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How the low-cost iPhone will make money for Apple

Karen Haslam | July 30, 2013
Why iPhone marketshare matters more than profits and how Apple can make money in other ways

Should Apple sell iPhones for less at the expense of its profits? Until now Apple's solution was to sell older models. While it makes less profit from these models at least it doesn't have to factor in R&D and new manufacturing equipment, the work has already been done. All Apple has to do is press play. If Apple launches a new low-cost iPhone that device will have already have eaten into the company's profits.

However, there is another way Apple can make money from the iPhone. It is easy to think about the money Apple makes from the sale of an iPhone, but what of all the software and services that the company sells to the iPhone owner. Apple has hinted at the transition to software and services in its earnings statements this year, breaking out those revenues for the first time. In the second quarter, for example, the category Apple labels as "iTunes/Software/Services" made $4 billion in revenue. If Apple can continue to grow the marketshare of the iPhone then it can continue to grow revenue from sales from iTunes and the App Store, and from everyone that makes a device for the iPhone (the company takes a cut from anything that has the Made for iPhone logo on the packaging).

Apple's been lucky so far because it's had the marketshare and as a result developers made apps for Apple's App Store rather than the other app stores. This has done Apple a lot of favours. There is some concern that if Apple's market share were to decline these developers would go elsewhere.

However, there is another reason why developers prefer to develop for iOS and the iPhone, it goes back to Apple's recipe for success that we mentioned earlier. The company makes the software and the hardware and as a result everything just works. The problem with Android, for example, is there are multiple operating systems and multiple devices. The resources necessary to develop for that platform make it a no-go for some developers.

Despite this, history tells us that when a market matures it becomes all about volume - even the best system can lose out to the alternatives, as Apple discovered in the personal computer market. This is why Apple can't ignore marketshare and why it looks like it will be producing a low-cost iPhone.

 

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