why apple's revenues grow nearly 3 times faster than its expenses - apple 2.0 - fortune tech

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Why Apple's revenues grow nearly 3

times faster than its expensesPosted by Philip Elmer-DeWitt

December 14, 2010 11:11 AM

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. (SeeApple 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 enlar e. Source: Goldman Sachs

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About This Author

Philip Elmer-DeWittSteve Jobs, goes the old joke at Apple, is surrounded bya reality distortion field; get too close and you mightbelieve what he's saying. Apple has made believers outof millions of customers -- and made a lot of investorsrich -- but Elmer-DeWitt believes that an ounce of skepticism never hurts when writing about the company.He should know. He's been covering Apple - andwatching Steve Jobs operate -- since 1982.

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why apple's revenues grow nearly 3 times faster than its expenses - apple 2.0 - fortune tech

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