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Apple's ultra-thin MacBook Air also slim on profits?

post #1 of 69
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In its determination to deliver the world's thinnest notebook, Apple admitted to sacrificing some speed and versatility, but a new analysis suggests that it may have given up some early profits as well.

Though the Cupertino-based Mac maker largely beat estimates for its second fiscal quarter on Wednesday, one sore spot appeared to be gross margin, which came in at about 100 to 200 basis points below most analysts' expectations at 32.9 percent.

An ensuing conference call was thus dominated by matter, as Wall Street folk routinely pelted management with questions on the perceived shortcoming as they sought a better understanding for their models going forward.

While management largely attributed the near 2 percent margin decline from the prior quarter to February's iPod shuffle price cut and a routine falloff in sales of Mac OS X Leopard and iWork, Piper Jaffray analyst Gene Munster offered his own explanation.

"We believe the margin outlook may be viewed negatively by investors, who likely wanted to see more of Apple's significant revenue upside trickle down to earnings," he wrote in a note to clients early Thursday morning. "The bottom line, we believe the margin was negativity impacted by a higher mix of Mac Book Air, which we now believe carries a lower margin."

On the bright side, Apple has likely built the potential for margin expansion into its MacBook Air design as adoption swells and component prices fall. What's more, Apple management appeared upbeat in stating that the Air has thus far shown little to no cannibalization effect on the company's other notebook offerings and thus could be considered largely responsible for helping push Mac unit growth to its highest rate in nearly two decades.

"The key takeaway from Apple's March quarter is that the Mac units grew at the highest year-over-year rates (units 51 percent and revenue 54 percent) in 17 years," Munster added in his note to clients. "Macs are the most meaningful category with the most potential and they are performing the best."

Looking ahead, the Piper Jaffray analyst said he's modeling conservatively for Mac growth rates to decline to 12 percent year-over-year for the remainder of calendar year 2008, which leaves "ample room for positive estimate revisions over the next 8 months."

"Mac growth is accelerating despite multiple quarters of strong growth, iPod sales are stabilizing with higher average-selling-prices due to the touch, and the iPhone will be significant in the second half of the year with the release of new hardware and software," he wrote.
post #2 of 69
Quote:
Originally Posted by AppleInsider View Post

"The bottom line, we believe the margin was negativity impacted by a higher mix of Mac Book Air, which we now believe carries a lower margin."

On the bright side, Apple has likely built the potential for margin expansion into its MacBook Air design as adoption swells and component prices fall. What's more, Apple management appeared upbeat in stating that the Air has thus far shown little to no cannibalization effect on the company's other notebook offerings and thus could be considered largely responsible for helping push Mac unit growth to its highest rate in nearly two decades.

This shouldn't really be a surprise. Apple often launches with competitive prices. Then, as a product gets established increasing economies of scale benefits, and as component prices inevitably fall, the margin increases on its on. Apple gets their foot in the door first and then turns on the profit machine.

It is actually an amazing business model--they don't have to rase prices or cut quality to increase their margins. They just have to wait. Other computer makers cannot do this as they are essentially producing commodities--HP, Dell, Loveno et al have to keep cutting prices because they compete directly with each other. Apple, on the other hand, is somewhat removed and the competition is not as direct. Other makers can make a super-slim notebook, but few will be designed as well and none will run OSX...

'Course, it sucks for anyone who wants to buy a cheep super portable by Apple, but it should make the stock holders happy in the long run...
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post #3 of 69
Quote:
Originally Posted by AppleInsider View Post

and the iPhone will be significant in the second half of the year with the release of new hardware and software," he wrote.



Patiently waiting with my moolah.
post #4 of 69
Quote:
Originally Posted by Bageljoey View Post

It is actually an amazing business model--they don't have to rase prices or cut quality to increase their margins. They just have to wait. Other computer makers cannot do this as they are essentially producing commodities--HP, Dell, Loveno et al have to keep cutting prices because they compete directly with each other. Apple, on the other hand, is somewhat removed and the competition is not as direct. Other makers can make a super-slim notebook, but few will be designed as well and none will run OSX...

'Course, it sucks for anyone who wants to buy a cheep super portable by Apple, but it should make the stock holders happy in the long run...

None of those brands necessarily make the cheap ultraportables either. A lot of the people begging for a cheap Air either confuse the Air with the EEE & XO, or confuse the Air with the $400 Walmart specials - both of which is completely silly. It seems much of it is driven by an indifference to what makes the Air a completely different class of device, as if it's just too subtle to them.
post #5 of 69
Except in terms of thickness, it's one of the largest laptops with a 13" screen that you can buy, no? I carry a bag that I've kept two other small notebooks in before. A Macbook Air wouldn't fit, though. I verified that by placing one atop the bag in the local Apple store.

And the border around the screen makes it look cheap.

I'd have bought it if they'd gotten it right, even for the insane current price, possibly. But thinness was apparently their only aim. I think they designed the ad campaign before they designed the product.
post #6 of 69
Quote:
Originally Posted by Bageljoey View Post

This shouldn't really be a surprise. Apple often launches with competitive prices. Then, as a product gets established increasing economies of scale benefits, and as component prices inevitably fall, the margin increases on its on. Apple gets their foot in the door first and then turns on the profit machine.

...

Maybe often , but certainly not always.
The initial release of a $600 iPhone completely negates your comments. How was that pricing competitive - only to drop $200 in less than 3 months?
post #7 of 69
Quote:
Originally Posted by JonathanC View Post

And the border around the screen makes it look cheap. .

I like the Air, i really do - but I have to agree with you on that point. It would look sooo much better if they reduced that bezel. Even adding an iMac style black surround would have helped - I'm very surprised they didn't.
post #8 of 69
Oh please.

This guy claims that Apple is flat out lying for stating that the price drop on the Shuffle caused the SLIGHT margin decline because he believes it is the MacBook Air.

What utter hogwash. Apple, and the senior management, have a fiduciary responsibility to the shareholders, they can't just tell an outright lie, and would not risk doing so.

Just because this moron wants to convince himself that he, standing on the outside looking in, has a better knowledge of Apple's financial operations does not make it so!
post #9 of 69
Quote:
Originally Posted by kresh View Post

Oh please.

This guy claims that Apple is flat out lying for stating that the price drop on the Shuffle caused the SLIGHT margin decline because he believes it is the MacBook Air.

What utter hogwash. Apple, and the senior management, have a fiduciary responsibility to the shareholders, they can't just tell an outright lie, and would not risk doing so.

Just because this moron wants to convince himself that he, standing on the outside looking in, has a better knowledge of Apple's financial operations does not make it so!

Fair enough, but tone down the personal insults a bit. I'm pretty sure Gene does not strive to make inaccurate assertions. I think he was asserting that while Apple listed some possible reasons for the margin decline, it may not have listed them all.

Best,

K
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post #10 of 69
Quote:
Originally Posted by JonathanC View Post

But thinness was apparently their only aim.

So, Steve Jobs walked into their offices and said: 'Get me something thin, I don't care about the rest".

(Why do people always have to exaggerate their often valid points to such a degree that they come across as ludicrous?)
post #11 of 69
I find it really hard to believe that Apple's not pocketing at least $900 from an $1800 computer built from half the parts of a circa 2006 consumer laptop.
post #12 of 69
Quote:
Originally Posted by kresh View Post

Oh please.

This guy claims that Apple is flat out lying for stating that the price drop on the Shuffle caused the SLIGHT margin decline because he believes it is the MacBook Air.

What utter hogwash. Apple, and the senior management, have a fiduciary responsibility to the shareholders, they can't just tell an outright lie, and would not risk doing so.

Just because this moron wants to convince himself that he, standing on the outside looking in, has a better knowledge of Apple's financial operations does not make it so!

Munster does have a "holier than thou" attitude that is at best condescending, and for the most part out right boring.

It would be great to have a an organization that did nothing but track who wrong these guys are most of the time. Shaw Wu would be at the top of the "serial incorrect" list. If these guys were doctors, they would be on "Quack Watch".
post #13 of 69
Margins dropped for many reasons, many of which were one time events.

Apple for the first time that they have talked about lower the price in Europe for some of their
products to account for the strong Euro. Before this quarter, they were just making extra money
by keeping the price steady in euros and the euro was getting more and more valuable. When
the euro gains 20-30% in value in a matter of months this is a big deal!

Apple has not recognized earnings from the high margin iphone for models they sold since March
6, when they announced the sdk details. Iphone sales have been strong since then. When they
start recognizing this income again when 2.0 is released, margins will go up again. The deferred
revenue is almost 2 billion dollars from iphone/apple tv...huge...over $2 a share in earnings yet
to be recognized..and this figure is growing dramatically each quarter.

Every product has lower margins when they first introduce it. Once the development costs are fully
amoratized, like it probably has with the macbook and macbook pro, margins will go up, especially
if they can keep the price the same, whih Apple usually does.
post #14 of 69
Quote:
Originally Posted by Cory Bauer View Post

built from half the parts of a circa 2006 consumer laptop.

It's hardly the same parts, but then, you wouldn't be saying that sort of thing if you actually knew what you were talking about.
post #15 of 69
I listened to the entire conference call yesterday, and quite a busload of reasons were given for the low (but higher than predicted) margin:
- lower contribution from Leopard/iLife/iWork sales (nothing makes for better margins than software)
- some components (mainly memory/storage) purchased in 2007 at higher prices than current
- Shuffle price cuts
- international price cuts (mainly for the new MacBook and MacBook Pro) to reflect the USD exchange rate, these are fairly significant (my new Penryn 17" MBP with highres LED screen and 7200 rpm HD is almost 500 EUR / 793 USD cheaper than the previous model (Apple has not adjusted pricing to meet the declining USD for the 6 previous months), also new products (MacBook Air, iPod Touch, TimeCapsule) carry less USD/EUR mark-up than older products, so currency adjustment is already figured in here as well. Far over 40% of Apple's business are outside the US, so these price cuts do effect the margin a lot.
- Almost entire months of March not reflected in iPhone revenue (for units sold after 6th of March)

Now, how an analyst can ignore all these facts (which make good sense) and make up some magic MacBook Air profit problem is beyond me. There is no sustainable evidence to support this statement, a component tear-down would likely reveal that the MBA is pretty much identical in cost to a MacBook, maybe a tiny bit higher. At introduction this was the only 3 lbs ultra-portable notebook with a full sized screen and a full size keyboard on the market. Why would Apple sell a product that has no direct competition with lower profit margins than anything else? This statement is pure speculation and the article does not make one single point to support it.
post #16 of 69
I have to say I'm shocked the stock is up today. I would have expected something more like this.
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post #17 of 69
Quote:
Originally Posted by Cory Bauer View Post

I find it really hard to believe that Apple's not pocketing at least $900 from an $1800 computer built from half the parts of a circa 2006 consumer laptop.

Perhaps that's because you don't understand manufacturing and sales?
post #18 of 69
Quote:
Originally Posted by JonathanC View Post

Except in terms of thickness, it's one of the largest laptops with a 13" screen that you can buy, no? I carry a bag that I've kept two other small notebooks in before. A Macbook Air wouldn't fit, though. I verified that by placing one atop the bag in the local Apple store.

And the border around the screen makes it look cheap.

I'd have bought it if they'd gotten it right, even for the insane current price, possibly. But thinness was apparently their only aim. I think they designed the ad campaign before they designed the product.

No, they did the research & found their market first. Maybe you are looking for a smaller screen but for the market the Air targets I think the design you are looking for will increasingly be satisfied by devices like the iPhone. The ultra portable laptop Apple designed was targeted at CEO types, people who want to carry it to a quick meeting or around the airport. These people don't cary backpacks, they carry binders & briefcases.

I'm tired of people wining that the Air wasn't their cup of tea, get over it. The ultraportable niche is very complex & contains many variety of mini niches inside it. Apple chose the mini niche that makes the m the most money. Maybe they'll come out with more variety in the Air to fit other mini niches but enough with this stupidity about "they missed the mark". They didn't, they hit it right on the head so quit wining already.
post #19 of 69
Quote:
Originally Posted by hezekiahb View Post

No, they did the research & found their market first. Maybe you are looking for a smaller screen but for the market the Air targets I think the design you are looking for will increasingly be satisfied by devices like the iPhone. The ultra portable laptop Apple designed was targeted at CEO types, people who want to carry it to a quick meeting or around the airport. These people don't cary backpacks, they carry binders & briefcases.

I'm tired of people wining that the Air wasn't their cup of tea, get over it. The ultraportable niche is very complex & contains many variety of mini niches inside it. Apple chose the mini niche that makes the m the most money. Maybe they'll come out with more variety in the Air to fit other mini niches but enough with this stupidity about "they missed the mark". They didn't, they hit it right on the head so quit wining already.

I think that this case style has some built-in upgradability. After a while, Apple will eliminate some of that extra edge. It will then look new again, and smaller.
post #20 of 69
Quote:
Originally Posted by walshbj View Post

I have to say I'm shocked the stock is up today. I would have expected something more like this.

Same here. I was ready to buy some more today and benefit from the usual post-conference-call-plummeting... this is highly irritating.
post #21 of 69
Quote:
Originally Posted by hezekiahb View Post

No, they did the research & found their market first. Maybe you are looking for a smaller screen but for the market the Air targets I think the design you are looking for will increasingly be satisfied by devices like the iPhone. The ultra portable laptop Apple designed was targeted at CEO types, people who want to carry it to a quick meeting or around the airport. These people don't cary backpacks, they carry binders & briefcases.

I'm tired of people wining that the Air wasn't their cup of tea, get over it. The ultraportable niche is very complex & contains many variety of mini niches inside it. Apple chose the mini niche that makes the m the most money. Maybe they'll come out with more variety in the Air to fit other mini niches but enough with this stupidity about "they missed the mark". They didn't, they hit it right on the head so quit wining already.

Nicely put which is why the product is selling quite well.
post #22 of 69
Quote:
Originally Posted by kresh View Post

Oh please.

This guy claims that Apple is flat out lying for stating that the price drop on the Shuffle caused the SLIGHT margin decline because he believes it is the MacBook Air.

What utter hogwash. Apple, and the senior management, have a fiduciary responsibility to the shareholders, they can't just tell an outright lie, and would not risk doing so.

Just because this moron wants to convince himself that he, standing on the outside looking in, has a better knowledge of Apple's financial operations does not make it so!

Well said.

Apple offered several explanations as to the decline of margin.

There is no way that the decline was due to the MacBook Air. That thing is so obviously one of Apple's highest margin machines! It's competitively priced relative to PC ultraportables, but that's because the ultraportable market as a whole is a niche market, and mainstream PC manufacturers rely on those niche markets to increase margins. It's like the Mac Pro - is that a low margin machine? No, but it's still cheaper than Dell's workstations because Dell can't afford to lower the margins on those; it's not a high-volume market, Dell uses the high margins on its workstations to subsidise the ultra-thin margins on its cheaper desktops.
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post #23 of 69
Quote:
Originally Posted by dreyfus2 View Post

Same here. I was ready to buy some more today and benefit from the usual post-conference-call-plummeting... this is highly irritating.

I'm sure you'll see another $20-35 dip, at least, some time between now and Christmas. Patience pays!

(by "sure" I mean maybe there's a good chance that might happen, and I suspect it will)
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post #24 of 69
Quote:
Originally Posted by walshbj View Post

I have to say I'm shocked the stock is up today. I would have expected something more like this.

Although the cartoon is boring, it's more or less accurate.

Proud AAPL stock owner.

 

GOA

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GOA

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post #25 of 69
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Originally Posted by teckstud View Post

Maybe often , but certainly not always.
The initial release of a $600 iPhone completely negates your comments. How was that pricing competitive - only to drop $200 in less than 3 months?

If you read my post, I did say often, not always. To say that the iPhone "completely negates" my assertion is a little odd. Rather, I would say it is the exception that proves the rule. Tell me Apple's other big price drops soon after introduction...

I'm just working from casual memory here, but it seems to me they usually (almost always) wait for a revision to bring the prices down. Even then, they often* do not bring the price down, they just upgrade the specs and keep the price. This has led to a lot of wailing on these boards about Apple not offering competitive low end products, but that is a separate discussion...


*Please note, I said "often"
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post #26 of 69
Quote:
Originally Posted by teckstud View Post

Maybe often , but certainly not always.
The initial release of a $600 iPhone completely negates your comments. How was that pricing competitive - only to drop $200 in less than 3 months?

While I thought the quick price drop was a bit soon, pricing a new product steeply and reducing later it is a common practice, although it's often done a little differently. This might be called the "early adopter tax" and it's unfortunately levied by a lot of companies.
post #27 of 69
Quote:
Originally Posted by walshbj View Post

I'm sure you'll see another $20-35 dip, at least, some time between now and Christmas. Patience pays!


No doubt you are probably right. Except that it will be of little use if AAPL is up $50 when that dip comes...
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post #28 of 69
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Originally Posted by JeffDM View Post

None of those brands necessarily make the cheap ultraportables either. A lot of the people begging for a cheap Air either confuse the Air with the EEE & XO, or confuse the Air with the $400 Walmart specials - both of which is completely silly. It seems much of it is driven by an indifference to what makes the Air a completely different class of device, as if it's just too subtle to them.

I agree completely.

I was talking in general about pricing trends, not specifically about the Air. If it is a runaway success, however, you can be sure that all the manufacturers will have thin aluminum computers out there and they will be beating each other over the head with deals, coupons and discounts while Apple stays above the fray...
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post #29 of 69
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Originally Posted by melgross View Post

Perhaps that's because you don't understand manufacturing and sales?

With both the Playstation I and II, when technological advances allowed for it, Sony released far slimmer versions with the same capabilities. Likewise, advances in technology has allowed Apple to make 2006's computer components (processor, motherboard) much smaller. The only difference is, Sony sold their far slimmer Playstations for considerably less than the original bulkier models, while Apple charges twice as much, and removes half the capabilities in the process.
post #30 of 69
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Originally Posted by SpamSandwich View Post

Although the cartoon is boring, it's more or less accurate.

Cut me some slack SpamSammy. Cartoonist is like my 5th career.
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post #31 of 69
Quote:
Originally Posted by walshbj View Post

Cut me some slack SpamSammy. Cartoonist is like my 5th career.

Hope the first 4 careers paid well, cause this one ain't lol .
post #32 of 69
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Originally Posted by drjjones View Post

Hope the first 4 careers paid well, cause this one ain't lol .

I actually had high hopes for my bitstrips characters....
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post #33 of 69
Quote:
Originally Posted by Bageljoey View Post

'Course, it sucks for anyone who wants to buy a cheep super portable by Apple, but it should make the stock holders happy in the long run...

It is difficult to be both a shareholder and a customer at the same time because they have almost completely opposite interests. Customers care about reasonable prices and long term support for the things they purchase. But shareholders only care about bringing in money, fat margins, and high revenue above anything else. If Apple sells something for a reasonable price, it makes prospective customers happy but shareholders start worrying about profit margins. One would almost think that shareholders actually want Apple to price gouge its customers. How many of these guys analyzing Apple stocks even buy a Mac?

As for cannibalization, wasn't it an Apple's executive who said "Better to cannibalize ourselves than for other companies to take our business"?
post #34 of 69
Quote:
Originally Posted by Haggar View Post

It is difficult to be both a shareholder and a customer at the same time because they have almost completely opposite interests...

I know what you mean, but it's never really bothered me. I have a significant aapl position(not hedge fund significant, but a few years of income for some people), and I buy my share of Apple stuff. Some of the stuff is priced a little high, like the big classic and some AppleCare. But the last thing I'd want to see is more discounting than they periodically do now. Things are priced within reason. There's definitely an aapl surcharge on everything from RAM to Time Capsules, which is to be expected.

A big part of the recent success is retail - Apple stores look right at home next to Burberry and Louis Vuitton. Cut prices too much and the stores lose that image.
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post #35 of 69
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Originally Posted by JeffDM View Post

It's hardly the same parts, but then, you wouldn't be saying that sort of thing if you actually knew what you were talking about.

He probably means it's as slow as the same parts from circa 2006.
post #36 of 69
Quote:
Originally Posted by JeffDM View Post

While I thought the quick price drop was a bit soon, pricing a new product steeply and reducing later it is a common practice, although it's often done a little differently. This might be called the "early adopter tax" and it's unfortunately levied by a lot of companies.

"A little differently"?-May I have another example where a product was dropped 1/3rd of it's inititial price in less than 3 months? It was not ony the shortness of the drop but more importantly the amount/percentage of the price reduction itself.
post #37 of 69
I'd like a smaller bezel around the Air, since the keyboard could remain full-size. However:

* I notice I already ALMOST touch the screen when opening and re-adjusting the lid. With a smaller bezel I would be touching it--which I'd rather not be doing.

* A smaller bezel on all 4 sides would make a much smaller machine--and it can't get any smaller--unless they also made it thicker and/or used a brick shape instead of tapered every which way like it is now (which I like a lot). No thanks.

Still, it's bound to happen--eventually. Things do keep shrinking!
post #38 of 69
Quote:
Originally Posted by nagromme View Post

I'd like a smaller bezel around the Air, since the keyboard could remain full-size. However:

* I notice I already ALMOST touch the screen when opening and re-adjusting the lid. With a smaller bezel I would be touching it--which I'd rather not be doing.

* A smaller bezel on all 4 sides would make a much smaller machine--and it can't get any smaller--unless they also made it thicker and/or used a brick shape instead of tapered every which way like it is now (which I like a lot). No thanks.

Still, it's bound to happen--eventually. Things do keep shrinking!

There is stuff that goes into the tapered volume. The antennas, wiring, IR reciever, both wireless modules, latches, ports, camera and even the battery seems to go into the taper a bit. Some But maybe the taper could be a bit steeper.
post #39 of 69
Quote:
Originally Posted by teckstud View Post

He probably means it's as slow as the same parts from circa 2006.

But it's still hardly the same parts. Regular notebook chips of any generation aren't all that special, but the LV chips either seem to need to use a different fab process to make, or be one of a low number of rare chips that's low power enough for the bin. I know some people can't read any more than spec numbers, but it's not that hard.

Maybe Apple is pocketing half the price, but we don't know, but not much else out there that compares. There certainly aren't a whole lot of similar ultraportables that are priced significantly less. There are plenty of them that cost more despite being much slower. The closest comparable model to the Air is the Thinkpad X61s, and it's not much less expensive, about $300 less.
post #40 of 69
Quote:
Originally Posted by Mr. H View Post

Well said.

Apple offered several explanations as to the decline of margin.

There is no way that the decline was due to the MacBook Air. That thing is so obviously one of Apple's highest margin machines! It's competitively priced relative to PC ultraportables, but that's because the ultraportable market as a whole is a niche market, and mainstream PC manufacturers rely on those niche markets to increase margins. It's like the Mac Pro - is that a low margin machine? No, but it's still cheaper than Dell's workstations because Dell can't afford to lower the margins on those; it's not a high-volume market, Dell uses the high margins on its workstations to subsidise the ultra-thin margins on its cheaper desktops.

How is it obvious?
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