The video included a long list of claims regarding Apple, its product pricing strategy, and the company’s overall positioning in the marketplace.
Apple was said to be bringing in huge profits by charging higher prices for its products. The progression of pricing from iPhone 6 to iPhone 11 ($649 to $999) and the Mac mini ($499 to $799) were used as examples of Apple charging more for basically the same product. These higher prices are said to be part of Apple’s strategy to squeeze as much profit as possible from loyal customers “unwilling to switch out of the Apple ecosystem.”
Apple products were said to contain components that are standardized and comparable to what is found in competing products. Accordingly, higher-priced Apple products are more expensive than products from competitors despite not including additional functionality. An iPhone’s bill of materials was positioned as a useful tool for tracking how profitable an iPhone is for Apple.
Apple was said to rely on “sneaky” tactics to grab additional profit from these loyal users by charging more for higher-end configurations and requiring users to buy expensive dongles, keyboards, mice, and cables.
When assessing the video’s long list of issues, the primary problem was found with how much long-standing narratives about Apple guided Business Insider’s talking points. Numbers and data were cherrypicked to support false narrative after false narrative while Business Insider ignored or brushed aside evidence that would prove its narratives wrong. For example, Apple’s downright aggressive pricing with Apple Watch and AirPods was ignored. Meanwhile, strategies that have proven to be flat out wrong, such as relying on a product’s bill of materials to figure out profitability, went unchecked.
In an effort to come off as more authoritative, Business Insider relied heavily on commentary from Mohan Sawhney, a marketing professor at Northwestern University. The problem was that Sawhney viewed Apple through a marketing prism - the company was said to be nothing more than a luxury brand selling nice-looking tech gadgets. Sawhney claimed the only reason Apple is able to extract so much profit from the industries it operates in is because people are willing to pay more for the Apple logo. There was no mention of Apple controlling much of the profit within an industry by purposely avoiding the low end of that market while also offering a wide range of devices with different amounts of technology.
Apple Tax
The theory of there being an Apple Tax has been around for more than a decade. The term was coined during the mid-2000s to refer primarily to Apple laptops (iBooks and then MacBooks). A MacBook was said to cost more money than a Windows laptop with similar specifications because of there being a premium built into the MacBook’s price. Said another way, the MacBook was more expensive than other products since it included an Apple logo.
The “Apple Tax’ phrase became a way to poke fun at MacBook users for their apparent cluelessness in paying more for a product despite cheaper alternatives being available. In recent years, the Apple Tax definition has morphed to merely refer to higher-priced Apple products like the iMac Pro and new Mac Pro.
There has always been a glaring hole in the Apple Tax narrative: Since Apple does not license its Mac operating system to OEMs, a MacBook running Apple software ends up being very different than a Windows laptop said to have similar specs. In addition, while Apple made a number of content creation applications available for free on the Mac, Windows laptops positioned as direct competitors lacked such free applications. It may be more correct to say that the Apple Tax reflected the price of Mac software instead of some kind of premium created out of thin air.
Apple’s Pricing Strategy
Apple’s pricing strategy is not based on the idea of forcing users to pay an “Apple Tax.” Instead, Apple follows a revenue and gross profit optimization strategy. Here is Apple’s CFO Luca Maestri talking about the strategy on various Apple earnings conference calls:
4Q17: “We tend to think about maximizing gross margin dollars because we think that's the most important thing for investors at the end of the day. When we look at our track record over years, I think we've found a good balance between unit sales growth and gross margins and revenue, and we will continue to do that as we go forward.”
2Q18: “Our primary consideration is always around maximizing gross margin dollars, and that is the approach that we take around pricing decisions.”
4Q18: “[W]e make our decisions from a financial standpoint to try and optimize our revenue and our gross margin dollars.”
1Q19: “It is important for us to grow gross margin dollars. And if at times we grow services that are at a level of gross margins, which is below average, as long as this is good for the customer and as long as we generate gross margin dollars we're going to be very pleased.”
2Q19: “[W]hat really matters to us and what we look at -- when we look at the elasticity of these [iPhone upgrade] programs is to see the impact on our gross margin dollars.”
While “revenue and gross margin optimization” may sound like loaded terminology, the idea underlying the strategy is straightforward. Instead of Apple including a certain amount of “tax” or premium in a product’s price to maintain a specific gross margin percentage, Apple prices its products in a way that maximizes gross margin and revenue on an absolute basis. Gross margin is cost of goods subtracted from revenue.
The strategy requires Apple to come up with forecasts for how a product’s price will impact customer demand for that product. Price a product too high, and the lower unit sales (as a result of weaker demand) may more than offset the higher amount of revenue and gross margin found with each device. Price a product too low, and the higher unit sales (as a result of stronger demand) may not offset the lower amount of revenue and gross margin found with each device.
Gross Margin Data
A closer look at Apple’s gross margins demonstrates this “revenue and gross margin optimization” strategy in action. Exhibit 1 highlights Apple’s gross margin percentage going back to 2000.
Exhibit 1: Apple Gross Margin (Percent of Revenue)