IB Docs (2) Team
Market power
Why is Apple the most valuable business in the world?
On January 4 2022 Apply became the first business in the world to be worth $3 trillion. If Apple were a country its value would put it just behind Germany which is the world’s fourth-biggest economy. Apple is worth more than the combined value of the following US businesses: Walmart, Disney, Netflix, Nike, Exxon Mobil, Coca-Cola, Comcast, Morgan Stanley, McDonald’s, AT&T, Goldman Sachs, Boeing, IBM, and Ford.
A remarkable aspect of Apple’s growth is its 200 per cent rise in value since 2018 when it was worth a mere $1 trillion. The graph above shows the value of Apple since its launch in 1976.
Where does Apple's value come from?
In simple terms, Apple makes a very good product that huge numbers of consumers are willing to buy. Here are some observations on why Apple might have become the first $3 trillion company.
Total revenue
The average American household has 2.6 Apple products and if you multiply that number by nearly 130 million households in the US that adds up to a lot of Apple products. If you open the ownership of Apple products to the rest of the world you quickly see its potential to earn global revenue. Apple’s total sales revenue worldwide in 2021 was $365 billion which makes it the fourth-largest company in the world in terms of total revenue.
Brand loyalty
Apple generates incredible levels of brand loyalty amongst its customers. Apple’s customer loyalty rates have exceeded 90 per cent for the past three years. This means, for example, that for every 10 buyers of the iPhone, 9 will buy an iPhone over and over again. As a result of this, the company’s stream of revenue can be sustained over time because loyal customers act as a barrier to entry against new entrants into its markets. It can be argued that the strength of Apple’s brand loyalty is based on a strong anchoring bias towards its brand in the mind of consumers.
Profit
The strength of Apple's brand allows it to charge a premium price for its high-end products like the iPhone, iPad, and MacBook. They are often significantly more expensive than other products in the market and rarely discounted. Apple earns an average gross profit margin across its range of 42 per cent. This means a $2000 MacBook pro earns Apple a profit of about $800. Combining high sales and high-profit margins explains why Apple is the most profitable business in the world with a net profit of $58 billion in 2020.
Complementary services
The growth of Apple’s complementary services is becoming increasingly important to the company. The large number of consumers who have Apple products also demand the services that go with these products. Complementary services such as iTunes, Apple Music, AppleCare, and Apple Pay earn revenue streams for Apple that are second only to the iPhone in generating income.
Importance of the share price
The factors discussed above give an insight into Apple’s success as a business and this is what attracts the investors to Apple. People are always going to want to buy shares in the most profitable business in the world which looks likely to maintain its profitability over time. It is this attraction to Apple’s shares that drives its share price and has pushed up the value of the business to $3 trillion which is measured by its market capitalisation (share price multiplied by the number of shares issued).
The question is, how long will Apple remain the world’s most valuable company. When Apple was launched in 1976 the US oil company Exxon Mobile was the most valuable company in the world and now Apple is worth 10 times as much as Exxon. The future of the oil market looks bleak, will the market for consumer electronics products ever look as bleak?
Possible discussion questions to discuss with a class
1. Explain two demand factors that might explain why Apple is such a successful business.
Explanation of the two of the following demand factors might be:
- Effective advertising and promotion by Apple could increase the demand for their goods.
- Rising household income could increase the demand for Apple's products as the products they sell could be described as luxury goods.
- A fall in the price of complementary goods such as broadband and mobile phone contracts could lead more consumers to buy Apple products.
2. Discuss the importance of the anchoring bias in the success of Apple's brand.
- Anchoring bias is a reference point in an individual’s mind based on past experiences that strongly influences a decision they make. Anchoring bias in favour of Apple products could be based on the fact that from a young age many people experience positive exposure to products such as the iPhone, iPad and Macbook. This could attract consumers to buy Apple products later in life.
- The importance of anchoring bias in the success of Apple's brand has to be considered in the light of other factors that could also contribute to its success such as high-quality product design along with effective advertising and promotion.
3. Evaluate the importance of barriers to entry in the market for smartphones in contributing to Apple's success as a business.
- Barriers to entry are the costs and regulations businesses encounter when they enter a market that are over and above the normal costs and regulations of entering a market. As such a large business Apple will benefit from the barriers to entry in the production of the iPhone such as economies of scale, brand loyalty and patents. These barriers to entry will make it difficult for new entrants to the smartphone market to be effective competition for Apple.
- There are, however, other large firms in the smartphone market such as Samsung and Huawei that Apple still has to compete with to be successful even though there are barriers to entry.
On January 4 2022 Apply became the first business in the world to be worth $3 trillion. If Apple were a country its value would put it just behind Germany as the world’s fourth-biggest economy at $3.7 trillion. Apple is worth more than the combined value of the following US businesses: Walmart, Disney, Netflix, Nike, Exxon Mobil, Coca-Cola, Comcast, Morgan Stanley, McDonald’s, AT&T, Goldman Sachs, Boeing, IBM, and Ford.
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