Apple is the new Dell, as direct sales model helps power profit gains

John Shinal · October 22, 2007 · Short URL:

Amid all the talk about Apple's product design and marketing prowess being the twin pillars of its five-year resurgence, it's easy to overlook another big factor in its success: the company is using the Web as a distribution channel like few tech giants have before.

Yes, Apple's sales were up nearly 30% in its latest quarter, as it continues to churn out hip, feature-rich products that consumers want to have. Yet its profit rose at more than twice that rate, as its gross profit margin expanded to 33.6% of sales from 29.2% a year earlier. That's an eye-popping gain of more than 400 basis points and a sign of huge market momentum for any hardware maker.

While Apple is benefiting from lower component costs, it's also seeing surging traffic to its iTunes and Apple store Web sites, according to the latest figures from Nielsen Online. iTunes traffic rose 36% from a year earlier, hitting 30 million unique visitors for the third quarter, while visitors to the company's Apple Store rose 31%, to 4.4 million. That kind of growth comes close to matching the torrid pace of Google, which saw traffic to its search page rise 41% in September. 

Apple now gets 57% of its sales directly from its Web site or online stores. Direct store sales are highly profitable because they don't force Apple to share profits with distributors. Direct Web sales are even better, because Apple doesn't have to pay a store salesperson a commission on them. This is the same high-profit sales model that Michael Dell used to build the world's top PC company.

But Dell was known more for mastering distribution and supply chain management than for innovative product design. The fact that Apple has paired its marketing and product design expertise with a low-friction, Web-based sales model that gets people either into its stores or buying online should be striking fear into the hearts of its rivals. The trend suggests its PC-market share gains may be just gathering steam, and that profits on Macs are going to keep rising even faster than sales.

Now, combine that with iPhone mania -- Apple sold 1.4 million units in the product's first quarter and is about to launch it in Germany and the U.K. (where consumers want them so badly they have been buying bootleg versions run by hacked software) -- and you can understand how investors can remain bullish on Apple's shares even if iPod sales growth is slowing.

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