I read somewhere that Apple’s margins are a lot higher than competing companies. One site claimed something like 50% of the price of an iPhone is pure profit. (Apple's iPhone 4S price: How much it really costs to make | Daily Mail Online)
If this is true, how come something like the Samsung Galaxy S2 is about the same price as an iPhone 4S? Shouldn’t it be a lot cheaper?
It’s cheaper to the folks who actually buy them (cell providers). But cell providers subsidize that cost when they resell them to consumers.
In the case of the iPhone, they pay 65% of the cost. They do this because despite high demand for Apple products, they don’t think people will buy them if an iPhone costs three time as much as the Galaxy. And they believe (rightly or wrongly) that iPhone users use more bandwidth and they can make up the difference on data charges over the life of the contract.
So far, that’s not actually happening.
Could cell providers drive more people to the Samsung by dropping the price? Maybe, but evidence suggests that consumers aren’t driven by price when it comes to smart phones.
I don’t believe they are factoring in stuff like R&D in that article - there are many groundbreaking technologies in Apple products, and they don’t invent themselves.
Things sell for what the customer is prepared to pay. With iProducts Apple have such huge volumes that they account for a very large fraction of the manufactures’ total production of many components. This means they can get price breaks in a manner that competitors can’t. Apple’s domination of the market for flash RAM, with long forward contracts for the majority of output is the most well known. But we can’t find out what those deals are. These breaks have meant that the various iPad competitors have been unable to match Apple’s sale prices in iPads. So you end up in the situation where the competitor’s product is inferior, and the same or more expensive. Hence the dominant position of the iPad. Phones are a bit different. The physical handset is nothing special internally. And the cost to produce likely does bring Apple a hefty margin. There are numerous handsets on the market that better the iPhone in terms of pure feature set. Some even get close in terms of physical design. However Android phones are not paying the cost of their operating system’s development or maintenance, which Apple are. Android gets you what you pay for it, and vendors leaving customers with orphan devices, that are not updated to later version of the software, whilst Apple continue to maintain and support their older model handsets, is both a cost to Apple, and a significant value to the customer not in the hardware component price. Of course the nature of software is such that you only have to write it once. So once you have a successful product that covers its costs, the rest is pure profit. By controlling the entire product design, Apple gain a huge edge in terms of software development and maintenance. They only have to support and design software for products that they make. This restricts the headaches massively. That Apple have 100 billion odd in cash is testament that they do make a good profit. But as a customer, you are buying the entire product, not just the bundle of parts that go into the product. Apple made that entire bundle very attractive, and were able to made it so attractive that they now reap the rewards of very high volume production. That simply makes them a good business.
There’s a good reason for that omission.
Stated well here:
If there are two things I would desire everyone understood, including myself because I forget to account for them a lot too, it is opportunity cost and sunk cost.
So in essence, what you are saying is that their huge product margins are paid for by the manufacturers and phone companies, and not by the consumer?
Literally, yes. The phone companies pay 100% of the profit margin. If you don’t like the link I posted above, here’s another from the LA Times.
Whereas the cost to develop an individual software artifact is a sunk cost, the cost to a company like Apple of software must be considered as an ongoing expense. They have a steady state development. They are maintaining old software, they are developing new features for existing software in order to keep it competitive in the market, developing new software products, and researching new ideas. They don’t do this in an episodic fashion, it is a constant process that is required to maintain a competitive edge. As a customer of an iProduct, part of the value of that product you get from Apple is that they do continue to develop and maintain software for your particular device, even when it is out of production. That is a competitive edge for Apple, and one they fund on an ongoing basis. At any moment you could stop the clock and say that everything so far developed is a sunk cost, but this only become relevant if you have a financial problem, and do need to stop the clock to decide what to do. For Apple the cost of R&D is part of the price of doing business in a large steady state system. It must be funded, and the health of the business (and thus the value of company) depends upon this being done. So a portion of the cost of any product must take into account a share of this burden. However, how you do this is more fluid. An individual product does not need to include exactly some portion of only its own software costs. That might be difficult to determine anyway. But across the entire company, and its products, the continuing R&D must be funded, and must be reflected as part of the cost of the end products.
But even if you buy the phones without a subscription, the prices are still similar. How come?
But you really should be doing this sort of calculation before you invest at all, and see how long it will take you to recoup your initial investment based on that. And, at that point, the investment is not a sunk cost.
And, granted, this initial run is speculative, since you don’t have a product yet. But it’s still important. If you don’t recover your initial investment, you won’t be able to invest again.
Apple’s margin’s aren’t higher because they charge more than other phone makers. They’re higher because they spend less on components. Part of this is simply volume discounts. There are a lot more iPhones than Samsung Galaxy 2s.
Apple has essentially front-loaded a huge amount of what other phone makers pay as marginal costs into fixed costs.
In recent years, Apple has paid in advance for the entire production run of some components. They get a volume discount and their competitors sometimes have trouble meeting their quality at any price. cite.
Apple started designing its own chips, which means they only pay for fabrication. Instead of having to share part of the profit on a phone with Intel or Nvidia or some ARM licensee, Apple keeps it.
Apple designs their hardware and software together, so they can get away with more efficient hardware in some cases. The iPhone 4S only has half as much RAM as the Samsung Galaxy 2. Yet it feels as responsive, because iOS was designed with those constraints in mind.
Apple makes fewer revisions of their hardware. They can afford to invest in machining to make the iPhone 4(S) body components very efficiently because they’re going to use the same design for two+ years. Other phone makers are selling dozens of models, and have to produce smaller batches of everything.
All of this adds up.
Ran across a couple of interesting blog posts about Apple, Carriers and margins that others might find interesting.
One from Gaseé in his Monday Note where he points out the carrier subsidies (and whining about them). Another in BusinessWeek discussed the margins on iPads, which are much lower than iPhones - and point out that a 20% margin on the iPad is part of the difficultly other table providers face.
The BusinessWeek article says:
Worse for competitors, Apple has left no price umbrella to give them shelter. The company earns a gross margin of 20 percent on every iPad, says Anand Srinivasan, a technology analyst with Bloomberg Research. While smartphone makers have some room to undercut the iPhone, with its rich 56 percent gross margin, would-be iPad rivals have no such luxury.