With the release of iPhone 3G, “not only will the iPhone be a growth story for Apple, but it could also be a huge margins story,” Market Folly writes or SeekingAlpha.
“Portelligent released research stating that it thinks that the new iPhone will cost as little as $100 to produce, when the first generation iPhone cost around $170 to produce,” Market Folly writes.
“However, even if that figure is only slightly off, the point is that AAPL will still be seeing huge margins, and here’s why. AAPL is Billy Badass when it comes to component pricing… AAPL will be paying much less for components this time around due to technological/engineering advancements and the bullying approach they take in the component space. The display will most likely cost them half as much this time around. Additionally, AAPL will be getting memory for the phone on the cheap and in turn can sell it to consumers for nearly five times as much as it got it for. The point is that AAPL has significantly reduced its input costs this time around; even with more/newer components in the phone,” Market Folly writes.
“I don’t think most people realize is the huge margins AAPL will be seeing with this product,” Market Folly writes.
More in the full article here.
[Thanks to MacDailyNews Reader “Carl H.” for the heads up.]
Raw component cost tallies are interesting, but they tell only a portion of the total cost of the product. Apple’s R&D and marketing costs, to mention just two areas, are significant contributors to the real total cost of the product.
Tell us about the margins on Blackberries, Nokia, RIM and all the others. Who cares about the margins? What are the margins on dog food?
“AAPL is Billy Badass when it comes to component pricing”
I thought AAPL was Paul Prudent when it comes to component pricing.
“The display will most likely cost them half as much this time around.”
Nice guesswork. Nothing like throwing out presumptions without any facts to back them up.
I love how these “parts analysts” give no credence whatsoever to the time, energy and costs associated with putting OS X on the iPhone, preparing the iPhone SDK, and creating MobileMe, Me.com, and the App Store.
Yeah, those things are free because they’re not hardware.
Apple expenses R&D;as it is incurred, and while internally they may attribute R&D;costs to a product, on their 10Q they do not.
The same is true of marketing expense. Internally they may attribute it to a specific product, but on their 10Q it is lumped under General and Administrative expense.
To clarify a point in the article, Apple does not ‘bully’ it’s suppliers. To the contrary the suppliers compete with each other to claim Apple’s business. This is because Apple’s products are growing in unit sales, and, as has been demonstrated with the iPod, have the potential for very large volume.
The volume buyer always gets better pricing than a lesser buyer. Add to this the fact that Apple doesn’t buy for the moment, they buy for the projected life of a product (model).
Protracted guaranteed volume is highly valued in any industry. They discount pricing heavily to get it.
I took a marketing class years ago, and heard the prof say the average American manufacturer spends 6% of a product’s cost on raw materials. The balance is GSA stuff (General, Sales, and Administrative).
Most of that is walking around on two feet. Or at Palm, with its feet propped up, sweat running like a river.
When an article has the word “could” in the first sentence, it should be a cue to stop reading. Facts will not follow, only fantasy.
Gregg, what you say is correct, however,
you fail to mention that however expensed, when pricing a product, such administrative overhead is averaged into that price, so that the general overhead is split between all the product lines a company offers.
Thus, yes, the General overhead IS part of a product’s price. However else will that overhead ever be regained?
Gregg point is valid and as Gregg said, Apple may, for their internal accounting purposes, rougly estimate the expenses for R&D;, marketing, sales and similar, for each of their individual products or product lines, but when they report quarterly earnings, all this comes under genera administrative expenditures. This only makes sense; Apple shifted many developers last year away from OS X Leopard over to the iPhone in order to meet self-assigned deadlines. An Apple engineer works for a specified sallary. For the next three months, he may be working on the iPhone UI; later, they’ll assign him to iTunes; or perhaps to iPod. These shifts occur all the time. This doesn’t matter for the profit reporting.
What matters is the following: Apple will be raking in about $550 or so for each iPhone sold ($200 retail + about $350 average estimated subsidy from the carrier). If they spend between $100 and $150 to make and ship the device, their net profits could be close to $400 per device. If they sell 20 million of them (ver conservative) in 2009, that will bring NET profit of $8 Billion (with a B), which is more than twice their entire net profit for fiscal year 2007.
Yes, but what you and Greg are glossing over is that those overhead expenses are averaged between ALL the company’s product lines and used to help set a price.
That’s how they determine that they will even make a profit! Without determining a product’s share of that overhead, they cannot determine what a profitable price for a product is.
Folks, remember this:
OS X and all the software is a one time charge, called Non-recurring Engineering (NRE) in the business. It costs just as much to make one as 10 million.
Marketing gets cheaper on a per unit basis as you sell more and more units.
Component costs are generally constant for each unit, though if you make enough units, there are some savings to be gained – and Apple is gaining them.
Likewise labor costs, unmentioned in MDN’s excerpt. Though like parts costs, savings can start to happen once enough units are made and the factory gets better at making them.
Basic business facts often overlooked here.
I am not sure if Apple isolates expenses on an individual project/product in order to determine its projected profitability. Apple’s business success comes from the ‘Whole Widget’ philosophy. While they have rarely, if ever, dumped money on a product that would never return its investment (unless we count free software, such as QuickTime player, Safari browser, iTunes player and such, which are strategic products), Apple’s entire product development strategy is founded on a combined return of multiple products as a whole package, and these are a bit more difficult to clearly identify. As a business, though, they obviously have a good way of making these projections, since their bottom line seems to be growing very, very rapidly.
In the case of the iPhone, it is possible that good parts of its development effort could be isolated and quantfied (Although one could ask questions regarding MobileMe, iTunes, QuickTime, even OS, as many are essential for iPhone, but shared extensively with other product lines).
Setting a retail price probably isn’t directly related to the overall expenses in development. I would say, it is the opposite; the retail price for an imagined product is determined by the current market conditions. Then, they will evaluate if the effort and expense used to develop it would make it worthwile, assuming certain sales volumes are achieved over specific period of time. Steve Jobs will NOT build something that doesn’t sell well and have solid profit margin. Apple will never be Microsoft (selling Zune, X-Box and other hardware below cost).
@qka
How many engineers work on iPhone’s OS X? Indeed, how many engineers are STILL working on (maintenance/development of) all versions of OS X?
There must surely be significant amounts of RE – recurring engineering costs.