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International Core Share Update - Apple Inc

Apple is among the largest companies in the world. The company enjoys strong brand recognition globally as do its flagship products, most notably the iPhone. While you often hear about the success of Apple Watch, Apple TV, iPad and even the likelihood of an Apple Car, the company’s success is built on the iPhone and iPhone-related services, which generated about 80% of Apple’s revenue and represented about 90% of Apple’s gross profit in fiscal 2018.

For all of Apple’s success, people warn that there are few consumer hardware vendors that maintain competitive advantages over time. Yet Apple is unlikely to lose relevance as Blackberry and Nokia phones did because Apple’s extensive ‘ecosystem’ effectively makes the purchases of Apple devices a form of subscription payment to access the platform. Apple’s plan to expand its business is simple — grow the number of Apple users and sell each of those users more Apple products and services. The number of people who use iPhones now totals about 900 million. The big opportunity to grow this number is in emerging markets because rising income is expected to make Apple’s ‘aspirational’ products more affordable to the growing middle classes there. Once people become Apple users they tend to stay. People are loyal for a number of reasons. They value the way Apple products work seamlessly together—say the way iPhone and AirPods do. People find it a hassle to switch from iOS as they are reluctant to learn a new system. Many want to associate with the cool brand, which Apple is, particularly in emerging markets. Users want to maintain access to apps such as Facetime that are found only on the iOS system, and keep services such as their photo collections in iCloud.

Apple’s ability to generate revenue from its users is constantly improving. The mobile platform gives Apple a captive audience to which it can sell new devices and services such as AirPods (wireless earphones), Apple Watch, Apple TV, Apple Music (music subscription), Apple Pay (payments), HealthKit (health wearables) and HomeKit (home automation). The more devices and services sold, the more valuable the platform becomes and the harder it is for users to leave Apple. As good as Apple’s business model is, there are risks.

One trend to watch is the length of time people hold onto their iPhones before replacing them—the time between upgrades is getting longer; it’s more a question of how much longer. Another risk is Apple’s exposure to China, from where Apple generates about 20% of its revenue. The problems here are that Apple users in China are typically less loyal, regulators have targeted Apple before and might again, and increased anti-US sentiment could hurt Apple sales. Another risk to monitor is rising competition from Android. While switching costs to Android are meaningful, people would bear them if Android became a vastly superior system compared with iOS—for example, if Android offered a much better digital assistant.

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