How Apple Makes Money: iPhones and Services

Nobody holds a candle to Apple (AAPL -0.81%) when it comes to consumer technology. 

With its emphasis on minimalist design and a simple user experience, the company has defined product categories like the tablet, the smartwatch, and of course, the smartphone. The iPhone is the device that made Apple one of the largest companies in the world and is responsible for most of Apple's sales. But it's not the only way Tim Cook and company make money. 

In this video from our YouTube channel, we break down how Apple starts with devices and then makes even more with services after that first sale! (A full transcript follows the video.)

Check out the latest Apple earnings call transcript.

Narrator: Most hardware companies have a hard time making money on devices, but not Apple. Reports in 2018 indicated that 80% of the profits in the global smartphone industry were earned by Apple. But that's not the only way Cupertino's finest makes money.

In this video, we're going to break down how Apple can turn a profit on hardware, and how it makes more money from its users once they have an Apple product in their hands.

There are two popular smartphone operating systems -- iOS and Android. The second is open source and is effectively the default for all non-Apple devices. Worldwide, Android owns about 80% of the market and in the U.S., it commands about 55% of the market. The operating system is all you'll find on devices from major players like Samsung, HTC, and Huawei.

That ubiquity is great for Google's parent company Alphabet (GOOG 0.56%) (GOOGL 0.69%), but it means that it is harder for Android phone manufacturers to differentiate themselves. Because they're all running similar operating systems, the companies need to compete on features and price.

Apple has always kept its operating system to itself. If you want to use it and enjoy having your smartphone integrate with your Macbook, you need to buy an iPhone. That exclusivity, coupled with Apple's focus on simple, intuitive design and the company's strong brand, has helped Apple establish luxury status in an industry where most other companies are trying to keep costs low.

In fiscal 2018, Apple had hardware sales of over $220 billion. Over 70% of that revenue came from the company's iPhone segment. All told, the company's hardware business -- which includes iPhone, Mac, and iPad, among other lines -- earns over 30% margins... which is virtually unheard of for a consumer-hardware company. But the money doesn't stop there for Apple.

Once someone owns an iDevice, they enter Apple's ecosystem of apps and services that it offers via the software on its devices. Want to download a productivity app? Check out the app store on your iPhone. Want to expand your storage and put some of your photos on the cloud? Just pay for an iCloud storage plan.

Individually, these seem like minor transactions, but they add up to big money for Apple.

In the company's 2018 results, they noted that their services segment had generated $37 billion in revenue and 60% margins. The services segment is twice as profitable as Apple's core hardware business, and increasingly, it is going to become the focus for Apple.

Recently, iPhone sales have struggled as Apple battles longer upgrade cycles, but services growth has kept chugging along. In the company's fiscal 2018, services revenue grew 24% year over year. The beauty of it for Apple is that even if one part of the business is struggling, the company is still cashing in.

Services strengthen Apple's device offering, and the more people that own one of the company's devices, the larger the market for its high-margin services business. In early 2019, the company announced it had an installed base of 1.4 billion devices, showing the incredible scale of Apple's hardware business and the massive opportunity for its services business.

Devices, services... no matter how you slice it, Apple is making money.