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The Economics of an iPhone (AAPL)

In 2017, the top-selling phone in the world was the iPhone 7 from Apple Inc. (NASDAQ: AAPL). From our culture to the economy, this small, handheld device has made a splash — and is likely to continue doing so. Apple unveiled the iPhone 8 and X on September 12, 2018 and customers eagerly await the international launch of the iPhone X on November 3. Pre-orders for the device began on October 27, and demand has sent the company’s share price surging. 

Let’s take a look at how Apple makes and sells such an influential product.

Impact on Apple’s Bottom Line

Apple reported $229.2 billion in revenue during fiscal year 2017, roughly a 6.3% increase from $215.6 billion in fiscal 2016. In 2015, Apple announced its highest annual revenue on record of $233.72 billion. Over $150 billion of that year’s revenue came from iPhone sales, meaning the company’s phone segment was responsible for around 70% of the company’s total global revenue. iPhone sales reached 216 million units in 2017, up from 150 million in 2013 and 40 million in 2010.

Apple is one of the most valuable companies to date, yet nearly two-thirds of its revenue depends on one product line. iPhone sales are historically resilient, partially because Apple makes it difficult for customers to adapt to alternative operating systems.

iPhone Component Pricing: What It Costs to Build

Apple’s sourcing model is one of the reasons it generates astronomical profit margins. The company makes very little of its own products. Instead, components and materials are gathered from around the globe and sometimes even from direct competitors, such as Samsung. This significantly lowers capital expenses for Apple, saves the consumer a bit of money, and lets shareholders benefit from the difference.

The typical iPhone model sold for $645 in 2016. That number is sure to rise, with the higher priced iPhone 8 and iPhone X. Estimates by IHS Markit — a tech research company — put the building cost of an iPhone 8 Plus at $288.08, not including marketing costs, research and so on. Here’s the breakdown:

  • Apps Processor — $27.50
  • Baseband — $33.90
  • RF / PA — $24.60
  • Battery — $4.45
  • BT / WLAN — $7.35
  • Cameras — $32.50
  • Display — $52.50
  • (electro)mechanicals — $50.95
  • Memory — $31.20
  • Power Management — $16.05
  • User Interface  — $11.28
  • Sensors — $6.65 
  • Box contents (headset, lightning cable etc.)  — $11.80

Economics of iPhone Carriers

The most basic models of the iPhone 8 and iPhone 8 Plus are priced at $699 to $799, and devices with more memory could cross the $900 mark. With this solid price tag, customers could opt for carrier-subsidized deals from companies such as Verizon and AT&T. Installment plans ranging from $20-30 per month are common, and some carriers will give (or lease) customers an extra phone for free, probably because the iPhone X is a few weeks away from stores. 

iPhones and Economic Growth

In early 2015, it was alleged that Apple’s iPhone 6 sales were responsible for 10% of all U.S. economic growth, as reported by Forbes.

The claim featured a 1.9 to 2.5% growth rate for the U.S. economy between 2014 and the first quarter of 2015. Based on pure mathematical estimates of the productive value of all final American products, as well as the revenue generated from iPhone 6 sales, the Apple device was seemingly responsible for 0.25% or 0.3% of the change in the United States’ GDP. On the surface, this meant iPhone 6 sales were 10 to 15% of conventional economic growth.

GDP is actually a very rough, overly simplistic, and problematic estimate of growth. Moreover, revenue from iPhone sales is not the same as a domestic product from iPhone sales, since domestic product tries to capture value added, not just incoming dollars. Even if that statistic is wrong (which Forbes admits, it probably is), 10% is still an interesting figure to express how huge Apple’s sales numbers were—even back in 2016.

More recently, Apple took it upon itself to illustrate its effect on the economy and the job market. It claims to have created nearly 2 million jobs across all 50 states, most of which are attributable to the “App Store ecosystem.” The company based its claims on research by Dr. Michael Mandel from the Progressive Policy Institute.

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