Apple 2.0

Covering the business that Steve Jobs built

Why Apple's revenues grow nearly 3 times faster than its expenses

December 14, 2010: 11:11 AM ET

The key, according to Goldman Sach's new Apple analyst, is how it leverages its platform

Click to enlarge. Source: Goldman Sachs

"Apple's hardware products often capture the hearts of consumer with their innovative and elegant designs, and this has been the case throughout the company's 34-year history. Nevertheless, we believe Apple's tremendous success in its most recent decade has been primarily driven by the evolution of its content and software platform, with the hardware devices serving primarily as platform delivery mechanisms."

So begins Bill Shope's "deep dive" into what he calls the core of the Apple story: its software platform. His analysis of that platform is the centerpiece of the 59-page report he filed Sunday to inaugurate Goldman Sach's renewed coverage of Apple. (See Apple pops on Goldman note.)

Shope was recruited from Credit Suisse to replace David Bailey, who had downgraded Goldman's rating for Apple (AAPL) from "buy" to "neutral" in Dec. 2008 and kept it there for sixteen months while Apple's shares climbed 150%.

Shope seems to have a deeper understanding of what makes the company tick, and he spends much of his long report talking about Apple's growing content and software ecosystem -- how it fuels the company's revenue growth, how it opens up new markets, how it creates "switching costs" that keeps Apple customers loyal, and what it means for Steve Jobs' succession.

The first point he makes is illustrated by the chart above.

It shows that since the platform achieved a major milestone with the 2003 launch of the iTunes music store. Apple's revenues have grown nearly three times faster than its operating expenses. The bang it gets for its R&D expenses is even more striking. By leveraging third-party developers and content providers as a source of value for its software ecosystem, it's been able grow revenues seven times faster than operating system R&D costs.

Click to enlarge. Source: Goldman Sachs

Shope illustrates how much room Apple has to grow by a chart showing the company's share of the two markets it's devoting most of its resources: The smartphone and mobile PC/tablet markets. If you think of the iPad as a computer -- which Shope does -- he predicts that Apple could be the largest vendors of the combined PC/tablet market before the end of 2011.

And what does all this mean for Apple's succession plans?

"In our view," Shope writes, "it is clear that Apple wouldn't be successful today if it weren't for the strategic vision of Steve Jobs. Mr. Jobs saw the shifting tides of consumer computing, and he capitalized on this by leading Apple in the development of one of the most powerful software and content platforms in the world. This platform may have never been created with any other leader at Apple. With that said, the platform is here now and it's robust. We believe the current executive bench is more than capable of managing this platform into the future, notwithstanding the uncertainty that could be produced by a departure of Mr. Jobs or Mr. Cook."

[Follow Philip Elmer-DeWitt on Twitter @philiped]

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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