Apple Earnings Show Unparalleled Pricing Power

It’s looking like this earnings season has a consistent theme among US companies. Most are showing an ability to manage their way through the recession with cost cuts but hardly any companies are showing significant revenue growth. Except Apple (AAPL). Apple’s report stunned just about everyone. Apple’s closed ecosystem is proving to be the way to win in modern technology. Unless your business model has some kind of moat surrounding it, you are destined to become just another commodity caught in a pricing war. Apple’s earnings report defies the logic that says you can’t sell high priced computers in a recession. 3.1 million Macs and 46% net income growth shows that avoiding the low margin netbook fad is the way to go. Oh by the way, real earnings growth was much higher. Apple’s real net income was $2.85 billion on revenue of $12.25 billion (non-GAAP). Consumers are rewarding this company because they trust the products.

The big debate going on in the tech world right now is whether or not Google’s (GOOG) Android is going to put an end to the iPhone market share growth. Android is an open platform akin to the Microsoft (MSFT) operating system that dominated share in the PC market for so many years. Because of Microsoft’s past success, many assume that Android will eventually overtake the iPhone for similar reasons. The problem with this assumption is that modern tech is too complex; the only way to simplify it is to control both the hardware and the software. Steve Jobs’ insistence that Apple maintain such tight control on the Mac OS hurt Apple during the last generation but it will propel them to greatness in the future. In a world of constant downloads and upgrades it is imperative that all users can seamlessly perform such functions. The latest release of Snow Leopard has already doubled the rate of Leopard. It’s so easy to do and it only costs $29. Most who upgrade to Windows 7 are going to need a new computer along with new software that is compatible. That doesn’t work for today’s generation.

Apple is so good at what they do. They shouldn’t be the best at both software and hardware but they are. The resulting pricing power is yet another reason why I’m predicting the 2010-2020 decade will be known as the Apple Revolution. The latest earnings release merely reconfirms that the Apple trend is on solid footing.

Disclosure: Long AAPL.

Comments

[Roger Knights:]

Apple: Delicious!

Apple: Once you bite, you're bitten!

Oct 20 05:38 AM

[LilBob:]

I recently completed my A-Plus training and repair computers as a little independent side business. I honestly feel that much of Apple's success is a reflection of just how bad the Vista operating system really is. Microsoft also appears to be cutting off their nose to spite their face as reportedly it will be relatively difficult to install Windows 7 over the XP operating system-requiring a clean install and reformatting of the hard drive rather than just popping in an upgrade disk.

We really haven't seen any of the larger PC or software companies make moves that would constitute an all out "price war" for desktop computers. Some PC retailers-such as TigerDirect.com-are selling refurbished PCs and there are quite a few computer techs who pride themselves on their ability to produce or maintain high-performance computers cheaply. I'm still confident that the first company that does take a real "price war" approach to computers will decimate the competition.

Oct 20 05:55 AM

[John Galt:]

Congrats to Apple, I know you love them and you've rode the train on the way up. I don't usually buy Tech but when I saw Apple at 80 bucks a share it was worth the risk/reward for me... ( I jumped off early but nobody ever went broke taking profits right?).

However you said that most people will need "new computers" to download Windows 7. Look, I'm no fan of Microsoft, but a new computer? Isn't that a little bit much?

Oct 20 08:55 AM

[dano123:]

Jason, your take on Apple last spring gave me what I needed to buy in then. Once again, much thanks!

Oct 20 09:01 AM

[mollytjm:]

great article! in tech companies, the bottom line is fast/good innovation. Because Apple has kept a tight rein on it's products and OS, they can innovate faster than anyone else. that's the name of the game. And their customer satisfaction is higher than anyone else's. When Apple didn't sell millions of products in a quarter, it was easy for critics to say that customer satisfaction polls came in with high numbers because the buyers were 'fan boys'. There's no way to justify that sort of thinking now. Obviously people love the products because they're great products.
Long APPL

Oct 20 09:49 AM

[Zenfar:]

It is my opinion that Microsoft should buy Palm. They have to do something now to get into further into the mobile game with a solid Microsoft branded device.

Apple is great company, I see Mac gains continuing the future as long as they stay with Nvidia graphics and Intel CPUs. Would like to see a new iPhone with the Tegra chipset.

Oct 20 10:34 AM

[tripleblack:]

I have said the same thing myself, several times, over the past few years. Palm is pretty cheap, too.


On Oct 20 10:34 AM Zenfar wrote:

> It is my opinion that Microsoft should buy Palm. They have to do
> something now to get into further into the mobile game with a solid
> Microsoft branded device.
>
> Apple is great company, I see Mac gains continuing the future as
> long as they stay with Nvidia graphics and Intel CPUs. Would like
> to see a new iPhone with the Tegra chipset.

Oct 20 11:11 AM

[jbelkin:]

Finally, the right analysis. As for Android, yes it will do fine but Android is not like reselling a badged item like a Maytag dishwasher - it is like a Chevy V8 - a fine engine that goes into a multitude of cars including many custom CARS but it's only one component - what's the transmission? What the exterior look like, thevinterior functionality and quality? THAT IS THE DIFFERENCE that Android will NOT be able to compete with Apple. A few DOZEN cell companies and manufacturer will each make their OWN ANDROID phone - some will hype up the Google connection - others won't. Google is NOT Apple in many measures. Google is brilliant but and its strength is in shifting data but look at Google UI's outside of search? How well is YouTube actaully integrated? It's not. Android is a fine SOFTWARE TOOL because it's FREE - otherwise, what's the adoption rate? Companies are using it because it's free and actually makes GOOGLE NOTHING upfront - their payoff is presumably the 'store' which again has to be 'opened' by the cell or phone company and advertising. It's a nice model and a potentially profitable one but it's NOT the Iphone & Apple's ... at the end of the day, Apple will be the most profitable smartphone seller skimming 70% of the cream of the crop so they might lose out to the coming $49 smartphone market in overall percentage but Apple will make the most money by simply having the ONLY phone that has world class design, smart hardware & software integration and ITUNES. Android at some point might hit 2 or even 3 of the 4 but will never hit all 4 - same as the ipod makers ... it's NOT about specs.

Oct 20 01:46 PM

[James Katt:]

Darn.
I should have spent more on Apple stock.
What I have only doubled in price.
Darm.

Oct 21 12:31 AM

[Yang Wang:]

Great article!

One problem here:

Android is a mobile operating system running on the Linux kernel.
It allows developers to write managed code in the Java language, controlling the device via Google-developed Java libraries.

The unveiling of the Android platform on 5 November 2007 was announced with the founding of the Open Handset Alliance, a consortium of 48 hardware, software, and telecom companies devoted to advancing open standards for mobile devices.

Google released most of the Android code under the Apache License, a free software and open source license.

So, it has nothing to do with Microsoft operating system.

Oct 21 02:35 AM

[jack dee:]

Jason this is nonsense. The entire point of an OS is to provide a platform, that others can build on.
Windows Unix Linux have remained open and unfettered for decades, they only reason apple can even sell an ipod is precisely because these platforms allow anyone to build anything that they can make work and sell it to who ever they like , for what ever they can get.

Open platforms are the key, suggesting that somehow the world is too compex for this is silly , the world is far to compex not to have open platforms.

>>>The problem with this assumption is that modern tech is too complex; the only way to simplify it is to control both the hardware and the software.<<<

Oct 27 01:40 PM

[jack dee:]

>>>>Most who upgrade to Windows 7 are going to need a new computer along with new software that is compatible. That doesn’t work for today’s generation. <<<<

This is a meanless comment Jason.

most sales of win 7 will in the long term be OEM just as apple will sell most OEM.

As to "compatible" you clearly have no idea what you are talking about. Just about every single machine to come out of a factory in the last year or so is already compatible with win 7.

Please wake up and smell the coffee Jason there are millons upgrading old machines with win 7 and breathing a whole new life into them.

As to "todays generation" please cut bs, todays gen knows how to insert a disc, they are not dumb please dont sell them so short.

Oct 27 01:52 PM

[JW.USC:]

Well, now you know how the rest of us feel about reading the garbage you spew on this site every day.

On Oct 27 01:40 PM jack dee wrote:
> Jason this is nonsense.

On Oct 27 01:52 PM jack dee wrote:
> This is a meanless comment Jason.

Nov 05 03:10 PM

[Luke Skywooker:]

tough to predict. Apple is seamless, intuitive, but will cost slightly more than android. Plus Verizon network is so much better. The verdict is still out.

Nov 08 09:52 PM