What is Apple’s core business?

Apple Inc. (NASDAQ:AAPL) does more than just build computers; the company makes them, designs them and puts life (software) in them. They take care of both the hardware and the software of their machines. For those of you who like academic definitions, the way the encyclopedia would define the company would be: Apple “designs, develops, and sells consumer electronics, computer software, and personal computers.”

apple logo

Apple is one of the biggest tech companies and the way to the “tech throne” is adorned with lucrative collaborations and an efficient portfolio of partners.

And so it began

Apple was established in 1976 and sold the Apple I, a computer kit (just a motherboard). This kit was hand built by Steve Wozniak. From the motherboard, Apple went straight to the “killer app;” VisiCalc, a spreadsheet that made Apple popular in 1979.

I’m not giving you a history lecture on Apple. This nugget of information is important to get the sense of how Apple operates. VisiCalc was created by the company ‘Software Arts’ and distributed for Apple computers. This spreadsheet became the main reason behind Apple II sales. From this point on, Apple started recruiting both; computer programmers and production line assistants.

During the 90s, competition in the computer market became extremely fierce. Microsoft Corporation (NASDAQ:MSFT) started doing really well with their Windows as it was working solely on software development. This strategy paid off and they made lot of money selling Windows to anyone, who wished to integrate computers with it.

In 1994 AAPL collaborated with International Business Machines Corp. (NYSE:IBM) and Motorola Mobility Holdings Inc (NYSE:MMI) for the same reason; it wanted to focus on its software while leaving the hardware to experts. ‘Power Macintosh’ was the most notable product of this holy union against PCs.

Later in 1996, in its effort to not waste more time, it purchased NeXT, which was then owned by Steve Jobs. And so the NeXTSTEP operating system made its way to Apple computers.

Power of collaboration

After 1998 Apple purchased many companies and added them to a very lucrative portfolio. The majority of these purchases were to add heavy artillery to its software business.

In 1998, AAPL bought Macromedia’s Final Cut, an indication that Apple was focusing on its ‘soft’ side; especially targeting the digital video niche. Then in 2002, Apple bought ‘Nothing Real’ to support their digital compositor program ‘Shake’.

In the same year, Apple upgraded its music production by buying ‘Emagic’ for their music software ‘Logic’. Its advance form of ‘GarageBand’ is more popular.

When Apple bought Steve Jobs’ NeXT in 1998, it got more than just an operating system (and a genius advisor); OPENSTEP and BSD Unix were NeXT based operating systems that Apple used in its Mac OS X.

Collaboration with Intel

In 2006, AAPL announced that it would produce Intel-based Mac systems. So the popular Macs of today; MacBook Pro, iMac, Power Mac, PowerBook and iBook were born as a result of this nuclear fusion between Apple and Intel.

In 2012, Apple acquired an Israeli hardware company, Anobit for $500 million. The company’s reason behind the purchase was to acquire their memory signal processing technology, which is currently used in the flash memory of iPhones and iPads.

For manufacturing iPods, AAPL has a contract with Foxconn and Inventec. Apple also partnered with Nike for ‘Nike+iPod’ Sports Kit.

List of suppliers

Apple Inc. (NASDAQ:AAPL) has released a list of its suppliers for the first time. It consists of 156 companies and includes big names like Intel Corporation (NASDAQ:INTC) and NVIDIA Corporation (NASDAQ:NVDA) that make chips for Mac product line. This list consists of companies that have (had) active contract with AAPL till 2011. These suppliers form 97% of the Apple’s supplier expenditure for material procurement, manufacturing and assembling Apple products.

This list includes the names of companies that make parts of Macintosh computers such as Panasonic Corporation (NYSE:PC), Toshiba Corp (TYO:6502), Sharp Corporation (TYO:6753), Seiko Epson Corporation (TYO:6724) and rival tech company Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930). Names like Unisteel Technology, Vishay Intertechnology (NYSE:VSH) and Zeniya Aluminum Engineering are also in the list but they are not well known.

Apple’s list excludes some names that do not have a direct contracts for procurement, manufacturing or assembling. For instance American glassmaker Corning, the manufacturer of the tough iPhone glass, is not included, as it doesn’t have a direct contract with Apple (the glass is supplied to another party for finishing and then it is shipped for assembling).              

Apple – Product Design & Branding

When marketing to large corporate clients; branding or designing PCs doesn’t give you a competitive edge. But on small scale, branding/designing does provide an advantage. Apple is marketed to small business customers and that’s why branding has helped it boost its share price considerably over the previous years.

LTM PC unit share by vendor chart

Apple Inc. (NASDAQ:AAPL) truly makes the material its own; both the hardware and software get designed the ‘Apple way’ and that’s why Apple offers differentiated products than other PC Original Equipment Manufacturers (OEMs).

How Apple gets profits without competing

Looking at the whole PC hardware market, Macs are rare in many ways. Apple has a very small share among the Wintel-based PC vendors; only 5.1% share in this market brings Apple 11.4% of its revenues.

This business concept gives AAPL leverage; it doesn’t have to follow industry trends. Apple Inc. (NASDAQ:AAPL) produces both the hardware and propriety operating system. This way Apple doesn’t have to sell a ‘commodity’, instead it offers PCs that are capable of tech innovations and hence stand out from the crowd.

Hard-Soft Synergies                           

Relying on tech novelty to push sales can be very risky but expert engineering, precise marketing and brilliant design talent at Apple have made this work profitable. The way AAPL puts together the hardware and the software is unique to it and it gives Apple synergistic advantage – not everyone can accomplish this.

How is Apple’s strategy working out for them?

There is no doubt that without this synergy of software and hardware, products like the iPad and MacBook Air would not have been possible. You would argue that Apple didn’t actually create the first tablet, I agree; tablets have been around for quite a while but it was only after Apple introduced its iPad in 2010, that the market simply exploded (tablet market generated $52.3 billion revenue in 2012 alone).

AAPL sold 55% of all the tablets sold in 2012. It is the king of tablet market and is hoping to sell more in the coming years. While other companies like Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM), Hewlett-Packard Company (NYSE:HPQ) and traditional PC OEMs are finding it hard to break into the tablet market, Apple is simply steaming ahead.

tablet market share chart

Apple and Samsung both have the lion’s share in the phone market. The semiconductor market started seeing benefiting only after the emergence of smartphones; handset EMS market couldn’t grow because Apple and  Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) simply dominated the market share. Here is a summary of smartphone gainers in the last six years.

device revenue chart

When it comes to market share, there is a consensus that market will see status quo; Apple will continue to dominate. Apple Inc. (NASDAQ:AAPL) has the scale, brand name and propriety OS to keep the upper hand in the market, which is why Apple differentiates its products and keeps tight hold of the high end market.