So despite the unfortunate health news about Steve Jobs, Apple computers seems to be chugging along. They just reported a quarterly profit of $6 billion on $26.74 billion in revenue. Most opinion makers and consumers seem to be heralding the company, their products, and their business acumen. This graph shows how Apple controls 4% of the cell phone market, but makes 50% of the profits. Here is a similar finding. From the last link:
Along the same lines, Apple has been able to have the press salivating over every announcement. Even things as minor as the release of a new version of their mobile OS, or the MAC App Store. Apple has very little bad press. All of this in and of itself isn’t a big problem in my opinion. What I find strange is the way other profitable companies are treated in contrast (eg. Walmart, Microsoft, Exxon)
The last case, Exxon, is particularly interesting. Now that Apple is the 2nd biggest company in the world, it is not a stretch to compare them to the biggest company (ExxonMobil). Flash back to 2005 when Exxon released their own report of record profits. There was nearly across the board condemnation. Quoting this Washington Post article discussing the fallout from Exxon’s report of a $9.03 billion dollar profit:
Yet, few wonder what has happened to push Apple’s costs through the roof. Is there any reason why people who were concerned with Exxon profits should not be concerned with Apple’s? Obviously the demand for gasoline is less elastic, but consumers in both circumstances still have choices. So why the difference in treatment? Is it because Exxon is considered a blue collar type company while Apple is basically an intellectual luxury brand? Why should one company’s success be subject to congressional investigation, windfall taxes, and price gouging accusations, while the other is almost universally celebrated?
The underlying idea seems to be that corporations should, in part, exist to serve the public. Thus, selling a cancer drug for an exorbitant price, or charging a lot for gas solely in the interest of greater profits is wrong. When you are dealing with consumer goods, the stakes are obviously much smaller. However, when there is a cultural climate that often helps to blur the line between luxuries like an iPhone, and necessities, at what point does a company who actively exacerbates the problem, and profits from that obfuscation need to be more responsible in the way they market and price their products?
I think you more or less answered your own question. People may joke that they “need” their igadgets, but even then I think they realize that they don’t really need them in the same way they need heating oil, electricity or fuel for transportation. If times are tough or prices are up, they can delay getting a new cel-phone or mp3 player. Oil derived products on the other hand, can be cut back on a little, but its pretty hard to do more then that without serious lifestyle changes.
Plus, Apple is profitable because its selling more and more products that people want. Exxon was profitable because they were selling the same amount of their product for more and more money. Obviously this is because its a lot harder to drill a new oil well then it is to churn out some more ipods in response to increased demand, but from the viewpoint of the consumer, it seems like Apple is giving people what they want (more igadgets for the same price) while Exxon is just jerking up the price because they know people can’t cut back very much on oil consumption.
So prices go up, people get pissed, and their congresscritters respond with some meaningless inquires and bluster about windfall taxes.
Simplico pretty much nailed it. You can’t really compare the two simply because of the elasticity of goods. Assuming that Apple products are overpriced(an arguable but reasonable position), they aren’t a good that you need in any case, and thus they can’t price gouge.
For a comparison, Exxon would be like the sole owner of an oasis in the desert charging $100 per glass of water.
Apple would also be an oasis in the desert, where you could either get a glass of water for $1, or a glass of their special Premium Smoothie Strawberry Water for $100.
The fact of the matter is, people don’t need Apple products like they do Exxon’s product. People buy iPads and iPhones because they want them and they think they’re worth the price.
Add in to this that when Exxon (et al.) raise prices, it raises prices across many different industries. Ever wonder why you get 2 tortillas instead of 3 at El Pollo Loco? Why do airlines charge you to check bags? Those were put into place when gas prices went up. Suppose tomorrow Apple starts charging $1000 for their low end iPod. What impact would that have on prices for other goods and services?
Also, add in the dishonesty. According to gas companies, they operate on razor thin margins. That is due to a bookkeeping trick of selling yourself the gas. Let’s say it costs $2 per gallon to get oil and turn it into gas. The refining division sells it to your gas station and independents for $3.95 per gallon and you then sell for $4.00. You now claim that you only make 5 cents a gallon which is true for the independents but not the Exxon stations.
I think another part of it is that Apple is doing exactly what people want rich companies (or people) to do, that is, create products that people actually want and do a good job of it. If Joe Blow invents the proverbial better mousetrap tomorrow and sells 50 to every man woman and child in America and then retires to live in a floating palace sleeping on large piles of money, most of us would basically think “good for him, that’s good old American ingenuity, I wish I’d thought of it tomorrow”.
But then when he sells his company to Joe Schmoe, and Joe Schmoe runs it in an extremely efficient and competitive fashion, and does lots of lobbying to get various government tax breaks for mousetraps, and drives other mousetrap companies out of business, and then raises the price of mousetraps, it’s a lot less clear to anyone what he did that was worthy of admiration.
Joe Blow is capitalism at it’s finest. Joe Schmoe… isn’t.
Respectfully, while there are sometimes abuses of transfer pricing, it is incorrect call it a “trick” except in uncommon cases of outright fraud often related to tax evasion. It serves the perfectly legitimate purpose of identifying what part of the value chain is adding the most value and allows a vertically integrated company to compare the performance of its individual operations with its competitors.
In your example, there is a clear delineation between refining (profit $1.95 per gallon) and distribution (profit $0.05 per gallon). As long as there is sufficient outside competition to validate the transfer price, there’s not a problem saying that Exxon’s stations make $0.05 per gallon. Or in other words, if you were a dealer and owned the station and bought the gas from Exxon, that is the profit you would make. Being able to raise the price a few cents would make a huge difference in your profitability. And, if Exxon sold all of its stations (which they’re doing in many markets), it would still be making $1.95 per gallon selling to retailers. Exxon’s $0.05 argument in your example was basically “we don’t even make a lot of money distributing the gas, we’re predominantly a refiner,” which is true.
And in fact, companies have strong incentives to get transfer pricing correct. If you get it wrong, the result is misallocation of capital, underperformance relative to competitors (equaling lower profits for the same risk), which creates lower stock valuations compared to competitors, which gets the CEO fired.
EDIT: I’m certainly not holding up the oil companies as pillars of virtue, just wanted to clarify the transfer pricing issue.
But isn’t that like blaming the mortgage company because your variable interest rate went up? A lot of the pain our dependence on oil creates comes from the choices we make like building a huge house, buying a gas-guzzler, or not living near ones workplace. Plus, there is little evidence Exxon is jacking up the price just to be greedy. They don’t control the price of a barrel of oil, nor are their profit margins particularly high.
Your point about Apple is noted, but I still think the charge of being greedy applies to them far more than it does to Microsoft, Walmart, or Exxon. Regardless, I think the elasticity argument is somewhat of a red herring.
Do you have a cite for this? One that outlines the “real” profit margins versus companies in other industries?
Clarifying, at least in my world. Sometimes the company gets bought and the CEO gets a payout for underperformance. Either way, the shareholders lose, as the premium they would receive from the buyout would be less than the value of performing optimally.
Just to be clear (and this is something that actually strengthens your OP), that’s not the usual way “bigness” is measured. APPL is the second largest as measured by market cap. Normally, though, people look at gross sales. Point being, Apple’s margins are huge and Exxon’s are mundane. Exxon gets a lot of grief because it has large profits as measured in absolute terms. But its sales are huge, so its margins are nothing exceptional.
Well, there’s two questions, why did people act with more hostility to Exxon profits then to Apple’s, and were they justified in doing so. I think your right that Exxon raised prices in response to increased demand, not because its CEO woke up one morning and decided to screw people, so its silly to get more angry with them then with Apple. But the nature of Exxon’s business is such that, reasonible or not, people get pissed at them when gas prices go up and their bottom line improves, for the reasons I stated in the post.
Also, note that for all the bluster, nobody actually did anything to hurt Exxon. No windfall taxes got passed, nobody repealed any of their subsidies, I’m sure when their execs got yelled at by Bill Frist, they went home and cried themselves to sleep on a giant pile of money, part of which was no doubt earned from gov’t subsidies passed with Frist’s votes. Attacking them was just a way to vent about anger over high oil prices, it didn’t really have anything to do with the actual practices of Exxon, regardless of what those practices were.
I just picked Exxon as an example, but I mentioned how Microsoft, Walmart, and others are just as often stuck with the label of being greedy and ruthless. I think the crux of my issue with this is how inconsistent we are with those terms. If an oil companies profits are a de facto indication of greed, why does Apple get a pass just because they have a better image? I also want to state that I own several Apple products, but I don’t like the way the conduct business.
True, but the ability for them to foment such anger against oil companies is, in part, due to the idea that their profits are evidence of wrong-doing being so common.
Huh? What red herring? Elasticity/Inelasticity is a clear difference between the two. People buy Apple Products because they want them, not because they have to. The point is Apple has limited ability to gouge customers. Sure their stuff is expensive, but then you might as well rail on the high fashion industry. Their stuff has crazy margins… and that’s the whole point!
I’m not sure I agree that high profits are taken by most folks as a “de facto indication of greed”, usually the anger is that evil-corp is making so much profit while doing X, Y and Z (charging so much for gas, using their size to squash mom and pop stores, bundling their OS with a bunch of their other products, etc). But its really X, Y and Z that people are angry about, the fact that their making a profit is just an explanation of why they’re doing the evil things people are pissed about.
So far, Apple hasn’t done anything that the average consumer is pissed about, so their profits are seen as benign. When it turns out the Ipad causes cancer or whatever, people will start being angry at Apple’s profits, even though Apple’s profitability won’t have directly caused the Ipads carcinogenic qualities.
Anthropomorphizing companies with human-like personality traits (“greedy,” “innovative”) is simply bad thinking. Anyone who analyzes them in those terms, rather than doing hard thinking about the incentives of a particular market space and the true space of choices faced by different companies, can be safely ignored.
Its a clear difference that has not actually proved to be meaningful in this case. Also, people don’t have to buy Exxon’s gas. Exxon also has a limited ability to “gouge” people. If you pull into an Exxon station where gas costs $7 per gallon, do you go, “oh well, I have no choice but to pay”? Of course not. Now you may need to buy gas, but that alone does not explain why people who hate seeing Exxon make money love seeing Apple make money.
Also, the reality is that if you want to make an app, you will likely have to sell it in the app store. If you want to buy apps, you will likely have to use an Apple product and itunes. After a certain tipping point, network effects come into play. We are at a point where Apple is so dominate is some areas that they its basically the standard. That means choosing Apple is less of a choice than many other choices we make.
You make a good point about high-end fashion. What would people say if Gucci made a $6 billion profit last quarter? You would likely see people deriding the intelligence of American consumers, and our destructive elevation of style over substance.
Are Apple’s hands really any cleaner than most? I tend to think you have to do questionable things to get to that size.