What it is: Apple doesn’t just sell hardware and software. They also sell services like iCloud as well.
There’s a common belief that Apple only makes money selling iPhones. That’s why Wall Street panics every quarter because they think there’s no way apple can keep selling more iPhones than the previous quarter. Never mind the fact that Apple sells more than just iPhones. Besides the Macintosh and other hardware devices like the Apple Watch and Apple TV, Apple also sells services.
Last year, Apple sold $19.9 billion in services. If Apple’s services were a company by itself, it would have generated more sales than Southwest Airlines (), Starbucks ( ) and the Gap ( ).
While $19.9 billion pales in comparison to the billions Apple makes from the iPhone, earning $19.9 billion in one year is still a great profit stream that other companies would love to have. Every time you use Apple Pay, Apple gets a cut of the purchase. Every time you buy music through iTunes or an app through the App Store, Apple gets a cut of that sale. Pay for more iCloud storage and Apple makes more money.
How do other companies like Samsung and HTC make money? They sell inexpensive smartphones and tablets and try to sell as many as possible. To keep costs down (and profits up), they use the cheapest materials possible. Once they sell you a smartphone or tablet, they have little incentive to provide you with operating system upgrades because that costs them money, so they’d rather wish you would just buy a new device from them instead.
In other words, without services, most companies have to rely on one-time sales of products. To keep making money, they must keep selling to new customers and (hopefully) repeat customers.
On the other hand, Apple sells products and once you buy one of their products, you might pay for one of their services as well such as Apple Pay, iTunes, or Apple Music. The more people use Apple products, the more likely they’ll use one of Apple’s services too. The more people use Apple’s services, the less likely they’ll switch to a rival product in the future.
By making superior hardware, Apple grabs the premium share of the market whether it’s in computers, smartphones, tablets, or wearables. That premium market is far more likely to spend more on additional services.
With Apple’s rivals, they make copycat products targeting the mid to lower end of the market. That market has far less disposable income to spend on services, but even if they did choose to purchase additional services, that money doesn’t go back to the hardware manufacturers. That’s why Samsung is trying to promote Samsung Pay (similar to Apple Pay) to make money from services and keep people loyal to future Samsung products.
The big problem with Samsung Pay is that it competes with Android Pay but is only limited to Samsung devices. So why not use Android Pay instead of Samsung Pay? That question right there means far fewer people will use Samsung Pay than Android Pay, and that also means far fewer merchants will want the hassle of supporting Android Pay and Samsung Pay if Samsung users could just use Android Pay instead.
Apple’s services provides secondary income after the initial sale. Samsung and other companies have little or no secondary income after the initial sale, so they earn far less and rely solely on making additional sales of hardware. Since they’re competing against each other, their profits in hardware is far less than what Apple makes.
Apple’s services have positioned the company to earning a steady revenue stream as more people use their products. Rivals don’t have that luxury so they can’t spend as much to keep up with Apple. Look how long Android manufacturers took to get 64-bit processors or fingerprint sensors. As Apple moves forward, rivals will struggle to keep up. In the meantime, Apple will make the majority of all profits and rivals will not.
The future increasingly looks bleak for companies like Samsung and HTC. They can continue making money selling multiple products, but they can’t hope to compete directly against Apple. They simply don’t have the money.
Eventually Android manufacturers will find it increasingly difficult to make money and drop out of the smartphone and tablet markets just like companies like Sony dropped out of the PC market. When you can’t make a profit making something, why bother? That’s the future Android manufacturers will face in the near future.
The future for Apple looks fine. The future for everyone else looks chaotic and dismal. Guess which company will likely be around and continue defining new markets for everyone else to copy?