What it is: Like many companies, Apple licenses processor technology from a company called ARM. Unlike most companies, Apple designs its own processors based on ARM technology.
One of the biggest lessons in business is to gain a competitive advantage over rivals. Yet that’s not the way most companies work. In the smartphone and tablet world, most companies simply use off-the-shelf products, slap them together in a case, and call that innovation. The problem is that anyone else can slap those exact same off-the-shelf products in a case and sell the exact same product as well. When companies sell identical products, their only competitive advantage is lowering their price until it’s impossible to make a profit any more.
That’s why Apple takes 94% of the smartphone profit while Samsung takes 14%, which means most smartphone manufacturers lose money selling Android phones. What’s the difference between an Android phone made by Sony, Samsung, HTC, or LG? They all use the same hardware parts and the same Android operating system, so there’s little to differentiate between these products.
Most smartphone and tablet manufacturers rely on processors from Qualcomm or other companies. That means everyone’s using the same off-the-shelf processors so nobody has a real advantage over anyone else.
That’s why Apple makes their own processors. Licensing ARM processor technology, Apple optimizes their processors specifically to run the iPhone and iPad. Meanwhile, competitors have to use generic ARM processors that aren’t optimized for anything. That immediately gives Apple a major competitive advantage. Back in 2013 when Apple introduced a 64-bit ARM processor, it caught rivals by surprise. It wasn’t until nearly a year later that rivals could also offer 64-bit processors, and even then they still had to use off-the-shelf 64-bit processors that weren’t optimized for anything in particular, making them slower than Apple’s 64-bit processor.
Buy controlling both the hardware and software of their products, Apple has only themselves to blame if something goes wrong. On the other hand, they also have complete control in creating the fastest, optimized processors for their products, which is a luxury rivals can never have if they have to rely on off-the-shelf products.
That’s why Samsung stopped using Qualcomm ARM processors and started developing their own ARM processors for their own smartphones and tablets. This gives Samsung an advantage over other Android manufacturers as they continue to follow Apple. Samsung succeeds precisely because it mimics Apple as often as possible, even to the point of making their own processors. Rival Android manufacturers can’t create their own hardware like processors, so they’ll always be perpetually behind both Apple and Samsung.
The bottom line is that Apple (and to a certain degree, Samsung) sells products with parts optimized to work together. If you just want a generic smartphone or tablet, you can choose from plenty of manufacturers currently losing money trying to sell smartphones and tablets. Or you can buy an optimized product for the same or slightly higher cost. Which do you think represents a better deal?