What Does Apple Make?

John Cassidy on Apple versus Goldman Sachs is very interesting, but I think this part of the account is a mistake:

Unlike some corporations, Apple doesn’t record on its balance sheet much of the value of its patents and other intellectual property—the look and feel of the iPad, for example. If it did this, the figure for total assets recorded on its books would be considerably higher, and its ROA would be lower. But accounting is only a small part of the story. (As far as I know, Goldman doesn’t capitalize its intellectual capital, such as it is, either.)

The main reason why Apple is so much more profitable than Goldman is a reassuring one. It makes tangible things—iMacs, iPhones, iPads—that millions of people want to buy, and for which they are willing to pay a premium price. (I am writing this post on an iMac.) Despite operating in a highly competitive industry, Steve Jobs’s firm has successfully differentiated its product line to such an extent that it now has considerable monopoly power: it can charge considerably more for its gizmos that they cost to manufacture.

Apple doesn’t have “monopoly power” (its market share isn’t even that big) in the markets for laptops or smart phones. What Apple has is intellectual property—operating systems. After all, Apple doesn’t really manufacture “Apple” products. But even though Foxconn builds the iPhones, the bulk of the sale price ends up with Apple because Apple owns the intellectual property. You can see this by looking at the makers of Android devices, who get software free from Google but earn much smaller profit margins than Apple does. That’s not because people don’t like Android phones—people love them!—it’s because the phone manufacturing business, as such, just isn’t that profitable precisely because nobody has monopoly power in building phones.

By contrast, intellectual property is necessarily a kind of government-created monopoly. Thus anyone who owns intellectual property that people like is in good shape, hence big profit margins. And the other really profitable end of the business is the other monopolistic one, where cell phone operators own slices of a finite set of usable spectrum.