This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- The iPhone helped Apple grow tremendously.
- But one hidden factor is responsible for the company's current dominance.
Every investor wishes they had invested in Apple (NASDAQ: AAPL) before the release and ultimate success of products like the iPod, iPad, and iPhone. Without a time machine, the only option investors have today is to find the next Apple.
This can be achieved by analyzing the characteristics that have made Apple so successful over the last two decades. Innovative products are a big part of that story. But there's a secret ingredient hiding in plain sight that is responsible for the company's current market cap of $4 trillion.
Apple makes most of its money from one product
Apple is diversified when it comes to the amount of revenue streams it profits from. It produces a wide range of hardware for consumers and businesses. And it sells a host of nontangible products like software and other digital services like its App Store. But one revenue source remains supreme: iPhones.
Last fiscal year, the company generated roughly 51% of its total revenue from iPhone sales. Keep in mind that this doesn't include any aftermarket revenue or digital revenue from its App Store. This is simply the revenue earned from selling new iPhone models to consumers.
In second place is a broad bucket it calls Services, which comprises a host of revenue sources including App Store purchases, content subscriptions through Apple TV and Apple Music, payments revenue from its Apple branded credit card, Apple Care warranty subscriptions, advertising revenue, and more.
The final 25% or so of revenue is a combination of other hardware products including iPads, iMacs, and headphones.
The takeaway here is that to find the next Apple, investors must find a company with the next big hit product. But this is true only to an extent. Without the iPhone, it's difficult to envision Apple as the behemoth it is today. You could say that iPhones are currently responsible for the company's dominance, yet that is only half true. They supply around 50% of revenue, with the entire other half of the business subsisting off a range of interrelated products. This is the true secret ingredient for success: an interoperable ecosystem.
The source of Apple's historic success
Apple's success involves inventing amazing products that consumers love. There's no doubt about that. But simply creating a great product doesn't ensure mass adoption -- creating an ecosystem in which use of one product drives use of another product is a powerful way to not only drive adoption, but also retain adoption.
In 2007, before the launch of the iPhone, tech analyst and former Apple employee Michael Mace outlined the company's strategy for success in a prescient post describing how it became the company it is today:
I'm now convinced that you can't understand the mobile world as a separate industry, because it's deeply interconnected with three other industries that deal with information: the Internet, personal computing, and the media ... The most important part of the ecosystem isn't any technology, it's the ideas themselves: the articles and music and essays and videos and memes that we use to make decisions and entertain ourselves. The Internet and the servers that hang on it like Christmas ornaments are the storage and transport mechanism for those ideas. PCs and mobile devices are capture and playback systems, and the software programs we run on those devices are the tools that we use to create and work with the ideas.
This is what Apple got right. It created an ecosystem for sharing information as easily and seamlessly as possible. Open your iPhone while surfing your iMac and an automatic bubble appears on the screen prompting you to connect the two.
Flip open your brand-new AirPods case next to your iPad and another automatic bubble appears begging for each to connect. The Apple Card you applied for, meanwhile, is automatically accessible digitally from your iPhone, iMac, or even your iWatch.
These products aren't designed in a silo; they're designed to work together, sharing information so seamlessly that it creates automatic friction to get rid of one of them. Why buy a PC when you already own an iPhone that can connect with an iMac? Why get an Android smartwatch when an Apple Watch works much better with all the devices you already own.
This is Apple's true success story: building a product and software ecosystem that makes you want to buy and maintain ownership of all its products and services.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
