How Apple stays years ahead of the competition

How Apple stays years ahead of the competition: Massive amounts of money

There's a fascinating answer up on Quora that suggests how Apple uses their massive $70 billion bank account to literally stay years ahead of the competition when it comes to manufacturing and components.

Apple actually uses its cash hoard in a very interesting way to maintain a decisive advantage over its rivals: When new component technologies (touchscreens, chips, LED displays) first come out, they are very expensive to produce, and building a factory that can produce them in mass quantities is even more expensive. Oftentimes, the upfront capital expenditure can be so huge and the margins are small enough (and shrink over time as the component is rapidly commoditized) that the companies who would build these factories cannot raise sufficient investment capital to cover the costs.

What Apple does is use its cash hoard to pay for the construction cost (or a significant fraction of it) of the factory in exchange for exclusive rights to the output production of the factory for a set period of time (maybe 6 - 36 months), and then for a discounted rate afterwards. This yields two advantages:

  1. Apple has access to new component technology months or years before its rivals. This allows it to release groundbreaking products that are actually impossible to duplicate. Remember how for up to a year or so after the introduction of the iPhone, none of the would-be iPhone clones could even get a capacitive touchscreen to work as well as the iPhone's? It wasn't just the software - Apple simply has access to new components earlier, before anyone else in the world can gain access to it in mass quantities to make a consumer device. One extraordinary example of this is the aluminum machining technology used to make Apple's laptops - this remains a trade secret that Apple continues to have exclusive access to and allows them to make laptops with (for now) unsurpassed strength and lightness.

  2. Eventually its competitors catch up in component production technology, but by then Apple has their arrangement in place whereby it can source those parts at a lower cost due to the discounted rate they have negotiated with the (now) most-experienced and skilled provider of those parts - who has probably also brought his production costs down too. This discount is also potentially subsidized by its competitors buying those same parts from that provider - the part is now commoditized so the factory is allowed to produce them for all buyers, but Apple gets special pricing.

Apple is not just crushing its rivals through superiority in design, Steve Jobs's deep experience in hardware mass production (early Apple, NeXT) has been brought to bear in creating an unrivaled exclusive supply chain of advanced technology literally years ahead of anyone else on the planet. If it feels like new Apple products appear futuristic, it is because Apple really is sending back technology from the future.

Once those technologies (or more accurately, their mass production techniques) become sufficiently commoditized, Apple is then able to compete effectively on cost and undercut rivals. It's a myth that Apple only makes premium products - it makes them all right, but that is because they are literally more advanced than anything else (i.e. the price premium is not just for design), and once the product line is no longer premium, they are produced more cheaply than competitor equivalents, yielding higher margins, more cash, which results in more ability to continue the cycle.

Steve Jobs, when he announced the original iPhone, said it was 5 years ahead of the competition. This has often been discussed in terms of software, but the above makes a compelling argument about its applicability to hardware as well (or perhaps even more so). webOS and Android can easily be seen as equal to iOS, if not better than iOS in certain areas. By contrast, few would contend that Palm/HP phones, or any Android device on the market (many of which creak like old Hasbro toys) are anywhere near the build quality of the one year old iPhone 4.

It's not even clear to me if the competition would make Apple-style investments in design, production, and components even if they could. It's a risky gamble and many seem far more content to play the low margin game, hoping to make it in the volume that sometimes comes with it.

Philip Elmer-Dewitt of Fortune, crediting Asymco's Horace Dediu says:

Apple has become not a monopoly (a single seller), but a monopsony -- the one buyer that can control an entire market.

If so, it's not only by virtue of Apple being bold enough to step forward, but by everyone else hesitating or stepping back.

[Quora, The Critical Path via Fortune]

Have something to say about this story? Share your comments below! Need help with something else? Submit your question!

Rene Ritchie

Editor-in-Chief of iMore, co-host of Iterate, Debug, Review, Vector, and MacBreak Weekly podcasts. Cook, grappler, photon wrangler. Follow him on Twitter and Google+.

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Reader comments

How Apple stays years ahead of the competition

24 Comments

Very interesting take. It does make a lot of sense. No wonder no phones have yet to match/top the retina display, Apple is buying them all up.
Cash is king.

rene you really do love everything apple even though you will deny...every article you write is how apple is the greatest lol. i know tipb is a apple site but i wish not everything was apple biased and post maybe some negative things about apple too....not everything is rosy as you make it sound in all your articles.

love the retina display too and recently got a galaxy s2 and the screen is just amazing..even though it has lower resolution you forget about that as soon as you see the blacks and colours...also you really cant see the pixels when held at normal distant.

HP can do what you're claim Apple does. They've been doing essentially this on the developer side since shortly after they purchased Palm. Combine that with their own hardware research and manufacturing deals and they have the potential to blow Apple away.
I'm looking forward to hopefully seeing HP webOS devices with memristor memory in place of flash memory after 2013.

While I don't disagree with this article, one thing that Apple certainly is great at is making an old technology sound new. Think copy and paste. Voice command. Multitasking. Higher res camera. HD video. Every one of these features came out on another device first, but Apple refines its feature set, and makes it sound like the greatest new thing.

Are you just talking about DPI? Lulz you can't even tell the difference. Or perhaps since it hasn't been blessed by the almighty Jobs, you can't admit that the colors, contrast, and battery life is better.

i know it came out much later, but my EVO 3D makes everyone i know who has an Iphone 4 (quite a few people) want to ditch it after a 1 minute demo. so the claim that Apple is YEARS ahead (as in plural) is a tough statement to back up due to the fact that a device that is only one year newer is (in my eyes) quite better... im no apple hating troll just to clear that up. i'v had ipod touch gens 1,2 and 3 so i know IOS. and im not a super android fanboy; i had a palm pre for 2 years. (there is still much to b desired of android after using webos)... so all in all Apple is no longer YEARS ahead of the competition is pretty much what i am saying

They are not years ahead. Android is mopping up BlackBerry and iPhone users with 200K activations/day. Also, Apple just uses brand awareness to deliver last-year specs (512 MB RAM in ipad 2.....my eee pad has 1GB) in their products and sell them to people who want simplicity over computing power and features. Then they steal android's notification system and call it innovative and magical, after it's been here for three years.
It's not that i hate apple, i used to have an itouch. I just think they're ripping people off. Some people will buy anything in the name of Steve.
However, i can't entirely disagree, though. Apple does make things look pretty good with an awesome build quality and simple-as-hell OS.

Number of users doesn't really show who's "ahead." The song Candle in the Wind '97 is the highest selling single of all time. If that doesn't show you that what's popular isn't always right, nothing will.

Pretty bold statement, which I think is outdated. Apple used to be able to outperform the competition, but they no longer are in the lead, neither for hardware nor for the OS story. I reckon they are over the top now in the smartphone market, but they still have the edge in the tablet market, which IMO is not an advantage : they will take growth for granted due to the fact that many of us will prefer to have iOS devices to sync (cfr. upcoming iOS5). That alone will cost them NEW customers that will be attracted by newer bells and whistles.

Back when I was using a Droid 2 w/Froyo, I had the ability in certain apps to choose push or pull. You are both wrong. Many times, I find my iPhone getting alerts sooner (for email at least) than my Pre 2.
This is probably because one is getting my gmail updates through Exchange and the other isn't (because it has more support for gmail through synergy). People don't realize that their personal observations of their phones aren't good, solid info for use in arguments. Everyone uses rhetoric like "Steve holding your little hand" because they think it makes their argument or tidbit of info sound more legit. If Steve Jobs gave a crap about what we did with our phones, Apple would find a way to close down jailbreaking.
In that case, I would definitely give up the iPhone (unless it just so happened to become more flexible then it currently is, in a native way like Android or webOS). I don't, however, care for the current state of Android as far as fugly and unstable apps are concerned (not to mention the system is poorly designed, graphically), or webOS lack of a decent selection of up-and-coming devs/app-making-businesses. This whole second paragraph of my comment, obviously, is my opinion and not a stance for arguing about people being right or wrong about their phones. Pick what you want, buy it and live with it.

This strategy is NOT NEW by the way... Many tech firms over the last two or three decades have done this to one degree or another - just not on the scale Apple has been able to pull off... This is the ultimate peak of 'Money talks and BS WALKS'...

Wait, Apple is ahead to it's competitors? Oh yeah, I'm pretty sure they came up with the idea about the notifications. -_-

I use my iPhone 4 without a case I drop it like once a week usually average height (where I hold my phone when i use it, so like between shoulder and waste height), and it's totally fine. No big ugly scratches. Yeah I know I'm really cluttered >.< but still iPhone 4 lasting fine and dandy for me (: Looking as good as new xD

You saying microsoft could buy anything they wanted? Not sure if it's the same thing but Apple had surpassed Microsoft in value and Google as most valuable brand a while ago. So hmmm Apple's worth more, not sure if it means they got as much cash to spend, but still pointing that out

Their multi-tasking support is awful. Not only are the options for background processing limited, but the amount of manual work required for even "basic multitasking" (i.e. suspend) is incredible. Application state needs to be manually saved, memory needs to be manually released, sockets need to be manually torn down.
But hey, Apple says this is multi-tasking "done right" and I'm sure they know what they're talking about.