3G iPod shuffle teardown reveals same costs as in 2007

[AppleInsider]

In spite of concerns touted around the web this week that Apple has arbitrarily padded its margins with the release of its latest iPod, a new teardown from iSuppli obtained in full by AppleInsider reveals that the third-generation iPod shuffle costs the same amount of money to manufacture as its predecessor did two years ago.

The part-by-part study of the screenless music player determines that Apple is keeping the price of the iPod shuffle at $79 because the price of NAND flash memory has fallen quickly enough that 4GB of storage is slightly less expensive now than 1GB was in 2007, the last time iSuppli examined the second-generation model. A 4GB chip is estimated to cost exactly $6 where 1GB would have required Apple pay $6.98 nearly two years ago.

As a result of this and other fluctuations in component prices, a standard version of the shuffle costs virtually the same to make as it did in the past: the pure manufacturing and part costs of the 2009 update are $21.77, or just three cents lower than what was needed in 2007. The stability of the price comes even as Apple has complicated the interface by adding voiced song titles and an audio menu system for choosing from playlists. iSuppli believes the balance was achieved by having a purity of purpose, where virtually every minor part is ultimately just a slave to the media processor or the flash memory.

"Apple has managed to take the lowest end of the iPod line and actually further downsize it, while adding features to what had been a virtually featureless device," the research firm's teardown director Andrew Rassweiler says. "Beyond the memory and controller, all the other components basically provide power, interface and interconnect functions for the memory and media-player chips."

iFixit's dissection of the third-generation iPod shuffle.

Of the parts in the iPod, Samsung has the greatest influence over the price as it's responsible for both the processor and the storage. These combined represent about $11.98, or 55 percent of the total price after assembly is included.

iSuppli is quick to head off accusations that Apple is charging a roughly 200 percent profit margin, noting that the $21.77 manufacturing price doesn't account for licensing, marketing, shipping, and other efforts needed to actually bring the iPod shuffle to a store. It also doesn't reflect expenses at Apple as a whole.

Nonetheless, the analysts believe Apple is still building in a significant amount of headroom into the $79 price tag that may give it a more than healthy return with each unit sold, even if solely in the ratio of costs rather than the actual money.

"At a retail price of $79, the Shuffle has to be one of the most profitable Apple products in its entire line, on a percentage basis," Rassweiler points out.

iSuppli's list of costs by part for the third-generation iPod shuffle.

[ View this article at AppleInsider.com ]

[anantksundaram]

Originally Posted by AppleInsider

In spite of fears that Apple was suddenly inflating its margins......

Fears?

For us AAPL shareholders (and non-shuffle consumers) the correct word would have been 'hopes.'

[hmurchison]

iSuppli

I don't place that much stock in their breakdowns. I think they gloss over what they don't know and that hampers accuracy.

[Paver]

Why does Apple put a dime in the iPod Shuffle? It seems like that would only serve to decrease their profit by 10 cents, where any piece of conductive metal could surely perform that function of a dumb dime.

[xander0985]

[QUOTE=iSuppli is quick to head off accusations that Apple is charging a roughly 200 percent profit margin, noting that the $21.77 manufacturing price doesn't account for licensing, marketing, shipping, and other efforts needed to actually bring the iPod shuffle to a store.[/QUOTE]

With costs of $21.77 and revenue of $79, Apple's gross profit margin (not accounting for licensing, marketing, shipping, etc., is not 'roughly 200%', it is (79 - 21.77) / 79 = 72.4%.

Gross profit margin = gross profit / total revenue, and as such cannot be higher than 100%. To have a gross profit margin > 100% you would have to have made more money than you received revenue, and that just doesn't make sense.

Markup can easily be well over 100% and perhaps that's what the article was referring to? Assuming costs of $21.77 and a selling price of $79, the percentage markup of the shuffle (barring the previously mentioned costs) would be: 79 - 21.77 / 21.77 = 263% of cost.

[solipsism]

Originally Posted by xander0985

With costs of $21.77 and revenue of $79, Apple's gross profit margin (not accounting for licensing, marketing, shipping, etc., is not 'roughly 200%', it is (79 - 21.77) / 79 = 72.4%.

Gross profit margin = gross profit / total revenue, and as such cannot be higher than 100%. To have a gross profit margin > 100% you would have to have made more money than you received revenue, and that just doesn't make sense.

Markup can easily be well over 100% and perhaps that's what the article was referring to? Assuming costs of $21.77 and a selling price of $79, the percentage markup of the shuffle (barring the previously mentioned costs) would be: 79 - 21.77 / 21.77 = 263% of cost.

[Galley]

Originally Posted by Paver

Why does Apple put a dime in the iPod Shuffle? It seems like that would only serve to decrease their profit by 10 cents, where any piece of conductive metal could surely perform that function of a dumb dime.

I see what you did there.

[Chris Howard]

Am I reading right that the cost of the stereo headset with volume control is $1.55? I see Apple does not sell a mic-less headset, but if they did I am guessing it would be $19 (as the one with a mic is $29).

[Quadra 610]

Originally Posted by AppleInsider

Nonetheless, the analysts believe Apple is still building in a significant amount of headroom into the $79 price tag that may give it a more than healthy return with each unit sold, even if solely in the ratio of costs rather than the actual money.

Ok. So what.

[DHKOsta]

They're estimating the cost of raw materials, subtracting it from the sales price, and calling it a profit margin.

Raw material cost is a portion of unit variable cost. Once you actually find out what the unit variable cost is, you can find your contribution margin.

Then there are fixed costs to account for.

I think iSuppli needs to hire an accountant. Or at least someone who took business math in high school.

[teckstud]

the Shuffle has to be one of the most profitable Apple products in its entire line, on a percentage basis," Rassweiler points out.

Of course it's one of the most profitable, it's the gift that keeps on taking.
Every time the headphones break- who you gonna call for new ones? Apple- HELLO!?!

[iBill]

Originally Posted by anantksundaram

Fears?

For us AAPL shareholders (and non-shuffle consumers) the correct word would have been 'hopes.'

Kudos to Apple on what looks to be a fine job on this new shuffle. They should make a mint off them.

[Dunks]

Originally Posted by Paver

Why does Apple put a dime in the iPod Shuffle? It seems like that would only serve to decrease their profit by 10 cents, where any piece of conductive metal could surely perform that function of a dumb dime.

I thought that too when I pulled apart my new 24-inch imac to find the new cooling mechanism is an origami fan made from hundred dollar notes.

[Eriamjh]

Apple hasn't provided a breakdown of iPod sales in years (if ever). While it is nice that the BOM (Bill of Material) cost is about $22 compared to the $79 price tag, there are manufacturing costs involved AND Apple does not actually build them. Don't forget that the Chinese company assembling them is making money at probably around 6-10% profit or more.

So I figure the margin is around 80-100%. Not too shabby. But Apple probably only sells one shuffle for every 10 other iPods, especially the nano.

The iPod Touch is the future. I still wish they made a 160GB version, but truthfully, I prefer to listen to music instead of watch videos so my 40GB 3G is still pretty ideal (except for lousy battery life) for me (It turned five in October of 2008 and I use it every day).

[minderbinder]

"Apple is keeping the price of the iPod shuffle at $79"

"Keeping"??

The previous generation started at $79, but they lowered prices to $49 and $69 over a year ago. They didn't keep the price, they raised it, and by quite a bit (60% over the old base model).

If this has the same build cost as the previous generation, then apple had no reason to raise prices other than padding their profit margins.

[solipsism]

Originally Posted by minderbinder

If this has the same build cost as the previous generation, then apple had no reason to raise prices other than padding their profit margins.

This price is the same as when the 2G Shuffle with 1GB flash was introduced. Though I have no doubt that Apple is making more on this new Shuffle, but as iSuppli points out their HW costs don't account for many, many costs associated with the device. The firmware even had some major updates for a Shuffle when the last time it was just a capacity bump or colour change.

[hillstones]

I think it is amazing how small the device is, especially for 4 GB of storage. My old Mac Plus sits on my bookshelf and that needed four 30-pin SIMMS just to get 1 MB.

[minderbinder]

Originally Posted by solipsism

This price is the same as when the 2G Shuffle with 1GB flash was introduced.

That's what I said.

But since the price was $49/$69 the day before the new model was announced, having the new model at $79 is still a price increase.

If they introduced a new shuffle at $129, would people try and spin it as "keeping the price" since at one point years ago it cost that much?

[hillstones]

Originally Posted by minderbinder

"Apple is keeping the price of the iPod shuffle at $79"

"Keeping"??

The previous generation started at $79, but they lowered prices to $49 and $69 over a year ago. They didn't keep the price, they raised it, and by quite a bit (60% over the old base model).

If this has the same build cost as the previous generation, then apple had no reason to raise prices other than padding their profit margins.

Nothing wrong with that when you know people will buy it. You would do the same if you had a product for sale that you knew would sell well at any price. It is called business. That is true of any item for purchase. Of course the previous generation wasn't 4 GB either. So you can't compare the price reductions in the past when they have increased in capacity. They wouldn't have been $79 if they remained at 1 and 2 GB.

Take a look at the Mac Pros. Those are now $1,000 more than the Power Macs, but people are buying them even at a price premium. So why not make a profit on that? Remember, the Power Macs used to start at an average price of $1,499. Not much has changed there either. They are still using a 6 year old enclosure.

[minderbinder]

Originally Posted by hillstones

Nothing wrong with that when you know people will buy it. You would do the same if you had a product for sale that you knew would sell well at any price. It is called business. That is true of any item for purchase. Of course the previous generation wasn't 4 GB either. So you can't compare the price reductions in the past when they have increased in capacity. They wouldn't have been $79 if they remained at 1 and 2 GB.

Take a look at the Mac Pros. Those are now $1,000 more than the Power Macs, but people are buying them even at a price premium. So why not make a profit on that? Remember, the Power Macs used to start at an average price of $1,499. Not much has changed there either. They are still using a 6 year old enclosure.

Whether it's "wrong" or not, my point is it's misleading for the story to say they kept the price point when they didn't. And it isn't uncommon at all for companies to boost specs AND drop prices. 4GB is dirt cheap these days, there are other mp3 players with that capacity for under $30.

And we'll see what happens long term with Mac Pro sales. I suspect after an initial boost, they may not sell any better than the previous generation did. For the first time in a long time I am seeing FAR more people looking for the previous generation machines instead of the new ones (partly for price, partly for compatibility issues).

[hillstones]

Originally Posted by minderbinder

Whether it's "wrong" or not, my point is it's misleading for the story to say they kept the price point when they didn't. And it isn't uncommon at all for companies to boost specs AND drop prices. 4GB is dirt cheap these days, there are other mp3 players with that capacity for under $30.

And we'll see what happens long term with Mac Pro sales. I suspect after an initial boost, they may not sell any better than the previous generation did. For the first time in a long time I am seeing FAR more people looking for the previous generation machines instead of the new ones (partly for price, partly for compatibility issues).

The original price point has always been $79. They cut the price after they had been on the market for a long time. Other MP3 players are crap, which is why they are $30. Those cheap MP3 players are made by Coby. Others are all $50-$80. Companies also boost specs and raise prices, or cut prices and cut specs (Samsung being one of them).

All items have an initial sales boost, and then drop in sales. Now you can find plenty of Wii players everywhere. At Christmas time, none could be found. I am sure the Mac Pros have sold well, in the professional market. They are no longer attractive to consumers, so they are now in a different class. But that is an example of improved specs and an increase in price, which contradicts your theory.

[hillstones]

Originally Posted by minderbinder

For the first time in a long time I am seeing FAR more people looking for the previous generation machines instead of the new ones (partly for price, partly for compatibility issues).

Macs have always sold well in the used market (eBay especially), and the refurbs and clearance are huge. This is the first time that Apple has not depleted inventory before a new model is released. They have never had a clearance section before. You can still find the 24" iMac 2.8 GHz for $1,399 or less, which is an incredible buy. Even the MacBook Air 1.8 80 GB can be obtained for $1,099 refurb. That is an amazing $700 off the original price. Now those would fly off the shelves at that price.