When iPhones ring, the economy listens

When iPhones ring, the economy listens

With more than 39 million sold in the last quarter, iPhone accounts for about 70 percent of Apple's profit

When iPhones ring, the economy listens

Gloomy economic news and the wild swings of the stock market may be getting you down.

But at least you can count on this: We’ve entered the sweet spot of the iPhone cycle.
Since September 19, when the iPhone 6 and its larger sibling, the iPhone 6 Plus, went on sale, consumers have been ordering the gadgets faster than Apple can deliver them.

The ripple effects are being felt throughout the economy – and they have been moving the stock market.

“The iPhone is having a measurable impact,” said Michael Feroli, the chief United States economist for JPMorgan Chase.

“It’s a little gadget, but it costs a lot and it seems that everybody has one. When you do the multiplication, it’s going to matter.” He estimates that iPhone sales are adding one-quarter
to one-third of a percentage point to the annualised growth rate of the gross domestic product.

You may not think of the iPhone as a financial powerhouse. After all, it’s just a consumer good – albeit a highly functional, high-end one that you can carry in your pocket or your purse. Sales typically surge every two years when, as now, Apple does a major iPhone upgrade.

You may have the warm and personal relationship with the iPhone that Timothy D Cook, Apple’s chief executive, described on Monday to Wall Street analysts during a conference call. Apple’s next three months will be “incredibly strong,” he said. And he spoke enthusiastically about the principal reason for this performance: “These iPhones are the best we have ever created and customers absolutely love them.”

Whether you love them or not, though, it’s a good moment to recognise their significance as a financial force. The iPhone’s financial impact starts, of course, with Apple, which is reaping enormous profit from it. As the company disclosed in data embedded in a Securities and Exchange Commission filing, it has been selling a broad mix of iPhone models at an average price of $603.

That’s not remotely close to the “starting price of $199” that Apple advertises, as I wrote last month. The full price is embedded in service agreements that many customers in the United States reach with phone carriers.

And many of those carriers are stating that full price quite openly. The real starting price for a new, basic iPhone is $649, and models with more memory and bigger screens cost much more.

This price structure is lucrative for Apple. “The cost of building a basic phone has stayed at about $200 for years,” said Andrew Rassweiler, senior director for cost benchmarking services, at IHS Technology.

That estimate doesn’t include many expenses, like research and marketing costs. But it’s a rough guidepost, and it helps explain how, as Apple disclosed in a court filing two years ago, its profit margins for the iPhone are roughly double those for iPads, which tend to be priced more cheaply.

Toni Sacconaghi, an analyst at Sanford C. Bernstein, says the gross profit margin for the iPhone is close to 50 percent. Because the iPhone is Apple’s most popular product — with more than 39 million sold in the last quarter — it accounts for a disproportionately large percentage of Apple’s overall profit, somewhere between 60 and 70 per cent, Sacconaghi said.

“Apple is now so big that it takes a lot to make it grow appreciably,” Sacconaghi said.

It’s producing an impressive interrelated ecosystem of products and services, including its forthcoming digital watches, its new digital payment system, its revived Mac line, refreshed iPads and new software operating systems. Even if all of its ventures succeed, none are likely in the next year or two to rival the financial impact of the iPhone. “The iPhone is the core of Apple right now,” he said.

In a sense, it’s the core of the stock market as well. Apple is the biggest company, by market capitalisation, in the world. Apple accounts for about 3.5 percent of the weighting of the Standard & Poor’s 500-stock index.

And, through Thursday, because its stock has performed magnificently while the overall market has not, Apple accounted for 18 per cent of the entire rise of the S&P 500 index this year, according to calculations by Paul Hickey, co-founder of the Bespoke Investment Group. And the engine driving Apple shares is the iPhone.

“The market is obviously counting on another strong sales performance for the new iPhone,” he said. So far, it’s getting that performance. And, he said, Apple’s invigorating effect is likely to continue.

Because the iPhone is made mainly overseas and sold worldwide, it is stimulating the economy in other regions, particular in East Asia, Feroli observed, and it keeps a substantial amount of its cash abroad.

Such factors make it harder to assess the company’s impact domestically.

Powerful impact

“It’s not like GM having a great quarter,” Feroli said. “It doesn’t translate directly into employment in the United States. It’s a more complex world today, and, in that sense, Apple is representative of that world.”

Apple, though, is having a powerful impact in the United States. Last month, for example, electronic and consumer appliance store sales jumped 3.4 per cent while clothing sales fell 1.2 per cent, according to Commerce Department figures.

“People are buying iPhones, partly as a status symbol,” Feroli said. “They’re not buying as much clothing.”

Even people who don’t buy iPhones and don’t own Apple shares have a stake in the company. I don’t own any Apple stock, for example, but I do have a stake indirectly through my 401(k) account.

That’s because mutual funds in my portfolio own Apple shares as their biggest holdings. Nearly every pension fund holds some stock, and these days, there’s a good chance the biggest holding is Apple.

And the most important financial lever at Apple is the iPhone.

All of that helps explain why Apple is such a formidable force, especially at this stage in its product cycle.

And as the holiday shopping season approaches, and iPhones keep flying off the shelves, Apple may well keep moving the world.