Should Apple Make Itself Less Profitable?

A blog about business and economics.
Aug. 9 2012 1:23 PM

Why (Strategically Speaking) Is Apple So Profitable?

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In this photo illustration, The North Greenwich Arena is seen on an iPhone's Google maps ahead of the London Olympic Games at the North Greenwich Arena on July 25, 2012 in London, England.

Photo illustration by Mike Hewitt/Getty Images

Android continues to grow like wildfire as a smartphone operating system, capturing fully 68 percent of the market to Apple's 17 percent.

That said, in a dialogue on Twitter about this many people were observing that Apple is much more profitable than all the Android phone makers combined. The structure of profits in the industry is that Apple earns crazy profits, Samsung earns decent profits, and the rest of the smartphone segment is losing money. Google created Android and has certainly achieved its strategic goal of ensuring that Apple faces tough competition in the marketplace, but seems to have made only a very modest amount of money for its trouble which is offset by the huge costs of acquiring Motorola.

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So one question you might ask about this is whether it makes strategic sense for Apple to be earning so much profit?

Sure it does, you might say, companies are supposed to make profits! But what Apple's doing with those profits is largely just banking them, presumably to give themselves strategic flexibility to make future moves. Yet something like cutting the price of the iPhone, or reducing the 30% house cut of App Store sales would be an example of a strategic move. The former would be aimed at expanding market share to indirectly help entrench Apple's lead as the favored platform for app development. The latter would be directly aimed at entrenching Apple's lead as the favored platform for app development. Either would seem to make more sense as an investment than other ideas out there like buying Sprint.

Now who knows. Business is hard and I feel a little silly second-guessing a strategy that's leading to enormous profits. But I think it's pretty easy to imagine looking back from 2020 and saying "we got greedy—if we'd cut prices and settled for an iPhone profit margin of 'only' 20 percent we could have dominated this market forever."

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.