Apple\'s record profits - where do they arrive from?

Apple is determined to report another record quarterly profit on Tuesday, continuing the relentless string of results that's made it the world's most precious company. Those profits don't pop out of skinny air: a number of businesses from the company's wireless carrier friends to its PC-making foes are seeing their profits melt away and flow to Apple's base line.

Apple's success is right for america economy, and a few businesses, like software developers and memory-chip makers, have benefited from the disruption Apple is causing. But its enormous gains have ended in others' pains, sometimes in unexpected places.

AT&T, as an example, took a bet on Apple's unproven phone in 2007, however the company is perhaps regretting that call. Because it became the 1st US phone company to hold the iPhone, its stock is down 25 per cent. Apple's is up 415 per cent.

Best Buy has sold Apple products on and off because the late 1990s, but analysts now see Apple as an enormous threat to the U.S.'s only remaining national big-box electronics chain.

Worst off, needless to say, are rival phone makers. Apple has just 8 per cent of the worldwide phone market, but makes about 80 per cent of the industry's operating profits.

Wall Street analysts expect Apple to post a profit of $US9.2 billion for the January to March quarter when it reports on Tuesday. That's roughly in step with the profit expected from the world's largest oil company, Exxon Mobil.

The vast majority of the profit will come from iPhone sales, especially now that three of the four national US wireless carriers AT&T, Sprint, and Verizon sell the telephone.

But, for a phone company, selling an iPhone is somewhat a chance. The corporate pays Apple a mean of $659 for iPhones after which sells them to consumers for between $50 and $200.

The telephone companies anticipate making their a refund, and more, in monthly service fees over the lifetime of a two-year contract. Each iPhone comes with a knowledge plan that adds at the least $30 to a consumer's monthly bill. At AT&T, the typical iPhone user pays greater than $100 monthly.

It seems, however, that a number of the added income wireless carriers get from data plans is only compensating for a drop in what they are able to charge for calling minutes. The cash also is eaten up by the price of network upgrades to support your entire data traffic the emails, photos and YouTube videos iPhone users consume.

"The first beneficiary of the expansion in wireless data have been one company Apple," says William Power, an analyst with R.W. Baird & Co.

Despite the smartphone boom created by Apple's iPhone, "free cash flow," or the money left over every quarter after expenses and capital spending, hasn't grown on the major US wireless companies since 2007, in line with Power's calculations.

Inside the same period, Apple's free cash flow has grown greater than sixfold, to over $40 billion last year.

There are signs that US phone companies are beginning to take countermeasures. Apple's stock has fallen 11 per cent from its all-time high, partly because investors think the telephone companies might start demanding lower prices from Apple or making it harder for consumers to purchase iPhones at heavily discounted prices.

Already, the telephone companies have tightened their phone upgrade policies, meaning existing subscribers must wait longer before they're eligible for a brand 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 telephone companies can have limited leverage to switch the economics of the iPhone.

AT&T, Sprint and Verizon are in a hotly competitive race. Every one is afraid to tighten policies or raise prices an excessive amount of, lest subscribers jump to a competitor.

When Verizon started selling the iPhone last year, AT&T's CEO vowed to push Android phones because they don't seem to be as expensive to subsidize. However the company ended up selling more iPhones than ever.

Sprint Nextel, the last of the enormous carriers to get the iPhone, is in a precarious financial position after a long time of losses. Sanford Bernstein analyst Craig Moffett thinks there is a risk that the price of selling the iPhone could push Sprint out of business.

Another partner struggling to cope with Apple's success is healthier Buy Inc., the biggest consumer electronics retailer inside the U.S.

"While Best Buy has enjoyed strong sales with Apple products, Apple has benefited more," Daniel Binder, an analyst with Jefferies & Co., wrote last month.

Apple's own stores compete with Best Buy, and as Apple products win out over others, consumers become prone to shop at Apple stores. Binder downgraded Best Buy a year and a half ago, saying the iPad would narrow into PC sales. That trend was even stronger than he expected, he says.

Best Buy stores sell not up to $1,000 in merchandise per square foot per year, based on research firm RetailSales. Apple stores sell greater than six times as much, a record for the united states retail sector.

If Apple does release a TV set this year, as have been rumored, that could be even worse news for Best Buy, Binder says.

Although Apple is barely the world's third largest phone maker, behind Nokia and Samsung, it's pummeling rival phone makers, to boot. Apple doesn't make inexpensive phones in any respect, which should leave a lot of room for other phone makers.

But that's somewhat of an illusion. Cheap phones are getting commodity products, with fierce competition and occasional margins, so most phone makers want to smartphones for profits. But that's exactly where Apple dominates. Because the world's largest buyer of chips, the corporate has an incredible advantage in procuring components on the best prices, and consumers appear to favor the iPhone whatever the features others use to jazz up their handsets.

High-end smartphones cost about $200 to make. Apple sells the iPhone for a standard of $659. Other manufacturers sell competing phones for between $300 and $400.

Canaccord Genuity analyst Michael Walkely estimates that when you add up the operating profits made by the world's eight largest phone makers within the last three months of last year, you can find that the iPhone accounts for 80 per cent of the cash.

Walkley believes Apple is determined to take a good larger share of these earnings this year.

A lot of the profits left over are going to Samsung Electronics, the Korean company that makes the favored Galaxy S line of smartphones. For now, Samsung appears like the only competitor that's ready to thrive in an industry dominated by Apple.

Nokia, the world's largest maker of phones, has taken the drastic step of ditching its whole smartphone family and betting instead on phones that run on Microsoft's new Windows software. Nokia shares have lost nearly 90 per cent in their value because the 2007 debut of the iPhone. Its sales fell 23 per cent, and it posted a big loss last year.

The patron electronics industry is suffering by the hands of Apple, too. As consumers use iPhones and iPads to do things that when required camcorders, cameras and GPS devices, sales of those devices are shrinking. Smartphones and tablets are sucking up the shopper dollars, says Steve Bambridge, research director at U.K.-based GfK.

Inside the US, Apple's computers and other devices accounted for 19 per cent of all of the spending on consumer electronics within the holiday season, in line with NPD Group. That's a tripling in two years.

The craze is especially rough at the Japanese companies that after ruled consumer electronics.

Last month, Japanese financial newspaper Nikkei ranked Apple the head consumer brand within the country, up from 64th place three years ago.

The highest Japanese electronics brand, Panasonic, moved down from a No. 3 spot last year to No. 7. Sony and Nintendo didn't even make the tip ten of their home country.

Sony has taken a very hard beating, because it competes with Apple on many fronts: music players, digital music sales, phones, portable gaming devices and PCs. It doesn't compete with Apple in TVs, but that's a terrible business in its own right, and an enormous money-loser.

Sony is projecting an incredible loss for the fiscal year that ended three weeks ago. It has been inside the red the last three years in addition. Last week, it said it might cut 10,000 jobs, or 6 per cent of its workforce.

US PC makers like Hewlett-Packard and Dell aren't doing as badly as Sony, but Apple's success is popping out in their pockets too.

Sales of Windows PC are holding up well globally, as households and businesses inside the developing world are becoming their first computers. But they're shrinking within the US, as customers turn to Macs and, to a lesser extent, iPads instead.

HP, the world's largest maker of PCs, said last year that it might dispose of its PC division, but later backtracked. In its most up-to-date report, it said sales were down 15 per cent from a year ago.

PC makers has been seeking to replicate Apple's success with the iPad, but have thus far failed. They're now looking forward to a brand new version of Microsoft's Windows to provide them another shot. Windows 8, due this autumn, is aimed at touch-sensitive screens.