Although many of its critics may dispute this claim, Apple is still one of the most innovative tech companies in the world. Of course, it has had a few spectacular failures – most notably Apple Music – but it has always remained ahead of the game with regard to features such as putting 64-bit chips in their mobile phones, delivering new ways for consumers to interact with their devices through technologies like 3D Touch, as well as leading the way in using biometric security for mobile payments.

In spite of all this, the company spends a far smaller percentage of its annual revenues on research and development when compared to its rivals such as Google and Facebook. By staying ahead of the curve with minimum spend; Apple has become one of the world’s most profitable companies.

In this article, our friends at Option.FM trading platform examine the reasons why Apple is so profitable – and one of the most popular investments among traders.

Apple store

First to Market with New Innovations

One of the reasons Apple has such a lead on its competitors is that it accesses the latest component technology months before the competition is even aware of it. This allows Apple to market groundbreaking technology that its rivals find impossible to duplicate. For example, for almost a year after the company released the iPhone, its competitors were still struggling to make their capacitive touchscreens to work as well as that on the iPhone.

It was not just about the software; Apple made sure that it included the latest components into their phones earlier, well before any other company in the world could access it in the quantities necessary to build a consumer device. An extraordinary example of this point is the aluminum machining techniques that the company uses to make its laptops – to date, this remains a trade secret that the company has exclusive access to. This allows Apple to build laptops that have unmatched strength while remaining relatively light.

Apple Inc. trade secret

Apple vs. Rivals’ R&D Spend

An incredible report published in Bloomberg BusinessWeek shows that the company has never spent as much as you would expect on R&D, even though it has steadily increased its spending in this department over the years. Overall, Apple spends only about 3.5% of its annual revenues on research and development, compared to Qualcomm which spends 22%, Google with 15% and Facebook that spends 21%. With that being said, Apple’s 3.5% R&D spend still adds up to a whopping $8.1 billion every year, which is still a higher nominal figure than any of its rivals, bar Google.

R&D spending graph

Part-Financing of Viable Third Party Technologies

A key reason that Apple does not spend more than 15% of its revenues on research and development is that many third party component manufacturers are fiercely competing to work with the company every year. They are therefore willing to offer Apple the most cutting edge hardware. In other words, these component manufacturers do all the R&D work on Apple’s behalf in order to win its lucrative business.

Innovation for less

Whenever the latest component technologies (LED displays, touchscreens and chips, for example) are first released, they are usually extremely expensive to produce. Building a plant to produce these new components in mass quantities is one of the major costs. Apple takes advantage of this by using its significant cash reserves to either fully or partially finance the cost of the factory on behalf of the supplier. In exchange, Apple has exclusive rights to the factory’s products for a set period of time, and then receives the components at a highly discounted rate after this period.

Focus On Commercially Viable Technologies

Another reason why Apple has managed to stay ahead of the pack when it comes to releasing innovative products to market with minimum R&D spend is the fact that the company places more focus on products that have immediate commercial viability. This is unlike companies like Google which pump large amounts of money into ‘moonshot’ projects which offer only a small chance of producing a return. Although Project Loon and Google Fiber are incredibly bold products, they are the type of projects Apple is unlikely to invest in.

Project Loon - Google

Still, $8.1 billion is not small change; it is a lot of money for a company to spend on research and development each year in spite of it being only a tiny fraction of revenues. So, although the company does not plunge back as much of its revenues into R&D as Facebook or Google, it still spends plenty of money to produce new products and bring new technologies to market.

The Final Word

Apple is crushing all its rivals through superior design, but this is only half of the story. Founder Steve Jobs’ extensive experience in mass production of hardware (the first Apple PCs, NeXT) has been absorbed into the company culture. This has resulted in the creation of an unsurpassed and exclusive supply chain of advanced hardware technology that is literally years ahead of anything available to its rivals. Apple’s new products appear futuristic to the consumer because the company is really sending back technology from the future.