It’s Drivel Time Again About Apple, The iPhone And Success

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It really does help if people understand the basic and underlying arguments before treating us to an analysis of how the world works. This is sadly not true in this latest expose of how Big Bad Apple works and operates to become the world’s Most Profitable Company*. I dunno but maybe this should have been contracted out to someone who knew some economics rather than a PhD student in the history of science?

First there’s the usual misunderstanding of Mariana Mazzucato’s work. She’s wrong anyway but this is wrong even within her own work:

Apple’s system of operation is less the result of genius than of capture and control. Semiconductors, microprocessors, hard drives, touch screens, the internet and its protocols, GPS: all of these ingredients of Apple’s immense profitability were funded through public dollars channeled into research through the Keynesian institution called the US military. They are the basis of Apple’s products, as the economist Mariana Mazzucato has shown. The company’s extraordinary wealth is not simply a reward for innovation, or the legacy of “innovators” like Steve Jobs. Rather, it flows from the privatization of publicly funded research, mixed with the ability to command the low-wage labor of our Chinese peers, sold by empathetic retailers forbidden from saying “crash”.

No, all that government stuff is, as with the language of William Baumol, invention. That’s the research into and possibly creation of new stuff. What Apple does really is innovation. Working out what can be done with all that new stuff that has been created.

Why Mazzucato’s wrong is that invention is a public good, we have government and pay taxes to gain public goods. Mazzucato then complains that we get public goods as a result of paying taxes for government. Honestly, some people.

But rather worse is this:

The profits have been stashed offshore, tax free, repatriated only to enrich those with enough spare cash to invest.

OK, true enough for rhetoric. But then this:

Steve Jobs wanted customers to understand the Apple store “with one sweep of the eye,” as if gods standing on Mount Olympus. Indeed, the iconic outlets seem to speak for themselves. Bright, uncluttered, and clad in glass, they couldn’t contrast more sharply with the big-box labyrinths they were designed to replace. Neither could their profit margins. Since launching in 2001, the instantly recognizable stores have raked in more money – in total and per square foot – than any other retailer on the planet, transforming Apple into the world’s richest company in the process. Yet the very transparency of the Apple store conceals how those profits are made.

No, the Apple Stores aren’t particularly profitable and the reason why is the same as that stashing the profits offshore.

Think of how Apple works as a business. Umm, Double Dutch? No, Double Irish with a Dutch Sandwich. Forget all that technical gubbins. There’s a bit of Apple that buys all the kit to make iPhones with, the screens, chips, GPS unit and so on. That’s all then shipped to China, that bit of Apple pays for them all to be glued together. This doesn’t work for sales in the US so they don’t do it there, this tax bit. This bit then sells the completed iPhones to distributors around the world and stacks the vast profits offshore.

Those distributors might be Vodafone, Apple Stores, Orange and so on. And here’s the thing, the trick only works if the Apple Stores are paying the same to that special bit of Apple as Vodafone et al. And margins on Apple kit are famously, famously, thin. The reason the margins in the Stores must be the same as at Vodafone is because that’s the way the transfer pricing rules work. The price paid by one subsidiary of a company to another must be – roughly and around and about you understand – the same as that charged to a third party. If Orange’s margins on an iPhone are low then so must be the Apple Store’s. If they weren’t then Apple would be paying tax in each and every country on those margins rather than stashing it all up offshore where it gets a tan and a rum punch.

We’ve another clue here, which is that the varied national companies which run the Apple Stores in each country don’t report good profits. Near all of them in fact report just a wafer thin profit over their costs of doing business – that cost including paying the same as Reliance Jio does for the iPhones.

Apple Stores might be lovely retail experiences, they might indeed be as alleged built on the back of brainwashed and thereby cheap labour. But they’re not actually profitable in any great sense. In fact they make rather smaller margins than most retail businesses.

And someone – yea, even a PhD student in the History of Science – who decides to write about the economics and profitability of Apple Stores should grasp that before they start, no?

*World’s Most Valuable, World’s Greediest, World’s Biggest Tax Avoider according to prejudice

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Rhoda Klapp

I don’t like Apple but I confine myself to not buying their stuff.