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The trick is to have a unique product that people want to buy, not cutting the profit to the bone when competing with other me-too products as the Android market does. Look at what happened in the PC market. Windows-based PCs account for 85 to 90% (depending on whose numbers you believe) and yet most major PC makers are going through very tough times because why buy a Dell at $x when you can buy a Harry's computer and fish food at $x-5? Doesn't make Harry's computer a better one (chances are it will actually be worse), just less expensive. So the Dells and HPs cut their costs even more and make deals to put on crapware at the time of purchase to help subsidize their computers even more AND cut back on things hardware-wise to make it even cheaper.

Apple doesn't go that route. Since they sell not only the hardware but the OS as well, they can (mostly) make sure that everything works as advertized.Yes their hardware if you look only at the individual components cost more, sometimes substantially more but it also allows them to know that one of their computers, unmodified over the course of its projected lifespan, will typically be in use 1/2 to 1/3 longer than a similar PC including OS updates.

They're applying this same reasoning to their smartphone line the big difference being that the turnaround is much shorter (typically 2-3 years or 2 major OS updates which ever comes first). With Android phones, people are turning them in if they can after a year to get the new hotness which honestly isn't that different from the old hotness paying the penalty when you get out of contracts early, or losing their shirt if they bought it off contract because their old phone isn't worth anything now. Older iPhones (like older Macs) sell for a higher price than similar Android phones but there aren't nearly as many of them because from my experience, most iPhone users stay with their purchased phone until the end of the contract.

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