Apple thrives by going upscale

It is Economics 101. The best business model involves strong sales and high profit margins. Sadly, the combination almost never happens.

Apple (AAPL) almost got there in the past quarter. The Cupertino, Calif., iPhone-maker reported third-quarter financial results that show its plan to remake itself as a luxury brand is paying off.

Investors should cheer and sit back. This could last a while.

The big story in the numbers was iPhone average selling prices. A year ago when CEO Tim Cook unveiled the $1,000 iPhone X, many financial analysts scoffed at the chutzpah. Pushing a near-20% price increase, in the face of flat worldwide smartphone sales, seemed crazy.

Apple managers had another agenda. They were continuing the campaign to move the brand further upscale. After the $10,000 gold smartwatch, a grand for a state-of-the-art iPhone would seem like a bargain for Apple devotees.


In the third quarter, Apple sold 41.3 million iPhones. Average selling prices rallied from $693 to $724. Sales soared to $53 billion, up 17%, year-over-year.

Services revues are growing fast, too. In the quarter, category sales reached a record $9.55 billion. Apple Music, iTunes, iCloud, Apple Pay, Apple Care and the App Store are benefiting handsomely from the size of the Apple ecosystem installed base, and the fact that the company has a reputation for making very fragile products.

It is a great luxury business, championed by iPhone, and limited only by how much customers are willing to pay for Apple products and services.

In July, Apple began shipping its latest MacBook Pro laptop. The super thin aluminum unibody is packed with the latest Intel core i9 processor, Apple’s T2 chip for Touch ID, disk encryption, audio and video processing, and digital assistant functionality. Fully loaded, the price tag is $6,699.

Apple is selling a laptop at a 40% premium to a comparable Dell. Let that sink in.

By all accounts, that product has real issues with the keyboard and heat throttling, a process that kills computing power because its nifty new microprocessor gets hot enough to cook scrambled eggs.

Despite this, all signs point to another successful product launch. Apple power users have been clamoring for more powerful mobile computers for years. A secondary use as a hotplate is a bonus, I suppose.

iPhone X — Photo by James Bareham / The Verge

This is not a knock on Apple. The company earned the loyalty of its customers by building hardware consumers fawn over. For many immersed in the ecosystem, Apple products represent the entire category.

One Plus, a fast-growing Chinese smartphone company, recently released a device that is arguably superior to the iPhone X, for about half the price.

Oppo, its sister company, builds a smartphone with an edge-to-edge screen, a gorgeous curved glass body, and a motorized pop-up camera that that is straight out of science fiction movies.

These companies are innovating with impressive hardware. But they have almost no chance of stealing Apple customers. They are not even on the radar.

And that is the true power of Apple’s business. It does not matter what competitors produce because Apple customers are not going anywhere, even when company products are inferior.

Apple is building a business in the mold of big European luxury brands, only bigger. Most of those brands must manufacture scarcity to maintain brand allure.

For decades, Ferrari (RACE) has restricted production, often requiring that customers place orders one year in advance of delivery. Even under the ownership of Fiat, a mass-market manufacturer, the company continues to limit supply.

Its new supercar, the Ferrari Sergio, is so exclusive potential customers need an invitation for the right to buy one.

By contrast, Apple sells tens of millions of iPhones every quarter.

As a tech company, I still believe Apple is thoroughly depressing. The company is not innovating, and when it does push the envelope, software fails, keyboards stick and thin light aluminum cases smolder red.

However, as a business, the company is moving units and raising prices. Only a fool would argue with that.

Best wishes,
Jon D. Markman

P.S. I’ll be speaking at the San Francisco MoneyShow in August. It will be a great show, with all sorts of experts sharing their insights. You can find more about that incredible conference by clicking here. I hope to see you there!

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One comment on “Apple thrives by going upscale

  1. German Krackow August 7, 2018

    Jon,

    I like reading many of your articles, but it really don’t understand what may be your problem with Apple. When you write about Apple it is always to bash the Company.

    By comparison any time you mention Microsoft, you present it with bright positive light, even comparing it to Google, which really has NO comparison. Google -truly creates- technology and products; they showed MS that they had missed the Internet train, which MS had since been ever trying to catch up.

    Microsoft Software had been always the *WORST*, even when they built a monopoly in the desktop by killing innovation other -good- companies made that created software products *WAY* much better than the crappy software MS produced. MS used the Windows OS to make sure these much better products won’t work.

    MS had been always a parasite company, it would not be a stretch to say they -never- created anything, but -copied- and *stole* the better ideas from other companies including Apple. MS products -always- sucked when compared with products from companies that *wrongly* bet on Windows as a platform for their products. MS -also- *stole* software design from the open software to improve its crappy Windows OS, which is -WAY INFERIOR- than anything Unix/Linux.

    The office products they pushed down user’s throats as there was no choice, was ugly and buggy as hell, and to add insult to injure it was *super expensive*. MS missed the Internet, and after making sure Netscape browser won’t work, they finally added an internet Browser which had -always- been way inferior to any other browser, as it was always packed with incompatibilities with industry standards that they used (and I am GLAD failed) to force users on the Wingarb OS to use.

    Apple taught Microsoft not only once but *TWICE* how to build -beautiful- and true user’s friendly interfaces and software product, that Microsoft continue trying to copy and emulate.

    Microsoft -even COPIED- the Apple Stores !!, that how much imagination they have !!

    Apple products may have some issues, but compared with the *garbage* that Microsoft had produced for their desktop monopoly, and ALL the really UGLY and failed products to ~compete~ with the iPod, the iPad, and Cell Phones, not to talk about the ugly and *super BAD* quality on the Desktop and Laptop that run Windows; it light years ahead.

    If well MS investors had benefited quite well, as Apple investors had done, if you are going to bash Apple for free here, just remember that MS had have, and -still- has mountains of ugly, *bad*, faulty, super buggy, virus plagued, failed products to talk about. Let alone the total lack of creativity.

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