How does Apple make money?
It’s a simple answer, but an important one:
Apple makes money by selling iPhones, iPads, Macs, and iPods — hardware gadgets. (And a lot of money, at that: $24 billion of profit on $100 billion of sales over the past year.)
Apple does not make very much money from selling iTunes songs and videos, iOS and Mac apps, iAds, or other software and services. That stuff is essential to the Apple ecosystem, as it makes Apple hardware more desirable and more useful, which helps Apple sell more iPhones, iPads, Macs, and iPods. But it’s not a big profit driver for Apple.
It’s an important distinction when projecting future business models for Apple, and one I think a lot of people (understandably!) confuse.
Apple is unlikely to give away hardware for free — or sell it at a much lower profit margin — in order to sell more apps or iTunes movies. (Amazon is supposedly going to do this to sell its tablets, hoping perhaps to make a profit on media or other Amazon e-commerce sales in the future.)
Apple is likely to spend money to make its content, apps, web services, and software better, though, in order to sell more hardware. That’s why it is investing in iCloud, for example — not because it expects to make much money from it, but because it hopes to sell more iPhones, iPads, and Macs to iCloud users.
There are occasional exceptions, such as the Apple TV, which Apple seems to be investing in as a “hobby” without generating a lot of revenue or profit from the device. There are many ways to look at this: As research for potential future hardware that can drive higher profits (such as actual Apple televisions), as an accessory that helps Apple sell more iPads, iPhones, and Macs, or as something else entirely.
But the general rule is that Apple optimizes its business and pricing in order to sell more high-profit iPhones, iPads, Macs, and iPods, with the rest of its products supporting those sales.
Check out my new site: The New Consumer, a publication about how and why people spend their time and money.