Apple: Still Growing

Last year, Apple co-founder Steve Jobs appeared on an earnings report to announce that Apple had had its first quarter that annualized to a $50B/year revenue rate. This year, Jobs is back. Apple's first $20B quarter isn't a Christmas quarter, it's the back-to-school quarter of 2010.

Apple has increased advertising expense, but revenue growth actually caused Apple's advertising expense to decrease as a percentage of revenues. Apple announced that its margins would be lower in the future, but it's made that prediction before. Apple's "low" margin areas of operation include its online stores for downloaded content (iTunes and the App Store), in which Apple takes 30% of gross, and against which it charges lots of advertising and datacenter overhead. Apple's new portable devices, which are themselves portals to the online stores, offer more hardware for the dollar than some of Apple's higher-margin computers. Apple always runs the risk that recalls, parts costs, and other contingencies might eat into margins. Apple's margins decline has worried some folks.

Apple isn't losing margins because it's being forced to compete in a commodity market: Apple has priced products to attract buyers. Neither Dell nor Acer can get the margins Apple does out of hardware; Apple is clearly still selling a differentiated product. Apple's pricing strategy appears to be a deliberate effort to leverage consumer appetite for electronics by pricing products to move volumes rather than to maintain an artificial per-unit margin. The result is clear from the iPhone experience: price it correctly, and the world is Apple's. Apple's profits have continued to increase, and profit hasn't eroded as a result of Apple's new product initiatives, the profit has grown.

Of significant interest to the Jaded Consumer in this regard is Apple's re-imagination of the iTV. Oh, sorry: the AppleTV. AppleTV is now no longer a set-top console, but an Airport Express that supports video and allows, for example, Netflix subscribers to get content onto their HDTV sets wirelessly from their computers. At $99, it's almost an impulse buy. When you buy it, you get another portal into Apple's online store.

Apple doesn't talk about future products, but Apple now competes with netbooks on size, even if not stooping to their typically abysmal performance.