NEW YORK Apples string of record profits dont come out of thin air: A range of businesses from the companys wireless carrier friends to its PC-making foes are seeing their profits melt away and flow to Apples bottom line.
Apples success is good for the U.S. economy, and some businesses, such as software developers and memory-chip makers, have benefited from the disruption Apple is causing. But its enormous gains have resulted in others pains, sometimes in unexpected places. Some examples:
AT&T Inc., for instance, took a chance on Apples unproven phone in 2007, but the company might be regretting that decision. Since it became the first U.S. phone company to carry the iPhone, its stock is down 25 percent. Apples is up 415 percent.
Best Buy has sold Apple products off and on since the late 1990s, but analysts now see Apple as a major threat to the U.S.s only remaining national big-box electronics chain.
Worst off, of course, are rival phone makers. Apple has just 8 percent of the global phone market, but makes about 80 percent of the industrys operating profits.
The majority of Apples profits come from iPhone sales, especially now that three of the four national U.S. wireless carriers AT&T, Sprint and Verizon sell the phone.
But, for a phone company, selling an iPhone is a bit of a gamble. The company pays Apple an average of $659 for iPhones and then sells them to consumers for between $50 and $200.
The phone companies count on making their money back, and more, in monthly service fees over the life of a two-year contract. Each iPhone comes with a data plan that adds at least $30 to a consumers monthly bill. At AT&T, the average iPhone user pays more than $100 per month.
It turns out, however, that some of the added income wireless carriers get from data plans is just compensating for a drop in what theyre able to charge for calling minutes. The money also is eaten up by the cost of network upgrades to support all the data traffic the emails, photos and YouTube videos iPhone users consume.
The primary beneficiary of the growth in wireless data has been one company Apple, says William Power, an analyst with R.W. Baird & Co.
Despite the smartphone boom created by Apples iPhone, free cash flow, or the cash left over every quarter after expenses and capital spending, hasnt grown at the major U.S. wireless companies since 2007, according to Powers calculations.
In the same period, Apples free cash flow has grown more than sixfold, to more than $40 billion last year.
There are signs that U.S. phone companies are starting to take countermeasures. Apples stock has fallen 11 percent from its all-time high, in part because investors think the phone companies might start demanding lower prices from Apple or making it harder for consumers to buy iPhones at heavily discounted prices.
Already, the phone companies have tightened their phone-upgrade policies, meaning existing subscribers have to wait longer before theyre eligible for a new $200 iPhone, and raised or introduced phone upgrade fees, which now range from $18 to $36. They promote cheaper phones running Google Inc.s Android software and more recently, Windows phones.
However, the phone companies may have limited leverage to change the economics of the iPhone.
AT&T, Sprint and Verizon are in a hotly competitive race. Each one is afraid to tighten policies or raise prices too much, lest subscribers jump to a competitor.
When Verizon started selling the iPhone last year, AT&Ts CEO vowed to push Android phones because theyre not as expensive to subsidize. But the company ended up selling more iPhones than ever.
Sprint Nextel Corp., the last of the big carriers to get the iPhone, is in a precarious financial position after many years of losses. Sanford Bernstein analyst Craig Moffett thinks theres a risk that the cost of selling the iPhone could push Sprint into bankruptcy.
Another partner struggling to deal with Apples success is Best Buy Inc., the largest consumer electronics retailer in the United States.
While Best Buy has enjoyed strong sales with Apple products, Apple has benefited more, Daniel Binder, an analyst with Jefferies & Co., wrote last month.
Apples own stores compete with Best Buy, and as Apple products win out over others, consumers become more likely to shop at Apple stores. Binder downgraded Best Buy a year and a half ago, saying the iPad would cut into PC sales. That trend has been even stronger than he expected, he says.
Best Buy stores sell less than $1,000 in merchandise per square foot per year, according to research firm RetailSales. Apple stores sell more than six times as much, a record for the U.S. retail sector.
If Apple does release a TV set this year, as has been rumored, that would be even worse news for Best Buy, Binder says.
Although Apple is only the worlds third largest phone maker, behind Nokia and Samsung, it is pummeling rival phone makers, as well. Apple doesnt make inexpensive phones at all, which should leave plenty of room for other phone makers.
But thats somewhat of an illusion. Cheap phones have become commodity products, with fierce competition and low margins, so most phone makers are looking to smartphones for profits. But thats exactly where Apple dominates. As the worlds largest buyer of chips, the company has a massive advantage in procuring components at the best prices, and consumers seem to favor the iPhone regardless of the features others use to jazz up their handsets.
High-end smartphones cost about $200 to make. Apple sells the iPhone for an average of $659. Other manufacturers sell competing phones for between $300 and $400.
Canaccord Genuity analyst Michael Walkely estimates that if you add up the operating profits made by the worlds eight largest phone makers in the last three months of last year, youll find that the iPhone accounts for 80 percent of the money.