Apple Rides High-Margin Hardware to Competitive Supremacy

Company now the most valuable technology ?rm.

Apple Inc. has become the world�s most valuable technology company based on sales of high-margin hardware like the iPhone, an approach that competitors are ?nding dif?cult to duplicate, according to iSuppli Corp.

Apple�s recent introduction of its latest iPhone perfectly illustrates the company�s route to corporate dominance--which is to generate huge profit by selling high-margin, high-value-added hardware, with the iPhone�s Average Selling Price at a whopping $600.

The company makes the majority of its profit on sales of hardware�an approach that defies the often-cited route to success used by many technology companies of selling hardware at low margins and cashing in on revenue generated by high-profit software.

As shown by iSuppli�s Teardown Analysis service, Apple commands hardware gross margins in the range of 50 percent on the iPhone, compared to 20 percent to 40 percent for competitive products.

These high margins are the product of the company�s unique approach to product design and Intellectual Property (IP). So far, competitors� responses to the iPhone have been lookalike, brute-force solutions that throw money at expensive features. Such a tactic yields a higher Bill of Materials (BOM) and generates lower profits�but still doesn�t provide the same quality of user experience as Apple�s products.

Oil Money
The benefits of Apple�s high-margin hardware strategy recently have manifested themselves in the company�s titanic market capitalization. At a level of $234 billion, Apple�s capitalization exceeded that of Microsoft Corp., making Apple the largest technology company in the world based on this measure. In fact, among all types of companies worldwide, Apple�s market capitalization is second only to oil giant Exxon Mobil.

Meanwhile, Apple now holds a cash reserve of $23 billion, giving the company a massive war chest.

To put this into perspective, Apple could buy more than half of Nokia Corp. or all of Motorola Inc. just with its cash reserves�not that iSuppli actually expects the company to consider that.

Building Differentiation
While many companies have developed smart phones to compete with the iPhone based on assembling increasingly expensive subsystems, Apple has taken a unique approach.

For instance, Apple employs a touch controller Integrated Circuit (IC) from Broadcom Corp., but combines it with its own touch system architecture. In another example, Apple�s fingerprints are all over the new A4 processor used in the iPad.

However, the A4 started with building blocks made by Samsung Electronics. A third example is that Apple chose to build around Infineon Technologies� baseband IC, rather than choosing a more encompassing Snapdragon solution from Qualcomm.

Apple�s Lucky Star
The stars have aligned for Apple, and the company�s hardware and design vision perfectly matches the demand for improving utility of the Internet.

The only company capable of directly challenging Apple�s prominence is Google Inc. Nonetheless, with the vast size of the market opportunity in the mobile world, iSuppli expects the two companies to profitably coexist.

At the same time, iSuppli expects Apple�s lead to extend. Given the variety of initiatives under way, iSuppli is convinced that Apple will offensively widen the gap that now exists relative to its peers, rather than simply extend the time defensively until others catch up.