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Apple iOS Becomes More Profitable, Crushes Android - Analyst Blog

Zacks Equity Research

Apple Inc. AAPL has yet again throttled the smartphone industry. According to a report by Strategy Analytics, last quarter Apple’s iPhone grabbed a robust 89% share of global smartphone profit, while companies relying on Google GOOGL Android saw their share of profits plummet to a meager 11%.

Apple iOS recorded operating profits of $18.8 billion last quarter, against Android’s $2.4 billion. The numbers are even more striking when we consider that Apple managed to derive all this profit from only 14.8% market share in contrast to a hefty 81.5% share claimed by Android (According to a IDC Worldwide Quarterly Mobile Phone Tracker report).

At the same time, other key operating system providers like Microsoft MSFT and BlackBerry BBRY were unable to register any profits in the quarter.

The last quarter marked a significant milestone for Apple. The company’s success in the quarter was largely attributable to the strong performance of the larger-screened iPhone 6 and iPhone 6 Plus.

However, Apple has always been more profitable than Android phone makers despite the contrast in their respective market shares. In the prior-year quarter, Apple’s profit share was about 70.5% against Android’s share of 29.5%.

What Makes Apple More Profitable?

Apple’s key to success is its focused business strategy. The company has always targeted the premium segment of the market that allows it pricing freedom to some extent. Additionally, the company has a unique supple chain that helps it maximize returns while minimizing costs.

Over the years, Apple has built an ecosystem that is now one of its key growth drivers. The integrated nature of diverse Apple products significantly improves user experience, thereby pushing up the company’s brand loyalty. Also, this enables Apple to create a ‘halo effect’ for its new launches, rendering it much easier for the company to market its products.

Apart from its focus on product quality, Apple also has a unique supply chain. The company has taken a number of initiatives to reduce costs and strengthen its supply chain. Further, Apple’s strong ecosystem ensures that it does not have to bother much about demand management. Effectively, it allows the company to create demand by generating sufficient market buzz.

All these factors have allowed the company to generate higher profits even when its peers have been affected by the declining average selling prices.

To Conclude

Apple remains the classic example of a company that is focused on providing remarkable customer experience while simultaneously maximizing its profitability. Moreover, Apple not only holds a premium position in the developed markets but also in emerging nations like China, where there are both pricing constraints and stiffer competition. 

We believe that, going forward, this Zacks Rank #2 (Buy) stock will gain even more traction from its novel product launches like Apple Pay, Apple watch and a possible electric car, which, in turn, will create more value for both the company and its customers.

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