It's no surprise that Apple (Nasdaq: AAPL ) crushed its fourth-quarter earnings estimate. The company delivered earnings of $1.67 billion, up 47% from last year on an earnings-per-share basis. To understand why Apple's crushed earnings predictions were no shock, take a look at the business model that telegraphed the punches behind what Apple called its most profitable quarter ever.
Apple's core competency is innovative design and technology. That's the spirit behind its famous "Think Different" ad campaign. Apple introduces products that truly wow the market. Think back to the Macintosh in 1984 -- the first affordable computer with a graphical user interface (GUI). Today, the iPhone challenges the definition of a phone, by combining a portable digital media player, Internet client, GPS navigator, camera, and ... um ... oh yeah, a phone. Not only does Apple wow consumers, but it changes the way we think about consumer electronics.
Apple doesn't just want you to think differently about their products. It wants you to redefine the buying experience. Visit an Apple store, and you'd almost think that it was designed more to create a clubhouse for Apple enthusiasts than to actually sell the company's products. Consumers enter a store, check out Apple's new products, attend a workshop, and sit in on a presentation or in-store concert. Get immersed in the Apple culture, and when you're ready, Apple will sell you a piece of the experience to take with you. Microsoft (Nasdaq: MSFT ) wants to create a similar experience with its own chain of stores. Good luck with that, Mr. Softy.
Lower the entry barrier
The real innovation of Apple's business model exposed itself when the company focused its core competencies on lower-priced products. Introductory Apple products like the iPod series have had great mass-market appeal, which directly addressed the perception that Apple only catered to high-end markets. Instead of cannibalizing its high-end products with lower-cost product offerings, Apple is capitalizing on an inverse effect.
The cash machine
Apple sold 3.05 million Macs this quarter, an increase of 17% year over year. This increase can be attributed in part to the halo effect, and partly to customer switching costs associated with Apple's iPod and iPhone customer base. Brand loyalty will keep growing as Apple continues to suck in the mass market through its introductory products.
In addition, more and more customers continue to purchase proprietary digital media and apps for Apple's products. As of September, Apple has sold more than 8.5 billion songs through its iTunes Store. On its latest conference call, the company also announced that users have downloaded 2 billion iPhone apps. How likely do you think these customers would be to ditch their proprietary Apple digital media and apps for a competitor's product?
Apple's business model is as innovative as its products. The company is a dominant force in the consumer electronics industry, but it still hasn't established a firm grip in global mobile market share. With competitors like Research in Motion (Nasdaq: RIMM ) looking to strengthen their foothold against Apple, and Verizon (NYSE: VZ ) and Motorola (NYSE: MOT ) on the attack with their anticipated launch of the cryptic Droid smartphone, Apple will need to quickly increase its presence domestically and abroad to keep up its lofty growth rates. However, recent announcements that mobile carriers like Vodafone (NYSE: VOD ) , Orange, and China Mobile (NYSE: CHL ) will start carrying the iPhone are a good indication that Apple is priming its business for the rest of the world. If Apple's iPhone can succeed beyond the U.S., you can be sure that any market-share gains will spill over to fuel continuing growth in its Macintosh line as well.
At this point, I'm not betting against Apple. Let me know what you think by chiming in with a comment.