Chip analyst: Apple is probably losing money on iPod nano

“Apple issued a major salvo to the industry this month with the Nano digital music player, which has up to 4 GB of flash memory for $249. Unlike most other flash players, the Nano has a big color screen and can hold about 1,000 songs. And it’s more likely to survive a hard fall than full-sized iPods, which use hard drives,” Michelle Kessler reports for USA Today.

“The Nano is so inexpensive that Apple is probably losing money on it, with the hope of profiting through music sales and later models, [chip analyst Jim Handy of Semico Research says]. Even so, nearly all of Apple’s rivals are probably rushing to develop Nanolike devices of their own, he says,” Kessler reports. “The numbers aren’t out yet, but Handy expects competitors to gobble up so much flash that there may be temporary shortages and price increases on the wholesale market.”

Full article here.

CNET’s Michael Kanellos has reported, “Right now, 1GB of flash memory in the volume market costs about $45, according to both Semico and iSuppli. Thus, the 2GB iPod Nano, which sells for $199, contains around $90 worth of flash, while the $249 4GB version has about $180 worth of flash, said Semico’s Jim Handy. ‘They might have been able to get something for $40, but that’s still $160 worth of memory,’ he said… Apple likely got a substantial discount from its flash supplier, which [iSupply’s Nam Hyung Kim] and others say is Samsung.”

Full article here.

AppleInsider reports that Apple “struck a deal with Samsung in which the iPod maker would purchase as much as 40% of Samsung’s second-half flash memory output in exchange for a significant volume price reduction. Some analysts speculate that Samsung offered Apple a 50% discount, which would bring Apple’s per-Gigabyte cost for flash memory inline with that of the hard disk drive-based storage used in the iPod mini.”

Full article here.

Advertisement: Apple iPod nano. 1,000 songs. Impossibly small. From $199. Free shipping.

Related articles:
USA Today: ‘iPod nano a hit’ – analyst predicts 26 million iPods will be sold in next two quarters – September 19, 2005
Also-ran MP3 player makers miffed by Apple’s impossibly low price for iPod nano – September 09, 2005

31 Comments

  1. Apple is more assuredly not losing money on the Nano. If they are, the executives will face a lynch mob at the next quater reporting. No way they would take their most profitable product (the Mini) and replace it with a loss-leader in the hopes of gaining back money in music sales – is this guy crazy? Apparently that’s why he is an analyst and not running his own company. Given some estimates that Apple will ship 11 million of the things in the next quater, even if they lost $1 per unit they would have to sell, what 15 songs (I think they only make about 7c a song) per unit – 157 million songs just to break even? Not a bloody chance! Did this guy not even think about this ludicrious statement before uttering it?

    I think the award for the dummest public statement has just been won by Professor Kessler. What’s that saying about it being better for people to think you stupid than to open your mouth and prove it?

  2. This is 100% speculation with 0% grounding in reality.

    Apple is _very_ sensitive to the per unit selling price and per unit profit. The only scenario where it would even be plausable for Apple to loose money on a product would be to gain market share. Clearly that is not a need for Apple at this time.

    Perhaps the chip makers are breaking even on the Apple deal in order to gain both a relationship with Apple and allow economies of scale to offset their fixed manufacturing costs. (Think Wal-Mart strategy for manufacturers who sell to Wal-Mart at razor margins in order to increase total sales and reduce per unit share of fixed costs so their non-Wal-Mart sales have larger margins on them.)

    MDN word: weeks

  3. This analyst is attributing the same price to both the 2GB and 4GB nano. Problem is that Apple is getting its NAND memory for the 2GB from Toshiba, anad volume pricing on their NAND memory is less than the $45 he suggests. Secondly, Samsung cut a favored customer price with Apple for committing to 40% of their (Samsung’s) second half production run. It is widely thought that Apple got pricing equal to 4GB HDs. Samsung was able to do this because of the value of the incremental increase in production volume. They may have made as little as 10% profit (pure speculation on my part), but because Samsung is operating above the breakeven line, all of the profit goes directly to the bottom line.

    The long term benefit to Samsung gong forward is that this move by Apple is going to force all other MP3 makers to adopt Samsung’s memory to stay even. This will increase Samsung’s gross revenue, gross margin AND profit, because none of them will get Apple’s price.

    Gee, could this be why Intel is sniffing around Micron?

  4. What are the 4Gb chip prices next March? Would $100 seem reasonable? OK, what if Apple is contractually obligated to buy the chips exclusively at Samsung at $120 for a year after the Nano release? Everybody makes money on a deal like that.

    The answer probably lies more in chip futures than in volume.

  5. Don’t forget that Samsung makes other components as well. Where is Apple getting their LCD’s? Apple could have received a bigger discount if they bought other components as well.

    Apple and SJ have never sold anything at a loss. They are probably not making the usual 51% profit margin they used to get.

  6. “The Nano is so inexpensive that Apple is probably losing money on it, with the hope of profiting through music sales and later models”

    Yeah, right. And Apple is losing money on iTunes sales because the iTunes Music Store is only there to drive iPod sales.

Reader Feedback

This site uses Akismet to reduce spam. Learn how your comment data is processed.