The iPhone is one of the key engines that powers Apple's financial power. Behind the high sticker price lies a significant margin that has pushed Tim Cook's company into the stratosphere of success. Each year's iPhone has to satisfy consumer demand and maintain Apple's income and profit.
Changes such as finally increasing the storage in the upcoming iPhone may be driven by market conditions and aggressive moves by the competition, but it also lowers the profit margin on each handset.
That's why the claims that Apple is squeezing its suppliers to provide components at lower cost for this September's smartphone not only ring true, but also highlight Apple's ability to extract every drop of profit out of the iPhone ecosystem. Which in turn allows it to claim the lion's share of the profits in the smartphone world.
There are reports that a number of existing component suppliers are having to lower quotes to Apple to compete with other companies looking to get in on the action. The volume of orders that Apple can provide to a company has a significant impact on the annual figures - and the volume of orders that Apple can take away has just as much of an impact in the other direction. The existing stakeholders are fearful of the later, and the new hungry companies want the former.
It naturally makes good business sense for Apple to play these two attitudes against each other. It creates competition, it drives down prices, and it forces the bidding companies to provide more innovative solutions to Apple in the hopes of being attractive enough to get, or keep, Cupertino's business. The iPhone's history has many instances of Apple playing two suppliers off against each other. The ultimate winner in all of this is Apple.
Take the recent moves around the A9 and A10 chip. Production of the A9 was split between Samsung and TSMC. While the performance of the chips in the 'middle' of the performance envelope was similar, there were notable performance differences between the two chipsets, leading to two 'grades' of handset depending on which iPhone 6S you were lucky enough to be handed in the Apple Store.
With the iPhone 7 family moving up to the A10 chip, both suppliers were looking to get some or all of the business. It is believed that TSMC has all the orders for the A10 in part because of a new fabrication technique by TSMC that allows for a thinner chip design which will help in Apple's seemingly eternal quest to make the iPhone as thin as a sheet of paper. That decision will mean Samsung's semi-conductor division will take a hit on earnings that will be visible over the next two years of reporting. Samsung is eager to get that back and can be expected to bid even more competitively for the A11.
Repeat that business practice over all of the iPhone's supply chain and you can see the power that Apple has on the construction engine of the smartphone world. It may not be the leader in terms of market share of devices sold, but the iPhone exerts far more control than any other brand.
All of this is predicated on Apple preserving the marketing aura around the iPhone and keeping the sales as high as possible. That's why the negative growth on iPhone sales reported in Q1 was worrying. In terms of raw numbers Apple's iPhone business will continue to be desirable in the short and medium term, but Apple needs to maintain the hunger with the public to have the conditions that can allow it to extract the best deals from the rival component manufacturers.
Without that hidden competition, the iPhone would not be as competitive or as profitable as it is.
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