Apple depends on the iPhone more than previously thought

The story on Apple’s margins is even more interesting when you look at how high its iPhone margins are. Analysts have calculated that the gross margins on the iPhone are nearly twice the margin on the iPad. And this suggests that Apple depends heavily on iPhone sales to maintain margins. What does this mean about Apple going forward? Well, to the degree that Apple wants a positive high margin/high growth mix they need to have an iPhone product cycle that sells a lot of units. If their product cycle is slow then both volume and margins fall as the product mix skews away from the iPhone. The reason Apple’s quarter was so bad was because of this.

The question is whether there are some sort of hysteresis effects, meaning that the lost momentum from one upgrade cycle feeds through negatively to the next upgrade cycle. Another question is whether the shift from non smartphone handsets to smartphones favors Android and therefore Samsung due to price. If so, the platform network effects could become a significant headwind for Apple as they attempt to keep both margins and growth high. I don’t think they can do it. I believe margins or growth will slow… or both. And I believe that’s what we are seeing right now.

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