What it is: Apple does more than just sell hardware. They also make money through various services by selling music, ebooks, apps, and touchless payment systems.
Most analysts on Wall Street constantly get it wrong. They look for short-term, quarterly success and market share, so based on those metrics, Google’s Android is number one and Apple’s iOS is a distant second. Yet if you look at the profit margins, Apple earns 94% of the smartphone profits while Samsung takes the rest. Other Android manufacturers actually lose money selling Android smartphones and tablets.
Besides focusing myopically on market share, Wall Street analysts also miss another factor in Apple’s revenue stream. Analysts obsess over iPhone sales and rightfully conclude that iPhone sales can’t keep increasing dramatically each quarter. What analysts are missing is that it doesn’t matter if iPhone sales go down because selling hardware is actually secondary.
Ideally you want to sell as much hardware products as possible every quarter. Yet most Android manufacturers do that and still don’t make a profit with the major exception of Samsung. When you rely on selling hardware, the best strategy is to sell cheap hardware that forces consumers to update them rapidly. That’s why so many Android manufacturers don’t offer Android updates because they don’t want to spend time and money testing the latest Android operating system version on older devices since they can’t make money doing that. They can only make money selling you new hardware, so if you ant a new version of Android, you generally have to buy a new Android device.
Apple works differently. The latest version of iOS runs on older models because Apple makes their money through services such as selling music through iTunes, music subscriptions through Apple Music, ebooks through iBookstore, apps through the App Store, and even touchless payment systems through Apple Pay. Apple makes money selling hardware at a hefty profit (unlike Android manufacturers) and then makes additional money through selling their customers additional services.
Of course, not every iPhone or iPad user buys anything more, but a certain percentage do. With so many iPhone and iPad users in the world, that small percentage of people who do buy Apple services sends a constant stream of revenue to Apple. Thus Apple makes money in two ways: Selling hardware and selling services. Android manufacturers barely make money selling hardware and earn no revenue after they sell a device.
So the secret to Apple’s success isn’t just selling more iPhones and iPads every quarter, but in getting its iPhone/iPad customer base to also pay for additional services. It costs nothing to use Apple Pay, but it does provide greater security (because merchants never see your actual credit card number so nobody can steal it). By using Apple Pay for free, you can get greater security while Apple takes a cut of every transaction.
If you buy music, apps, or ebooks, Apple makes a little more money through that as well. So it’s in Apple’s best interests to make sure every iPhone or iPad can run the latest iOS version since that insures more people can buy more services from Apple.
The way to make money is simply to make your customers happy. Most iPhone and iPad users are happy with constant iOS updates that they get for free. Most Android users are not happy with being denied access to the latest Android updates because the device manufacturers have no financial incentive to insure their customers have the latest Android version running on their devices.
That’s the difference between Android and iOS. Apple has a financial incentive to keep older iOS devices updated. Android manufacturers have a financial incentive to keep Android updates off your current devices to encourage you to buy a new device as often as possible. So which type of smartphone or tablet do you want to buy for your next purchase?