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Apple's early bet on making its own chips helped it keep the iPhone and Watch prices steady

·2 min read

For weeks leading up to Apple’s Sept. 7 product launch event, conflicting rumors swirled about which devices and which features would make their debut. But one prediction was nearly universal among the journalists, financial analysts, and Twitter leakers who typically set expectations about these events: The company would raise the prices of its most high-end iPhones and Apple Watches by at least $100, in order to offset the rising cost of electronic components.

Against that backdrop, the biggest surprise of today’s event was that Apple didn’t raise iPhone or Apple Watch prices, and introduced the new Apple Watch Ultra at $799—about $200 less than predicted by Mark Gurman, a Bloomberg journalist and the most prominent (and usually accurate) Apple rumor peddler.

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Apple’s surprisingly steady prices are a sign that the company’s strategy for weathering inflation is paying off. Apple has limited the impact of rising semiconductor prices by designing its own chips in-house and striking favorable deals with its main chip manufacturer, TSMC. Meanwhile, Apple’s growing software and services revenue—which includes earnings from the App Store, Apple TV+, Apple Music, and cloud storage—has allowed the company to pad its overall profit margins. Both trends are helping Apple withstand higher component costs for hardware like the iPhone and Apple Watch.

Apple’s A Series chips bring down component costs

Apple began designing its own A-series chips for iPads, iPhones, and Apple Watches in 2010, and switched its Mac computers from Intel semiconductors to Apple-designed M-series chips in 2020. Designing its own Mac chips saved the company an estimated $2.5 billion a year in licensing fees to Intel, and designing in-house iPhone chips may save the company billions more, although Apple hasn’t released concrete numbers about its semiconductor savings.

Cheaper chips have helped Apple keep its gross profit margins steady around 40% in recent years, even as the pandemic scrambled global supply chains and raised the cost of raw materials like battery metals.

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Apple’s service revenues are on the rise

Apple typically relies on iPhone sales to bring in the majority of its annual revenue. But over time, Apple has brought in more of its revenue through streaming services like Apple Music, which launched in 2015, and Apple TV+, which launched in 2019. Services are Apple’s second biggest revenue source and have been slowly closing the gap with iPhone sales.

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Apple’s streaming businesses aren’t subject to the same supply chain constraints or component costs as building and shipping iPhones, iPads, and Apple Watches. As more of Apple’s revenue shifts into the digital realm, the company faces less pressure to hike prices in response to inflated manufacturing and freight costs.