea could apply to almost anything.

      • Joe

        Absurd ‘logic’. You don’t have a  monopoly over your own product. You can only have a monopoly over a type of product or a market. For example, HP does not have a monopoly on the TouchPad. Ford does not have a monopoly on the Taurus. Lexus does not have a monopoly on the RX450h.

      • Anonymous

        Look at it from the perspective of apples Mac hardware business, you could say that they have a monopoly on selling PCs running OS X, which is produced by another entity (apples OS X software division). It is comparable to what would happen if HPs PC division had a monopoly on selling PCs running windows – its sales and profits would explode!

      • http://pulse.yahoo.com/_Y4AJEC7WSC22KKCYIH6ANZ43CM Mile L.

        NOOOO they do NOT! You aren’t understanding what a “monopoly” means!!!!
        -
        It’s the control of an ENTIRE MARKET… one vendor generally cannot control “a market”… Apple has what? 10% of the PC hardware market? So how in the world can Apple have a “monopoly”?
        -
        You aren’t making sense. If you don’t like Apple’s offerings, you have plenty of other choices!

      • Anonymous

        OS X can run on non- apple computers, yet apple is the only one that can sell it. Unless you are saying I can go and buy a new computer running OS X from someone other than apple, then that seems to me like a monopoly on OS X.

        Having a monopoly on OS X is different than saying it has a monopoly on all operating systems.

        Apple also has a monopoly on phones that can access the iTunes store, doesn’t mean I’m saying apple has a monopoly on phones that can buy music online.

        Perhaps exclusivity is a better way to describe it?

      • http://pulse.yahoo.com/_Y4AJEC7WSC22KKCYIH6ANZ43CM Mile L.

        no, it is in “no sense” a monopoly… it just means the company is vertically integrated… nothing wrong with that… if you don’t want Apple, you have hundreds of other choices with similar services. good luck. but please, look up the word “monopoly”, it will save you ridicule in the future.

    • davel

       I agree. Monopoly does not apply to iOS nor OS X.

      However Horace’s use of the word is correct. Apple does have a monopoly on iOS and OS X, just as Microsoft has a monopoly on Windows and WIndows Phone OS.

      • http://pulse.yahoo.com/_Y4AJEC7WSC22KKCYIH6ANZ43CM Mile L.

        no, they are simply “vertically integrated”, which does not constitute “monopoly status”. you need to have around 80% share of an “entire market segment”, then “abuse” that position for financial or other aims to be libel.
        -
        apple has about 10% of computer / OS sales, 20% of cell phone sales, 65% of MP3 sales, 12% of music sales… 40% of set top box sales… so Apple is fine, their customers can move forward…

    • http://profiles.yahoo.com/u/IWQ7HIPZ4UJ5YWJB7JSYZ7QXKM watchdog

      If you’re in the market to buy a computer that runs iOS or OS X, Apple is the only vendor from whom you can buy such a computer.  In that way, Apple has a monopoly in that market.

      If you’re in the market to buy a computer that runs Windows or Android, there are many, many vendors from whom you can buy such a computer, and no one has a monopoly.

      It’s clearly not the usual usage of the word, and not the way it has meaning in the field of economics. But it does get across that there is no other vendor in that market.

      • jimstead

         So you’re saying that “monopoly” is a synonym for “owner”. You might as well say that Nike has a monopoly on certain shoe soles because other shoemakers can’t build their shoes with the Nike soles.

        Certainly this usage is in keeping with the current styles of washing out all meanings from words and implying important things that don’t exist. I just like a little more precision from someone who writes and publishes it.

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  • davel

    It is amazing how large a share of of the market Apple holds with the Mac and iPad.

    How would have thought that Apple would be a market leader in PC shipments?

    I think you have made the case that tablets are PC’s with your posts comparing iPads with netbook shipments.

    I have had arguments at work that tablets are PC’s at work. In fact I have made the case just a few days ago. The counter is always but the PC can do X.

    Of course tablets in their current incarnation do not have the usability of PC’s in terms of the range of uses. This will change. Laptops are essentially the equivalent of a desktop. No one questions that a laptop is a PC. However this was not always the case. The same holds true with tablets. One day soon the infrastructure of tablets will be robust enough that no one will question the statement that a tablet is a PC and the statement of the post pc era will be moot. So Steve and Steve will both be right but for different reasons :)

    • davel

       How would have thought that Apple would be a market leader in PC shipments?

      *Who would have thought that Apple would be a market leader in PC shipments?

  • Ronin48

    I wouldn’t say “Apple has a monopoly on iOS and OS X” which suggests that iOS and OS X are markets unto themselves.  As unique as they are they are products – operating systems or platforms within markets – not markets.  One can only have a monopoly over a market. Apple doesn’t “have a monopoly” over iOS and OS X, it OWNS them and the related IP.  This is like saying Microsoft has a monopoly on Windows.  They don’t.  They own Windows.  At one time they were judged to have a monopoly in the desktop operating system market and perhaps they still do.  Apple has no monopoly in either smartphone operating system or PCs operating system markets.

    And even if iOS and OS X could conceivably be called monoplies (and they can’t) neither controls the majority market share that the description “monopoly”  implies and requires.

    Nevertheless a point similar to yours can be made that the superiority of Apple operating systems confer a significant and well-deserved premium on the Apple products that run them despite their minority market shares.  

    • jawbroken

      How do I know what constitutes a market? That seems to be the crux of the issue. Is there a specific objective procedure I can apply that decides how to segment all of the world’s products into separate markets? Is an iPad part of the computer market? What about a Kindle Fire? 

      How do I know that Apple computers and HP computers are in the same market? If they are in the same market then how are their profit margins so different? Shouldn’t competition within a market drive them to comparable levels? What’s the differentiating factor?

      Are smartphones in the same market as feature phones? Are they in the same market as netbooks? When I look at a picture like http://twitpic.com/8o4ez6/full do I really come to the conclusion that all of these companies are playing the same game on the same field? Why is one of them so unlike the others?

      In what sense is your definition of a market helpful to me? Where does it fit into the economics?

      • Ronin48

        14 questions?

  • http://wmilliken.livejournal.com/ Walter Milliken

    I would quibble a little with Horace’s analysis that Apple’s premium comes from its software. I think the truth is a bit more subtle — that Apple’s premium comes from system design, which manifests itself in a variety of tradeoffs and function partitionings between hardware, software, packaging, and even process. I.e., Apple doesn’t partition these things away from each other like a typical company does, but rather it seems like someone (Jobs at least, in the past) takes a holistic look at the entire system and pushes design choices one way or another until the right overall result is achieved. I think this is actually a bit more than the simple “integrated approach” tag that’s been applied in the media, which mostly seems to mean that Apple makes both hardware and software. Other people have done this much in the past without Apple’s breakout results. (Historically this was true of IBM in the “big computer” days; they did dominate their market, but all their competitors at the time were also integrated. DEC did the same in the minicomputer market.)

    My view is that Apple’s approach these days is to design the entire system, which is rapidly becoming more than hardware+software, but includes content access (iTunes) and ubiquitous computing support (iCloud), with more subtle effects back into the supply chain like using unique parts where they see an advantage, and optimizing their third-party production processes.

    This kind of holistic approach is *very* hard to do. (Horace had a post a while back which touched on this: http://www.asymco.com/2011/08/25/polymath/.

    It’s much easier to divide up everything into firewalled subtasks that aren’t allowed to influence each other very much after the initial partitioning. When I was working, the management view of this was called “focus”. I don’t think focus is a bad thing, necessarily, but I think a lot of companies practice it to excess these days, and leave all the cross-partition optimization to high-level management which generally lacks the skills to actually drill down and understand the tradeoffs across different disciplines (e.g. hardware/software tradeoffs).

  • Thezenofkipple

    Wow this is “news”?  All these johnny-come-latelys; this is how it’s always been people.  Nothing news worthy.  I would **LOVE** for them to license the OS.  But then OS X would become a turd like Windoze.  If only Linux could run more stuff I’d say goodbye to both.

  • Iain Perkin

    Horace,
    I think the advantage for Apple is a mix of OS, Hardware and ‘no viruses’. A buyer will have a preference for some mix of each. A Windows installer will wipe the hard drive just to install their preferred OS because as a fellow commenter stated ‘they just prefer the hardware’. The OS types need specific software i.e. Scrivener. The last group want to get away from viruses but Linux is just to strange a beast and not sold widely. ‘No Viruses’ has a great attraction when you include the need for a quite nonintrusive antivirus.

    Iain

  • Walt French

    “It comes down to software.”

    And customer service. And retail availability. And onsite support. And Apple’s mostly-friendly warranty policies (e.g., crack the iPhone4′s screen due to impact = $49 replacement and all data transferred). And knowing that if you want Downton Abbey, you’ll be able to get it at some not-ridiculous price and watch it on a plane or in the back seat or in bed. And knowing that there’s a simplified version of “Excel” that you can use if you need to do a budget, even though you’ve always panicked in Office. Plus knowing that 3rd party apps come out first + best, at least for non-business stuff. Plus you don’t worry about viruses, even if your workmates just chant “obscurity is no security.” Plus it doesn’t look/feel cheap. Plus the best choice of cases is for iPhones. Plus your friend got all her photos back after she thot she’d erased them all.

    Software is means to various ends, too, my friends.

  • Anonymous

    We used Mac laptops because it is the only vendor to offer an almost user-proof Unix experience for our scientists. Dell laptops running Red Hat Enterprise Linux (RHEL) were also a good fit for a while. But the Mac products were far more compelling, and soon we had at least half of our users on OS X.

  • Brant Arthur

    Interesting thinking about revenues from software vs. hardware. AppleInsider today: Google earns 80% of its mobile revenue from iOS, just 20% from Android (http://www.appleinsider.com/articles/12/03/29/google_earns_80_of_its_mobile_revenue_from_ios_just_20_from_android.html)

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