Someone recently asked us why Apple’s gross margins have been declining for years. We are not really Apple analysts, so we had to take a look at the numbers to confirm this.
It turns out that Apple’s margins have fallen in recent years, both gross and operating. We understand why their operating margins are down – the company has been investing heavily in all sorts of new areas – some that we know about like silicon, content and services, and some that we suspect like glasses. And if you look at the company’s R&D spending, it is up a lot over the same period.
But why are gross margins down?
This is surprising for a few reasons. First, Apple’s Services business has been growing strongly. And these have much better margins. Apple just began breaking out its services margins two years ago, so we do not have a complete time series, but not only is the services business growing strongly, its margins have been improving. So when we strip out those, the decline in product margins becomes even more stark.
A second reason that this surprised us, and frankly the one closest to our heart, is that Apple is in such a dominant position in the mobile phone and PC industries, that we know they apply immense pressure to their suppliers. It is not fun having Apple as a customer, but companies put up with the pain because the orders are so large. Despite this, and despite an extra wave of price reduction arm twisting earlier this year, Apple’s margins continue to fall.
The third reason, and the real motivator for this piece, is that Apple’s margins have declined just as their silicon strategy has reached full gear. In theory, Apple creating its own silicon should provide a huge boost to margins. Yet the opposite seems to be the case. Most of us assumed that Apple was willing to take the upfront hit of staffing a full silicon design team (hundreds of millions of dollars) in exchange for better costs on its components. By eliminating silicon suppliers, they should be able to capture the margins of companies like Qualcomm and Intel.
So much for theory, because Apple’s numbers tell the opposite story.
In our piece tomorrow, we will dig into some theories behind this.