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Apple Is a Hardware Company; Einhorn Just Doesn't Get It

Obviously, Apple does not want this to happen; hence it's alleged resistance to Spotify encroaching on its American turf. But, even if more people use Spotify to listen to music, it's not going to hurt Apple's bottom line one bit.

At the risk of stating the obvious, hardware sales drive Apple's revenue and profits.

Last quarter, Apple generated $39.186 billion in sales. Macs, iPods, iPhones and iPads accounted for roughly $35.5 billion of that total. Software and service sales, which include revenue from iTunes, the App Store and iBookstore, made up approximately $3 billion, bringing you to $38.5 billion. Other random hardware sales comprise most of the discrepancy between $39.186 billion total sales and the $38.5 billion figure.

A little rough, back of the envelope math shows us that hardware, primarily Macs and the gadgets we all know and love, comprise more than 90% of Apple's revenue.

I'm not missing some higher level point here. Einhorn's argument boils down to this: Software-based features (though the innovations often come from hardware enhancements) drive repeat sales of high-margin hardware. That's fine, but, from a long-term standpoint, it's a flawed perspective.

Music listeners, for example, could abandon iTunes for Spotify in droves. That will do very little, if anything, to hamper Apple's hardware sales. As with any other platform or app, you'll continue to access Spotify via an Apple device such as iPhone or iPad, particularly if you're one of the faithful. And that's because they are damn good pieces of hardware.

There's no question that Apple's entire ecosystem, including iOS, serves as a value add. But, for all intents and purposes, it's only the diehards who buy Apple products because of iOS's apparent superiority. The general public buys iPods, iPhones, iPads and Macs because they're cool, they work really well and they're beautifully designed. The brilliantly unique hardware hooks people, not the software.

Until this changes, Apple will dominate. The iOS, AppStore, iTunes and iCloud ecosystem will not save Tim Cook's butt if he cannot roll out products the public adopts as quickly as it has iPad and its relatively humble predecessors.

Stock quotes in this article: AAPL 

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