Apple Shatters the Hardware is Unprofitable Rule

Rich Tehrani : Communications and Technology Blog - Tehrani.com
Rich Tehrani
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Apple Shatters the Hardware is Unprofitable Rule

What you can learn from a company that shatters conventional wisdom like an elephant in a Swarovski store

Before you line up the virtual rotten tomatoes to hurl at me through the screen I want to give you the following disclosure… I am going to defend Goldman Sachs. You see, John Cassidy just wrote an article in the New Yorker to explain that is Apple twenty-times as profitable as Goldman Sachs when measured by return on assets.

He goes on to explain part of the reason is that Apple doesn’t record its patents for products like the iPad as capital – then again he points out Goldman doesn’t do this for its trading algorithms either.

He then goes on to say Apple has monopoly pricing power in a commoditized market while Goldman does not. To some degree this is the case but certainly a strong argument can be made Goldman is best-in-breed and does command a premium over the competition.

The article continues by explaining that Apple employees get an average of $46,000 (some estimates are as high as $107,719) while Goldman employees make $430,700 on average. So basically the company which is 1/20th as profitable pays employees ten times as much.

And in the case of Apple if you were to factor in that for every employee in the US about 9 are employed in China – at Foxconn, the average Apple salary will plummet and the salary discrepancy will be even more out of whack.

The interesting point about this analysis is that there are a handful of virtually irreplaceable people at Apple and many others who can be replaced. For example, many of the workers in the stores can be interchanged without the company suffering too greatly.

In the banking business, many of the rainmakers can leave to start hedge funds where money flows like water and compensation can be in the high six and seven figures. An accountant I know in Fairfield County, CT – the hedge fund capital of the world was detailing how a worker in a fund he knows got a half a billion dollar bonus recently! The kid in the Genius Bar is more than likely not going to start a company which generates millions if he resigns tomorrow.

So – pardon the pun, this is really and apple and oranges comparison but it does bring up a point worth addressing. While much of us in the tech world have said for years that hardware is commoditized and the only profit is to be made are from selling software, Apple has shown us that we are a bunch of idiots. Technology which we often think of as a commodity business becomes commoditized, if you let it. If you reach down and demand more from yourself and your team, you become a company with commodity-busting products which can demand a premium over the rest of the herd-mentality companies you compete with.

No, Apple isn’t alone in this regard – I pay more for my razor blades than I probably should because the product is better and it has solid marketing making me subconsciously feel good about my purchase. As a result I buy shaving cream from the same company at higher prices than the competition.

Of course not every brand can be premium – some rise to the top like cream. But if you want to be in this position, you have to remember that Apple did the unthinkable and continues to come out with product after product that shatters the conventional wisdom about commoditized products. So why cant you?



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