Apple Economy

How Apple makes its profit

Scott Tong Jan 25, 2012

Kai Ryssdal: You got, say, $450 burning a hole in your pocket? As of the close in New York today, you could use it to buy yourself one share of Apple. Stock watchers and tech analysts are still picking up their collective jaws up off the floor today after Apple’s report yesterday of its best quarter ever, revenue and profits.

Buried not too deep in the numbers is the secret: Profit margins of 44 percent. We asked Marketplace’s Scott Tong to figure out how Apple does it.

Scott Tong: Buy low, sell high has been the recipe for profits ever since the earth cooled. But how does Apple make a 60, 70 percent margin per phone, 30 percent per iPad? Let’s start with low costs.

Apple doesn’t own factories –- it contracts out manufacturing to Asian firms. And the company is so big, it can hammer suppliers on price, the way Wal-Mart and Costco do.

Consultant Mike Levin is with Consumer Intelligence Research Partners.

Mike Levin: They took ideas that, you know, Dell and others started to pioneer a decade or two ago. They didn’t invent any of this, they just do it better than anyone else these days.

By some estimates, each iPhone includes $190 in hardware costs, $10 in Chinese labor. If you’re think sweatshop, the company responded this month by naming its suppliers to be more transparent. But these costs are more or less the same across the industry.

Where Apple really makes its money is charging a premium price for products we want that bad. The average iPhone last quarter sold for $660.

Here’s MIT’s Ed Steinfeld.

Ed Steinfeld: There are many standard recipes for baking a cake. Nonetheless there are certain ways of doing it that really lead to an outstanding kind of cake. And one that’s differentiable from virtually any other cake out there.

One we can’t stop eating.

One other differentiator: Apple puts some of the same ingredients inside the iPad and the iPhone, streamlining its supply chain.

In Washington, I’m Scott Tong for Marketplace.

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