Where Have All The Profits Gone? Gone to Apple, Every One

by Steve Wildstrom   |   January 25th, 2012

A few years ago, folks in tech used to worry that all the profits in the PC industry were being scarfed up by Microsoft and Intel and that the crumbs left to PC makers would be insufficient to fund any innovation. For companies not named Apple, those were the good old days.

Chart: Apple per share earningsApple’s  blowout December quarter was stunning enough viewed in isolation. But it is even more striking in comparison to the rest of the industry. Apple’s revenues of $46.2 billion blew past Hewlett-Packard’s $32.3 billion to make it the industry leader by sales. But the real story is profits. Apple’s net of $13.1 billion was just a hair less than the earnings of Microsoft, Intel, HP, and Dell combined.

For a little historical perspective, in 2006, Apple earned just under $2 billion on sales of $19 billion for the entire year. Microsoft and Intel combines for sales of $80 billion and profits of $18 billion.  (M.G. Siegler at TechCrunch has a host of other Apple-industry comparisons.)

Apple’s growth and stunning profitability is obviously wonderful news for the company and its shareholders. And there are no signs that its remarkable run is over. The growth rate of the December quarter is unsustainable, but that is a reflection of the strength of one three-month period, not an indication of any weakness.

But the concentration of the tech industry’s profitability in one company is a potential problem for the industry as a whole. Apple is a wonderfully innovative company that has, year after year, come out with the most interesting products in tech. And the iPhone and iPad have spawned a whole ecosystem of successful third-party products.

Innovation, especially in hardware, requires talent, imagination–and money. Apple’s cash hoard–by now over $100 billion–allows it to do things that competitors cannot even think about.

It’s not a healthy situation to have all the innovation coming from one company, no matter how brilliant. But the razor-thin margins of Apple’s competitors make risk taking difficult. Consider the sad case of HP and the TouchPad. Executives of HP’s Personal Systems Group saw webOS and the TouchPad as a way to both challenge Apple and to free the company from the domination of Microsoft.  PSG chief Todd Bradley saw this as a fight of  ”years, not months.” But looking at startup costs in the billions and a lack of instant success, HP’s top management got cold feet and killed the project before it had a chance. A lot of this had to do with HP’s tumultuous internal politics,  but the fact that the company earns eight cents on every dollar of revenue  while Apple nets 29 cents  has to have been an important factor in its skittishness. The problem is the vicious cycle, in which a financial squeeze cripples innovation which damages the prospects for growth.

It’s hard to see how this situation changes anytime soon. Perhaps Google, which has margins even better than Apple’s though it is a much smaller company, can use some of its profits to turn stodgy Motorola Mobility into an innovation engine, assuming that it completes its planned purchase. Maybe the partnership of Nokia and Microsoft will produce something wonderful. But for the foreseeable future, expect Apple to expand its dominance.

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • JamesKatt

    The problem I have with this article is that each company noted has a different niche in the technology industry. They each profit from an almost non-overlapping area. They actually do not directly compete with each other in their area of expertise.

    Apple is wildly successful in its area – consumer electronics. And it makes most of the profits in that area. And it is a company to be envied because of this.

    However, in operating systems and business software, Microsoft is king. It rakes in billions in profits each quarter. It has over $40 Billion in cash. It has a much higher profit margin than Apple because it hardly has any hardware overhead. Software makes tons of money. Apple makes a small dent in Microsoft’s area but it is a small dent that hardly matters since Microsoft is still the de facto 800 pount gorilla in business and operating systems. Note that Microsoft has sold over 500 Million copies of Windows 7 – an amazing number.

    Intel is still the 800 pound gorilla of desktop and laptop PC chip business.

    Google is the monopoly in online advertisement. It has over $40 billion in cash saved up – nothing to sneeze at since it likes to spend, spend, spend.

    HP is the leader in business hardware, printers and services. Sure, it has the PC hardware loss leader. But that unit is still very profitable. Sure, it misstepped by having Apple envy and tried to enter an area which it had no expertise in. But it is still very profitable.

    Dell was in its deathbed. But Michael Dell has been silently rebuilding Dell into a very profitable company also.

    Each of these companies is in an almost non-overlapping niche in the techology industry. Each is innovating in their own way.

    Profit is not like a fixed-size pie that is cut up and doled out to each company. Profit actually is a growing pie. Just look at the cell-phone industry – there is enormous room for competitors. You just have to be innovative to compete. But when you are, there is more than enough profit for all. You don’t have to envy Apple. You innovate yourself.

    Each of the big boys is innovating in their own way. The author is just blinded by Apple to see this.

    • synthmeister

      But if you look at the four companies you mentioned, their revenue/profit drivers have all stayed the same for the last 10 years, they have not innovated any new profit mechanisms. Virtually every new thing they’ve tried has flopped or been insignificant as a driver of profits. For example, Google still won’t fess up to how much money Android brings in, it only reports mobile earnings which includes iOS. Meanwhile, in the last ten years, Apple has kickstarted multiple growth engines beyond the Mac:

      1. iPods
      2. iTune media store,
      3. Apple retail
      4. iPhone
      5. iPads

      And they have introduced multiple revenue “enhancements” like AppleTV, i-books, App store, Mac-app store, iAds, iTunesU, iBook textbooks, etc. that have never really lost money, unlike X-box, for example.

      The iPhone alone now generates more revenue/profit than all of Google, yet it did not even exist five years ago.

    • Mark Scott

      Your assertions are off base. These individual companies compete more than you are willing to acknowledge. HP, via its billion plus dollar purchase of Palm, attempted to compete in the phone and tablet arena; Google is spending almost 12 billion to purchase Motorola (not to mention its purchase of Danger) and has spent billions more in developing and giving away for free the Android OS. Microsoft has spent billions on Windows phone 7 and its “partnership” with Nokia. Intel has spent billions trying to get its processors into phones and tablet with nothing to show so far. Indeed, outside of Samsung, no one in the phone business is making much of a profit – even with a “free” OS such as Android.

      Now lets talk about tablets… All of the above have similarily poured billions into tablet hardware and OS and what do they have to show for it? Simple answer, nothing (i.e., NO profits).

      Yes, Microsoft still makes a fortune off of Windows and Office, but PC sales are down and this, as Microsoft itself stated, has impacted the bottom line. Moreover, Windows 8 has the makings of a disaster. Having used it, I will say it was suffer a fate worse than Vista. Office, is a mature market dependent upon increasingly marginal updates to the core package. This upgrade cycle is becoming more difficult for Microsoft to continue.

      Windows PC makers make virtually NO money on hardware. Apple make a substantial profit on EACH computer sold. Dell, who you cite, is NOT making a comeback in the PC arena – its focused on enterprise solutions and it would not surprise me to see them eventually go the way of IBM and to dispose of the PC component of their business line.

      As stated by Mr. Wildstrom, the lack of substantial return on investments in these overlapping areas, will REDUCE the ability and/or desire of these companies to innovate in new areas.

  • Spike Ennis

    “The problem is the vicious cycle, in which a financial squeeze cripples innovation which damages the prospects for growth.”

    Yes and no. While the issues you mentioned can fight spending money for innovation, its a different problem that kills these companies. GREED. Ask HP or Dell etc what their driver is for improving the company…. MAKE MONEY…. Greed. ask Apple… Steve Jobs said it best. We want to make insanely great products that people will want to buy.

    Apple’s satisfaction rating is usually in the 95% or better. Apple does not try to pinch pennys, but rather it makes great product, and that translates to sales.. Then they use that money (not to give the press and board huge bonuses or paychecks) to lock in cheap prices for hardware and try different designs.

    Apple said that if someone was going to steal their market away, it should be them. In other words, do not try to scrape every penny from the customer, treat them right and come out with new and better items while you are on top. It keeps you one step ahead of the competition.

    Nuff said.

  • Nigelash

    True it is not good for one company to do all the innovating, so what is everyone else doing??
    While there is some good stuff going on much of the ‘innovation’ appears to be nothing but Apple-copying.

    • http://www.youtube.com/watch?v=aroS9irNXfU David Abraham

      true, plus Apple slowly built a cohesive collection of branded products. It would take a lot of discipline and time to match that.

  • http://www.youtube.com/watch?v=aroS9irNXfU David Abraham

    Google’s best shot is to turn the Razr into an iconic device. Perhaps a Nexus RAZR with almost singular focus year after year.

  • ChKen

    It wasn’t that long ago when Apple was the one without all the cash resources to fund new product lines. Somehow they managed it. Why can’t others? Why blame a lack of resources when Apple had far less?

    The problem with your example of HP’s WebOS is that they weren’t innovating. They were just adding an entry into the tablet space that was already quickly becoming Apple’s personal fiefdom. What these other tech companies need to do is create true innovation where they leapfrog what’s already in the marketplace. Not a me-too product. A me-too product is the problem because it reinforces the notion that Apple is the leader. How is that going to work?

  • Jon T

    Steve, I agree with much of what you say, but disagree over your point on funding R&D. Historically Apple has much lower R&D levels than its competitors and I would be surprised if that wasn’t still the case today.

    If you could show me the chart of what Microsoft, Intel, Nokia, HP and Dell R&D $’s were compared to Apple I would start to share your concern.

    The problem is not $’s spent. It is not taking risks. It is not internal politics. It is about quality of innovation combined with the difference between wanting to make $’s versus making a great customer experience.

    Before it is too late, the rest of the market needs to learn that fundamental lesson in respect of everything they do…because Apple has lived it for many years already.

  • bbrewer

    When Michael Dell said that Apple should be broken down, sold off, and the money returned to shareholders, well that was after Steve came back. Steve’s response was, Michael, Buddy, we are coming after you.