How Apple makes Money

In the most basic sense, there are just two parts to Apple.  

- Software:  iTunes, App Store, iOS, Mac OS X

- Hardware: iPad, iPhone, iPods, and Mac

One of Apple's core principals is to make things beautiful and easy.  This includes both hardware and software.  They make things that they themselves would want to use and they make it simple.  So how do these two businesses work together to make Apple so profitable? Let's look at the gross margin breakdown from asymco.com.

Notice the iPhone in grey that makes up 57% of Apple's gross margins!  Then notice that the software components of this chart (there are just two), Music in purple and Software in green, and they are miniscule.  The rest is hardware.

So there we have it: Apple uses their software to make money on their hardware. They make iOS, Mac OS X, iTunes, and App Store beautiful and easy to use so that you continue purchasing new iPhones, iPods, iPads, and Macs.

Admittedly, once you start using Apple services it's not particularly easy to stop - there are not many "export" buttons in Apple software.   And moreover, why would you want to stop when it's even easier just to continue - just keep buying songs, apps, TV shows, and movies with one click. Therefore, the software is dual purpose: 1) It entices you in the door because it's easy to use and fully integrated 2) And then it keeps you there because it's easy to use and fully integrated.

Keeping you in the ecosystem is important because it keeps you buying Apple hardware. Which is where they make their money.

As Steve always said: Don't try to make great profits, try to make great products.  Profits will follow.