How Important Is iOS?

Apple (Nasdaq: AAPL  ) has transformed itself from a computer company to a mobile-device company, a change that began when it ditched "Computer" from its name in January 2007 -- the same day the first iPhone was launched.

Back then, the company was doing $24 billion in annual sales, with desktops and laptops combined accounting for almost 43% of revenue and iPods contributing 35%. Over the past several years, the breakdown has dramatically shifted heavily toward the iPhone, while the iPad was just introduced last year. Here's a breakdown using full-year data.

Source: 10-K annual reports.

Apple's fiscal year closes at the end of September, so this data above goes only through September 2010. The company is scheduled to report fourth-quarter and full fiscal 2011 results on Tuesday. The past three quarters have been whoppers, so it wouldn't be fair to leave them out.

Source: 10-Q quarterly reports.

The picture is crystal clear: iOS devices now comprise the vast majority of Apple's revenue.

Apple doesn't break down the iPod segment further, and some iPods -- specifically, the iPod touch -- run iOS, while others do not. The iPod touch is the best-selling iPod: NPD Group released the top 10 MP3 Players for 2010 by unit sales, and various models of the iPod touch occupied the top four slots.

Even if we were to exclude the iPod segment entirely and use a "conservative" approach, we'd find that the iPhone and iPad segments alone attributed 67.8% of revenue last quarter. In dollar terms, the two segments produced $19.4 billion in revenue last quarter. That's a good fraction of what the entire company was generating in an entire year back in 2007.

The entire iPod segment has fallen down to 4.6% of sales, so where we include it won't tip the scales either way.

The next Steve Jobs?
With Steve Jobs' passing, who will steer iOS into the future, battling Google (Nasdaq: GOOG  ) Android and Microsoft (Nasdaq: MSFT  ) Windows Phone 7, as its significance now overshadows Mac OS X Lion?

His name is Scott Forstall, and he is Apple's senior vice president of iOS software. Bloomberg Businessweekrecently provided an in-depth look at the young executive who has largely stayed out of the limelight. Jobs hired Forstall right out of college, when he joined NeXT Computer in 1992, before Jobs returned to Apple. When Apple picked up NeXT, Forstall came bundled with the package.

Many have described Forstall as possessing several Jobs-esque traits: extreme attention to detail, secrecy, and ruthless competitiveness. They even shared personal taste in cars. In many ways, Forstall resembles a young Steve Jobs. It's not surprising when considering how long Jobs acted as a mentor to him during Forstall's formative career years.

Forstall was tasked to compress Mac OS X to run on mobile devices and compete with the iPod division when Jobs was deciding what OS to put on iPhones -- a competition he clearly won. It was also his call when he persuaded Jobs to allow Apple engineers to test prototype iPhones "in the wild" last year, leading to the dramatic Gizmodo affair.

The decision for Apple to acquire Quattro Wireless, which turned into iAd, as well as Siri, which promises to be iOS's most revolutionary feature, were both also attributed to Forstall.

Who's counting?
Apple has sold a cumulative total of 250 million iOS devices, and last quarter's iPhone unit sales jumped 142% while iPad unit sales climbed 183%. Under Forstall's watch, iOS has grown to become the most vibrant smartphone and tablet ecosystem in the world, with growth continuing to accelerate. Apple CEO Tim Cook also pointed out that Apple claims only 5% of the worldwide mobile-phone market, leaving plenty of opportunity.

Apple is on track to top $100 billion in annual sales as it wraps up fiscal 2011, compared with fiscal 2010's $65.2 billion. The company has already racked up $80 billion in revenue in its first three quarters. On a trailing-12-month basis, it has already crossed that threshold with $100.3 billion revenue.

With the launch of the iPhone 4S and broadened distribution through the three largest domestic wireless carriers -- AT&T (NYSE: T  ) , Verizon (NYSE: VZ  ) , and Sprint Nextel (NYSE: S  ) -- Apple is on track to increase household penetration and iPhone sales growth even further.

Fool contributor Evan Niu owns shares of AT&T and Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Apple, Google, Microsoft, and AT&T, as well as creating bull call spread positions in Microsoft and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 15, 2011, at 5:02 PM, millsbob wrote:

    great article, Evan!

    good contrast to the bland commentary from b-school types who don't get the structure here.

    interesting sidelights on Scott...

  • Report this Comment On October 15, 2011, at 6:21 PM, xmmj wrote:

    The interesting thing is the Mac business. As a percentage of the total is is shrinking, but the interesting question is will this go on forever? What does the chart look like if we go further back in time, to the beginning of the iPod?

    My guess is that the iPod grew and grew (as share) and then leveled off. All the time the Mac was growing, but as fast. Eventually the iPod leveled off, but the Mac keeps growing. given Mac's very small penetration in the overall market, especially the foreign and developing markets, I see its growth being very very long term.

    So the question is: Will iPhone and iPad reach a steady state in several years, while the Mac continues to grow?

  • Report this Comment On October 16, 2011, at 9:52 AM, lucasmonger wrote:

    To follow up on xmmj, I dropped off my daughter at college earlier this fall with a MacBook Air, and it seems like the majority of her classmates have MacBooks, iPhones, and iPods. Althoughh i dont have precise numbers, it seemed to be 70-80%, at least amongst freshman girls. When they graduate, the numbers hitting the business world demanding a nonPC will be staggering.

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