On the eve of Apple's (AAPL 1.68%) highly anticipated iPhone event tomorrow, Fortune has just published an interview with CEO Tim Cook covering a wide range of topics. Executive editor Adam Lashinsky, who also wrote a book on Apple a few years back, conducted the interview in late March. Cook discusses things like philanthropy, education, the economy, and more.
However, there is one particularly bizarre portion of the interview regarding Apple's business.
Image source: Apple.
Cook gets defensive on premium pricing and profits
Lashinsky asks Cook about Apple's strategy of making "premium-priced, high-margin, high-end products," to which Cook responds:
Well it's not high margin. I wouldn't use that word. There's a lot of companies that have much higher margins. We price for the value of our products. And we try to make the very best products. And that means we don't make commodity kind of products. And we don't disparage people that do; it's a fine business model. But it's not the business that we're in.
It's not clear why Cook seems taken aback by the question, as it's common knowledge that Apple products across many categories are priced at a premium relative to most of the competition. In smartphones, Apple regularly captures the majority of the entire industry's profits -- an estimated 79% in 2016, according to Strategy Analytics -- on a minority of unit market share.
It's true that some companies may enjoy higher margins, including prominent peers like Facebook or Microsoft. But oftentimes those companies are focused more on software and services, which are by definition more profitable than hardware.
|
Company |
Net Margin (TTM) |
Net Income (TTM) |
|---|---|---|
|
Apple |
20.9% |
$46.7 billion |
|
|
39.6% |
$13.2 billion |
|
Microsoft |
23.6% |
$21.2 billion |
Data source: Morningstar. TTM = trailing 12 month.
In absolute dollar terms, Apple is the most profitable company in the world, which is also precisely why it's a favorite holding among investors. This is nothing to be defensive about, at least from an investor's perspective.
As far as not disparaging competitors that offer commoditized products, you could argue that Cook has done just that in the past. In a 2013 Bloomberg Businessweek interview, Cook famously said, "There's always a large junk part of the market. We're not in the junk business." Calling low-end competing products "junk" might qualify as disparagement.
In the Fortune interview, Cook continued:
But if you look across our product lines, you can buy an iPad today for under $300. You can buy an iPhone, depending upon which one you select, for in that same kind of ballpark. And so these are not for the rich. We obviously wouldn't have over a billion products that are in our active installed base if we were making them for the rich because that's a sizable number no matter who's looking at the numbers.
Apple doesn't want its products exclusively available only to the affluent, but at the same time its premium pricing strategy will naturally limit who can afford its devices. This is fundamentally true in emerging markets like India, where Apple has effectively priced itself out of the market. Apple products are still broadly accessible to large portions of the market, and the company has gotten more aggressive on pricing in recent years in its quest for growth.
Still, it's not clear why Cook is so defensive when it comes to Apple's business strategy.
