Apple (AAPL 0.30%) is arguably the most successful technology company in the world. During its last fiscal year, it raked in more than $229 billion in revenue and more than $61 billion in operating income. Sixty-two percent of that revenue, and quite possibly even more than that of its operating income, came from sales of iPhones.
Although the smartphone market is characterized by a large number of competitors, many of which struggle to turn anything more than a meager profit, Apple has managed to wring an incredible amount of profit from that market.
Image source: Apple.
Apple's financial success in this market, as well as in the other markets that it participates in, has been significantly influenced by the company's competitive advantages. Here are two such advantages that spring to mind.
1. A valuable brand
According to Interbrand, which deems itself a "global brand consultancy," Apple was the world's most valuable brand during 2017, worth more than $184 billion.
The stronger a company's brand, the better it is for its business. A strong brand can, for example, sway people to choose a company's products over those from a lesser-known competitor -- even if that competing product might be more attractive at first glance.
In addition to helping boost market segment share, a strong brand can help a company increase its average selling prices (and, presumably, gross profit margin). Take, for example, Apple's iPhone X that launched last year. The company charged $999 for the entry-level model and $1,149 for the version with greater storage.
Not only was Apple able to sell a substantial quantity of those devices at those relatively high prices, but it's the most popular model in Apple's iPhone lineup.
"[C]ustomers chose iPhone X more than any other iPhone each week in the March quarter, just as they did following its launch in the December quarter," Apple CEO Tim Cook said on the company's most recent earnings call.
While the iPhone X is, objectively, an excellent device (I'm a happy owner of one myself), Apple's brand strength likely contributed to its ability to offer a device at such high price points and still sell that device in relatively high quantities.
2. Research and development might
Apple invests heavily in research and development. Not only does it currently spend a lot, but the amount that it's spending continues to grow:
AAPL Research and Development Expense (TTM) data by YCharts.
Apple's ability to spend so much on research and development -- spending that ultimately fuels the development of its product pipeline -- is directly related to its financial success. The more revenue and gross profit that a company generates, the more that it can afford to spend on research and development while still delivering robust profitability and profit growth for its stockholders.
Many other smartphone makers simply don't have the wherewithal to spend what Apple does because they don't generate anywhere close to the revenue that Apple does and, often times, the gross margins they generate are lower than what the iPhone maker enjoys.
Although some of its more capable competitors can spend in roughly the same league as Apple, it's not clear that they're putting as much into the development of the products that compete with Apple's.
For example, Apple's largest competitor in the smartphone market, Samsung (NASDAQOTH: SSNLF), spent around $14.4 billion on research and development during its fiscal 2017 -- nearly $3 billion more than the $11.58 billion that Apple spent in its own fiscal 2017.
However, while Apple invests in a fairly narrow set of products and technologies to support those products, Samsung is far more diverse. Samsung churns out more smartphone models than Apple does each year, it runs its own logic chip fabrication business, it's the leading developer of memory technologies, it runs its own chip development arm, and it sells a wide range of other consumer electronics products, too, that Apple doesn't.
Apple's ability to outspend many of its peers looks like a competitive advantage -- at least as long as Apple's management team spends that money effectively.
