Apple is the world’s most valuable company by market cap. The company has achieved this feat by beating the curse that bedevils most hardware vendors, even tech ones such as Motorola, Sony Ericsson, Nokia and Blackberry. This scourge is that their products become commoditised. Apple has overcome this bane because its devices are not just devices. Apple’s products such as the iPhone can be better seen as ‘subscription’ payments to access Apple’s platform and services. Already 500 million people use Apple’s iOS platform and that number is growing at doubt-digits each year.
It’s almost redundant to say that Apple enjoys strong brand recognition globally and has extensive market penetration – sales in fiscal 2016 reached US$215.6 billion. Along with Microsoft’s Windows and Google’s Android, Apple’s iOS is one of the major global digital platforms. As Apple and Google have the only two global mobile platforms and no third competitor is in sight, the pair is likely to connect the world between them. That market is already 3.5 billion users strong and is expected to expand to 4.7 billion users by 2020. While Apple’s iOS is not the leading mobile platform by number of users, it dominates among people who spend the most.
It can be said that iPhone sales are annuity-like because so many users have become Apple loyalists. This allegiance is driven by the switching costs associated with learning a new system, the desire of users to maintain access to iOS-only apps (such as FaceTime) and services (such as photo storage in iCloud) and the integration benefits of multiple Apple devices (such as iPhone and Apple TV). For all the potential around Apple Watch and Apple TV, iPhone and iPhone-related services comprised about 70% of Apple’s annual revenue and about 80% of Apple’s gross margin in fiscal 2016.
And then there’s the opportunity that Apple has to cross-sell services. As the average person in the US checks their mobile more than 45 times a day according to a Deloitte study in 2015, Apple can boost revenues by selling services such as Apple Pay (payments), HealthKit (health wearables) and HomeKit (home network connectivity). As well, Apple is poised to benefit from the growth in emerging markets, from where 30% of its sales come already.