The iPhone Is A Miracle

Here’s the definition of a miracle, according to Merriam Webster:

Any one of those definitions works for the iPhone, which continues to defy expectations.

Two years ago I called the iPhone a miracle, and said the following: “Apple created and captured a once-in-a-lifetime opportunity with the iPhone.”

At the time, Apple’s phenomenal growth had rapidly decelerated. The stock was tanking as investors questioned where the company’s growth would come from in the future.

As the iPhone’s growth tanked, some smart folks suggested Apple’s next major business would be the iPad, but I knew there was no way the iPad was ever going to match the iPhone.

The iPhone sells for $US600 on average. In some markets, like the US, consumers think they’re only paying $US200 for their phones since carriers subsidise the rest of the cost. That allows Apple, which always a pursues the high end of the market, to seem like it is selling a product that cost the same amount as its low-end rivals like Samsung, or Motorola.

In essence, it allows Apple to get mass-market pricing and premium pricing. Plus, its customers come back every two years to get a new phone. And, thanks to Apple’s manufacturing efficiency, the company’s profit margin on the phone sales is extraordinary.

The iPad has no subsidy. The Mac has no subsidy. As a result, they are comparatively expensive. And combined, their sales growth and market share reflect those realities.

In 2012, it looked like Apple’s miracle was over. The market for expensive, high-end phones appeared to be saturated. Samsung was on the rise, building phones that would soon match, or depending on your taste, exceed the iPhone. Android was rapidly improving, and the difference between it and Apple’s operating system seemed to be coming down to taste.

But then a funny thing happened. The iPhone business just kept on chugging. It miraculously defied expectations and is stronger than ever, with no sign of letting up.

Last night Apple reported its best ever iPhone sales for the September quarter thanks to the iPhone 6. On the company’s earnings call, CEO Tim Cook said of the iPhone, “We’re selling everything we make.”

Apple can make a lot of iPhones. For the September quarter, it sold 39 million iPhones, a new record for that period. iPhone sales were up 16% on a year-over-year basis. For the holiday quarter, Apple is projecting $US64.5 billion in sales, which suggests over 61 million iPhones, according to Credit Suisse, which would be 20% year-over-year growth.

If Apple could make more phones during the quarter, it could sell even more. Demand for the iPhone continues to strongly exceed supply. Demand and supply aren’t even “on the same planet,” said Cook.

This is happening without Apple changing a single thing about its business model. In fact, you could argue that the company has doubled down on its heavily criticised strategy of charging a premium for the iPhone.

Last year, the iPhone 5C, which many expected to be a low cost phone, sold for $US549, which is more than most companies’ high-end phones. This year, the iPhone 6 Plus is the most expensive iPhone Apple has ever made, and it’s impossible to get your hands on one because it’s selling so well.

Even with high prices, Apple is selling more phones than ever.

This is what makes the iPhone a miracle.

No one believes it can really happen. The business model for Apple is literally unbelievable.

While just about every other smartphone maker fails to make a profit, Apple is minting money. Cash flow from operations was $US13.3 billion last quarter, a new record for September.

Apple is making all that money because it sells a product that is twice as expensive as its rivals. Though it’s hard for an unbiased, rational person to argue that it’s twice as good.

Apple has a tiny sliver of the smartphone market. As such pundits predict that one day developers will bail on iOS, thus leaving it starved for applications. Without applications it will be a second-class citizen, and consumers will bail. And yet, that’s not happening. The opposite is happening, developers are still building iOS applications ahead of Android applications, despite Android’s overwhelming market share advantage.

It’s hard to rationalize how Apple does it. There’s no other company doing what Apple does.

The iPhone is bigger and better than ever. Market share doesn’t matter. Price doesn’t matter. People want iPhones because they look good, they work well, and software is excellent.

It really is miraculous. There’s no other company like Apple.

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