Apple's ultimate goal, of course, is to build a large, recurring base of devotees. We think of Apple as a tech and consumer stock, but the way it keeps users hooked and coming back for more, it might as well be a drug maker -- albeit one with 43% return on equity. Studies show that people who buy, say, an iPhone are likely to buy an iPad or MacBook or music and movies from the iTunes store -- fully inhabiting the cozy universe Apple creates. "The lifetime value of that is huge," Ursillo says, "which is why Apple is willing to take a little margin erosion up front to build that installed customer base."
CRITICS FRET ABOUT Apple's front-loaded business model: It makes money selling gadgets and not from post-sale services. That creates pressure to keep selling more units, quarter after quarter. "But what's underappreciated is the annuity-like nature of its business," says Josh Spencer, who manages the T. Rowe Price Global Technology Fund. "Apple's built-in replacement cycle is such that customers locked into its ecosystem reliably upgrade and buy new devices every few years." Case in point: iPhones' purchase prices are heavily subsidized by phone carriers, and customers begin lusting after the latest models even before their phone contracts expire every two years.
The cult of Apple can only grow. Apple has about 255 phone-carrier partners in 114 countries -- less than, say, Research In Motion's 580 carriers in 165 countries. Deutsche Bank analyst Chris Whitmore reckons it can reach 1.8 billion subscribers worldwide. Judging by the number of phones and tablets sold over the past two years, he estimates that Apple has penetrated just 10% of its addressable market. "Apple has plenty of room to run, in terms of greater market penetration, as well as incremental carrier additions," Whitmore argues, starting with the launch of the iPhone 5 in 100 countries by December. His price target for the stock: $800.
It's actually a benefit to know that I can get a new upgraded product from Apple every time my contract is up. That's not a negative at all! Instead of moving to a different company for the latest and greatest gadget, I know I'll have the latest and greatest choice with Apple still. So a negative is turned into a postive. I'm sure many others feel this way too. Boo Yah! GO APPLE!!!!!!!!!!!
Here is the problem, people are sick of tired to see more upgrade products and they know they got rip off when they have to pay for additional accessory and gears. Apple is clever to make you pay more for these accessory and gears. My bet is that they will shop for miracle apple products, not rip off products.
CRITICS FRET ABOUT Apple's front-loaded business model: It makes money selling gadgets and not from post-sale services.
I don't understand this author. In the previous paragraph he states that Apple customers are locked into Apple ecosystem and now buy music and movies from iTunes. Next paragraph he is fretting about no post sales. Whats up with that?
Apple doesnt make a lot of money from itunes or the app store. I believe apple makes more $ off it than google does from the play store, but its not a sig ificant amount. My feeling is that once smartphones become as common as dumb-phones were a few years ago, i think both companies will start to make some decent $ off of it. Right now the biggest benefit of itunes and the appstore is that it helps keep people within apple's ecosystem.
The benefit shows up more as the continued purchase of apple hardware.
You are confused. No wonder you are long. Apple doesn't make nearly enough money off of iTunes to justify its evaluation and it never will. What happens when people stop buying the
hardware because they don't need any more?