“Almost every highly successful tech company,” writes Jan Dawson in his latest Tech.pinions post, “has a very high margin core business which essentially funds everything it does.”
It’s an interesting way to look at things, which Dawson has neatly summarized in the attached chart.
Then he drills a little deeper. What happens, he asks, when a company’s core business runs out of steam, either by saturating the market or losing share to nimbler competitors?
Microsoft (MSFT), for example, must find a new core to replace Windows, which is now winding down. Internet search ads are Google’s (GOOG) high-margin profit center, but its growth is linked to the growth of the Internet, which will eventually reach some natural limits.
Amazon (AMZN) is the conspicuous exception to Dawson’s rule. Its core business — Internet retail — is inherently low margin and minimally profitable. Amazon’s earnings have now shrunk year over year for three quarters in a row.
Apple, by contrast, is Dawson’s shining example, and the one that interests me.
Apple,” he writes, “has always faced a significant challenge in that its original product faced a fairly small addressable market, limited by Apple’s focus on high margin, high priced products. As such, Apple has had to layer on additional products using the same basic model (tightly integrated hardware and software) over time, and has successfully made the unusual transition from one highly profitable product to multiple, with the iPhone the highest margin of all. Apple is in the enviable position of having discovered a model which is replicable in the form of multiple highly profitable cores, creating enormous margins which have allowed it to fund many other businesses, some of them lower margin and others provided free to users.”
You can read the rest of Dawson’s piece behind the Tech.pinions paywall, where you can also find tech analysis from the likes of John Kirk, Bob O’Donnell, Steve Wildstrom, Brian S Hall and the father-son team of Tim and Ben Baharin.
Their stuff goes for $0.25 a pop — an interesting business model. For me, the $50 annual subscription is invaluable.
Follow Philip Elmer-DeWitt on Twitter at @philiped. Read his Apple (AAPL) coverage at coins2day.com/ped or subscribe via his RSS feed.
