What Are the Economics of the iPhone?

It's estimated that there are more than two billion people in the world own an iPhone. From our culture to the economy, the small, handheld device has made a splash, changing the way we live, and that influence is likely to continue.

Apple Inc. (AAPL) unveiled the XR and XS in 2018, which was the company's cheapest phones in recent years. Meanwhile, the iPhone X saw its international launch with a $999 price tag. In 2019, Apple unveiled its latest iPhone with the iPhone 11, which has a dual-camera lens and the iPhone 11 Pro along with its three camera lenses.

However, Apple's greatest product has also been its greatest curse. The iPhone makes up approximately 50% of the company's total revenue, meaning the company is at the whim of the mobile smartphone market. As a result, Apple has been busy creating ancillary services and products that complement the iPhone.

With all of the products and services intertwined, it's made it challenging for investors to determine, just how much money Apple earns from iPhone sales.

Key Takeaways

  • Sales from the iPhone make up more than 50% of Apple's total revenue.
  • Although it's estimated that 2 billion people own an iPhone worldwide, sales were down in 2019 versus 2018.
  • Apple's services and wearables businesses grew by 16% and 41% respectively, which indirectly adds new revenue streams for the iPhone.

Understanding How the iPhone Makes Money

Investors and analysts can not easily calculate how much profit Apple earns on each product. Apple, in the past, had reported unit sales for each product. However, the company has stopped that practice and instead, reports revenue by product. The table below contains the products and services revenues for the past three years. The data was pulled from the company's 10K report on September 28, 2019.

  • Apple reported $260 billion in revenue for the end of the company's 2019 fiscal year–highlighted in green in the table below.
  • The iPhone generated $142.3 billion in revenue in 2019, meaning the iPhone represented approximately 55% of the total revenue for the year.
  • The iPhone revenue declined in 2019 by 14% versus 2018. However, revenue for 2017 was an 18% increase from the year prior.
Apple Product and Services Revenue
Apple Product and Services Revenue.  Investopedia

Apple is one of the most valuable companies to date, yet more than 50% of its revenue depends on one product line.

Services and Wearables

Apple has been actively expanding its services business in recent years, which includes iTunes and Apple T.V. The company has also grown its wearables business such as the AirPods.

It's important to consider that the company's services and wearables business is an extension of the iPhone and other hardware products. To conclude that Apple had a poor year by only looking at the 14% decline (-$22 billion) in iPhone revenue for 2019 versus 2018 would not be a fair analysis.

The company also grew its services business by approximately $6.5 billion and wearables by $7.1 in the same period for a total of $13.6 billion. The $13.6 billion only partially offsets the $22 billion decline in iPhone revenue from 2018. However, the services and wearables businesses are growing at faster rates–16% and 41% respectively–versus the decline in iPhone sales of 14% from 2018. In other words, Apple is using the services and wearables business to fill the gap left from iPhone revenue declines.

The ancillary businesses would not be possible without the hardware products such as the iPhone, which makes determining the overall profitability for the iPhone that much more complex.

What Does it Cost to Build an iPhone?

Apple's sourcing model is one of the reasons it generates attractive 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 process significantly lowers capital expenses for Apple, saves the consumer a bit of money, and lets shareholders benefit from the difference.

The iPhone 11 Pro Max has a retail price of $1,099 per unit. It's estimated that all of the components that make up the iPhone cost approximately $490 per phone, according to a report by NBC News. Some of the components include the Samsung battery unit, which costs $10, the triple camera costs $73, and while other equipment such as the processor, modem, and circuit boards cost approximately $160 per phone.  

A $490 cost and a retail price of $1,099, Apple appears to be earning a $609 profit per phone. However, it's difficult to determine the actual profit per unit since there are other cost factors that go into making the iPhone. The manufacturing, assembly, software, research, and development costs all must be paid for with the $609 profit per unit. There are also marketing and advertising costs as well as the cost of sales, general, and administrative costs such as the corporate office. 

How the iPhone Helps the Economy

Apple took it upon itself to illustrate its effect on the economy and the job market. Apple reports that the company has created a "job footprint" of nearly 2.4 million jobs across the U.S.

According to Apple, most of the jobs created are in the app economy, which is:

"Currently responsible for 1.9 million American jobs—an increase of 325,000 in the last two and a half years."

Apple also employs 90,000 workers in all 50 states and is planning to add 20,000 more jobs by 2023.