Apple’s intellectual monopoly

In this section, we consider the types of rents from intangibles that we built on the basis of Durand and Milberg’s (2020) taxonomy to assess the recent evolution of Apple’s intellectual monopoly.

Apple’s GVC through the lenses of vertical natural monopoly rents

Apple is a GVC leader with a superior profit rate compared to that of its suppliers (Chan et al., 2013; Kraemer et al., 2011; Linden et al., 2009; Rikap, 2018). It was considered by Durand and Milberg (2020) as an example of a company garnering vertical natural monopoly rents from its GVC. Apple knows who can produce each step of its different value chains and has the exclusive knowledge to oversee and integrate the whole chain. This knowledge allows Apple to plan the value chains of each and every of its products.

Which enterprises participate in a GVC is not set once and for all. Rikap (2018) reconstructed Apple’s GVC by 2011 and used Compustat firm-level information for listed US and Rest of the World corporations to compare Apple and its subordinate companies’ profit rates. Apple’s hardware manufacturing is outsourced, primarily to Asia, and the rest is produced in the

United States and Ireland (Apple Inc, 2019). This strategy differentiates it from other GVC leaders of the smartphone market (Huawei and Samsung) that internally produce or assemble some components (WIPO, 2017).

Apple exercises extreme control over its subcontractors and suppliers, which results in the appropriation of part of their value (Chan et al., 2013; Froud et al., 2012; Haslam et al„ 2013; Kraemer et al., 2011; Linden et al., 2009; WIPO, 2017; Xing, 2019). An illustrative example is how Apple changed the screen of the iPhone weeks before it was launched, forcing an overhaul of the assembly line, and how Foxconn, Apple’s main contractor, reacted to produce it, waking up workers in the middle of the night to fulfil Apple’s requirement (Rikap, 2018). Chan et al. (2013) interviewed Foxconn employees that pointed out that Apple monitors onsite production processes and delivery times. These are characteristics that evidence Apple’s planning capacity over Foxconn. In fact, according to former employees and suppliers interviewed by Satariano and Burrows (2011, p. 50), Apple controls every bit of its supply chains, building a “closed ecosystem”.

Foxconn can be conceived as a complier company. Complier firms, as we explained in Chapter 2, are subordinate companies because they are not producers of new technologies but only their early adopters. They produce with the most updated techniques, but those techniques are defined by the intellectual monopolies whose production system they integrate. Foxconn’s technological levels are in line with those of advanced manufacturers from the United States.1 In these cases, where multiple companies are ready to comply, intellectual monopolies increase their profits by privileging those accepting to be paid the lowest price. Extreme working conditions and lower wages contribute - as it is the case of Foxconn - to guarantee lower prices (see Chapter 10 on the effects of intellectual monopoly capitalism on workers).

Foxconn takes the risks and accepts being planned by Apple, while the latter gets even higher profit rates by appropriating part of the value produced in its colossal subcontractor. In line with the expected (big) size of complier firms that concentrate the tangible capital investment that is outsourced by leaders, Foxconn is a gigantic corporation. Hon Hai Precision Industry (Foxconn’s company name in Taiwan Stock Exchange) was ranked 23rd in Global 500 by Fortune Magazine in 2019, which ranks enterprises according to their revenues.

Also in accordance with complier firms, Foxconn enjoys a positive - but lower than Apple’s - profit rate (Apple Inc, 2020; Hon Hai Precision Industry, 2020). As explained by Chan et al. (2013), Foxconn’s profit rate remains positive precisely, in part, by reducing labour expenditures both in terms of wages and benefits, which even led to a suicide wave as a protest measure. Driven by wages rise in China, Foxconn started replacing labour with robots. Moreover, Foxconn is considering opening facilities in Brazil and Vietnam, a decision accelerated by the recent trade war between the United States and China.2

Apple's innovation monopoly rents

Besides vertical natural monopoly rents, Apple collects intellectual rents from its innovation monopoly. The latter results from two complementary sources, both highly reliant on IPRs in the case of Apple: technological innovation and brand-building. Concerning technological innovations, Figure 7.1 presents the evolution of Apple’s granted patents. We also perform a network mapping analysis of its innovation networks, including a lexical analysis of its scientific publications.3 The latter will provide evidence of the multi-technology base of its innovations. The comparison between co-authorship and co-ownership will highlight the subordinate role played by companies and universities participating in Apple’s innovation networks.

A steppingstone in Apple’s intellectual monopoly was the introduction of the iPod in 2004, but its dominance was boosted after its major science-based innovation, the iPhone, in 2007. It was followed by consecutive improvements every year since then and by other innovative products like the iPad in 2009, which contributed to a further soar in profits and profit rate (Figure 7.2).4 Both innovations heavily relied on technologies funded and developed by the US state, such as the Internet and touch-screen displays (Mazzucato, 2015). Apple’s profit rate evolution can be explained as the result of a twofold process: rentiership and extraordinary profits due to its relatively higher intangible capital intensity. Concerning the former,

Evolution of Apple’s granted patents (all major patent offices). Source

Figure 7.1 Evolution of Apple’s granted patents (all major patent offices). Source: Derwent Innovation.

Evolution of Apple’s profit rate, R&D investment, intangible assets and advertising expense (millions USD).Source

Figure 7.2 Evolution of Apple’s profit rate, R&D investment, intangible assets and advertising expense (millions USD).5 Source: Compustat.

both a constant flow of innovations and vertical natural monopoly rents expanded intellectual rents over time. Financial rents are also part of this story, as we show in Section 4.

Since the iPhone was launched, Apple’s investment in R&D grew systematically, consistent with its skyrocketing profit rates until 2011 (Figure 7.2). Probably, the dramatic increase in profit rate allowed Apple to reinvest gigantic sums in R&D driven by its - back then - retain and reinvest strategy (Lazonick et al., 2013), while further investing in advertising was not the chosen strategy (Figure 7.2). As an intellectual monopoly, in order to keep its leadership, Apple needed to increase its R&D investment looking for further innovations.

The co-evolution of Apple’s margin and investment in R&D is quite telling in this respect. Just before the iPhone was launched, Apple increased its share of R&D investment over revenues, compatible with the quest for innovation monopoly rents, in this case, mostly based on IPRs (see Figure 7.1). Margins, as they are calculated in annual reports subtracting R&D as an expense instead of considering it an investment, were negatively affected but eventually led to the iPhone, thus paid-off enormously (Figure 7.3).

Additional R&D investments gave fruitful creative results judging by Apple’s intangible assets growth (Figure 7.2) and by the evolution of its granted patents (Figure 7.1). Interviews performed for a WIPO report stressed that “companies in the smartphone industry appear to consider their patent portfolios as central to maintaining a competitive advantage in a dynamic marketplace” (WIPO, 2014, p. 32). Still, as shown in this report, it is innovation rather than patents which is the key driver behind leading companies. Granted patents gather part of innovations’ effect, which is why they usually follow the same trend. Moreover, Apple has been fragmenting its innovations in multiple patents; a strategy called patent thickets that evidence Apple’s technological competition with rival intellectual monopolies. Patent thickets increase enforcement transaction costs and companies’ chances to threaten those trying to copy them (Ernst, 2016; Noel & Schankerman, 2013).

Figure 7.3 also shows that, in recent years, as iPhone-related innovations peaked, Apple increased its R&D investments vis-a-vis revenues. Therefore, margins that consider R&D as an expense show a more significant decrease than the alternative calculation that considers R&D as an investment (Rikap, 2020). In the next section, we will argue that Apple’s ambition to catch-up with other tech giants in data-driven innovation rents drives this second wave of relatively higher R&D efforts in relation to margins.

Together with technological innovations, we explained in Chapter 2 that brands are intangible assets that appropriate value in the form of intellectual rents. They do not contribute to value creation but enable value appropriation by segmenting markets, creating new ones, thus included in the

Apple’s margins over time, with and without R&D as an investment. Source

Figure 7.3 Apple’s margins over time, with and without R&D as an investment. Source: Compustat.

innovation concept mobilized in this book. “Apple” is the world’s most valuable brand, according to Forbes.6 Regardless of the specific calculation used to achieve this result, it is clear that a fraction of Apple’s innovation monopoly rents corresponds to its brand-building, which led to creating a somehow separate market for Apple products. Haskel and Westlake (2018, Chapter 4) claim that Apple’s brand is indeed beneath part of the iPhone’s success. The iPhone was not the first smartphone, but Apple’s brand implied stylish and user-friendly devices, which was in sharp contrast with already existing devices.

 
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