Storage increases in iPhone XS offers high profits to Apple with minimal production cost
The iPhone XS and XS Max stand to offer Apple considerable profits just from memory upgrade alone, with Bloomberg attacking the iPhone's relatively high price to increase its storage capacity compared to how much the components used actually cost.
The introduction of 512-gigabyte options in the Phone XS and iPhone XS Max, far above the 256 gigabytes offered in the largest-capacity iPhone X, arrives with relatively high charges for the upgrade. According to Bloomberg, the price difference translates to an extra $134 in profit per iPhone sold with 512 gigabytes of storage compared to the smallest 64-gigabyte option.
It is also claimed the $134 profit difference has increased from 2017's releases, where the revenue change between the smallest and highest-capacity iPhone X models was $107.
"Storage is one of their levers to create more revenue and is absolutely the most profitable iPhone feature," IHS Markit researcher Wayne Lam advised. There is no additional work for Apple to perform to increase the capacity, Lam reasons, because it is simply a chip swap, "whereas when you increase the screen size, you have to completely re-engineer the phone."
Lam suggests Apple pays approximately 25 cents per gigabyte, but charges consumers approximately 78 cents. The profit increase is largely due to the bigger memory capacity option, which to consumers represents a $350 jump in price between lowest and highest-capacity models, but to Apple is an alleged memory cost difference of between $23.69 and $132.48.
Aside from failing to offer consumers some level of per-gigabyte discount by opting for the higher capacity, price savings in Nand flash memory chips are apparently not being passed to consumers, despite the market price apparently down to half of the cost from 2017. It is suggested that Apple's contracts to "lock-in" the price of components from suppliers may in fact be working against the company in this case, as it may still be paying at older, higher rates for memory when it could be sourced for far cheaper.
It is also posited that owners of larger-capacity devices offer other revenue sources to Apple, due to the ability to put more music, videos, and apps onto their handsets. It is claimed an owner of a 512GB iPhone XS Max could spend at least $40 a month more to Apple for an iCloud subscription for backups, Apple Music, and buying one iTunes movie per month.
Reports that rely on BOM (bill of materials) estimates should generally be taken with caution, as they are purely estimates based on the market value of components used inside devices by analysts and think tanks, rather than an actual price list for parts, There are many reasons why the component prices can vary, including economies of scale, manufacturing challenges, scarcity of required materials, and even the contract between the supplier and Apple itself.
The BOMs also typically do not take into account other costs, including assembly and the initial research and development of the hardware by Apple itself.
Short of Apple itself confirming how much it costs to produce each iPhone -- a figure that will never be supplied by the company -- no-one outside the company will ultimately know the exact figure.
The introduction of 512-gigabyte options in the Phone XS and iPhone XS Max, far above the 256 gigabytes offered in the largest-capacity iPhone X, arrives with relatively high charges for the upgrade. According to Bloomberg, the price difference translates to an extra $134 in profit per iPhone sold with 512 gigabytes of storage compared to the smallest 64-gigabyte option.
It is also claimed the $134 profit difference has increased from 2017's releases, where the revenue change between the smallest and highest-capacity iPhone X models was $107.
"Storage is one of their levers to create more revenue and is absolutely the most profitable iPhone feature," IHS Markit researcher Wayne Lam advised. There is no additional work for Apple to perform to increase the capacity, Lam reasons, because it is simply a chip swap, "whereas when you increase the screen size, you have to completely re-engineer the phone."
Lam suggests Apple pays approximately 25 cents per gigabyte, but charges consumers approximately 78 cents. The profit increase is largely due to the bigger memory capacity option, which to consumers represents a $350 jump in price between lowest and highest-capacity models, but to Apple is an alleged memory cost difference of between $23.69 and $132.48.
Aside from failing to offer consumers some level of per-gigabyte discount by opting for the higher capacity, price savings in Nand flash memory chips are apparently not being passed to consumers, despite the market price apparently down to half of the cost from 2017. It is suggested that Apple's contracts to "lock-in" the price of components from suppliers may in fact be working against the company in this case, as it may still be paying at older, higher rates for memory when it could be sourced for far cheaper.
It is also posited that owners of larger-capacity devices offer other revenue sources to Apple, due to the ability to put more music, videos, and apps onto their handsets. It is claimed an owner of a 512GB iPhone XS Max could spend at least $40 a month more to Apple for an iCloud subscription for backups, Apple Music, and buying one iTunes movie per month.
Reports that rely on BOM (bill of materials) estimates should generally be taken with caution, as they are purely estimates based on the market value of components used inside devices by analysts and think tanks, rather than an actual price list for parts, There are many reasons why the component prices can vary, including economies of scale, manufacturing challenges, scarcity of required materials, and even the contract between the supplier and Apple itself.
The BOMs also typically do not take into account other costs, including assembly and the initial research and development of the hardware by Apple itself.
Short of Apple itself confirming how much it costs to produce each iPhone -- a figure that will never be supplied by the company -- no-one outside the company will ultimately know the exact figure.
Comments
I wonder how many 512GB models they'll sell?
As far as the memory tiers are concerned, we really don’t know why Apple chose not to offer a 128 GB option. It could be a hardware architecture constraint, supplier cost factor, or simply a marketing decision. I do know from personal experience that the availability and cost of memory components does not always follow an intuitive pattern where larger capability parts cost more. There are often other constraints such as wafer yield, demand from other buyers, production equipment provisioning, etc., that result in lower capacity parts costing more than higher capacity parts. Only Apple knows for sure.
This could also be a marketing and product mix decision by Apple. Despite the fact that Bloomberg and many other “experts” have been providing free unsolicited advice to Apple nonstop and on just about every front, Apple does seem to be barely squeaking by and somehow managing to stay afloat while flouting the superior expertise of outsiders. Maybe they are just lucky, or maybe they actually know what they are doing. Imagine that.
And could you image the backlash if people found out the 64GB actually had 128GB of storage but was artificially limited? Holy cow. You would definitely need to get the popcorn ready.
Wouldn't this be the opposite? Those with who subscribe to iCloud storage and Apple Music can more easily opt for the smaller capacity devices, since you don't need everything on device. Those with 512GB I would think wouldn't be streaming, and more likely own the music and videos they store on it.
I'm pretty sure Apple has great market feel. Maybe you are the one out of touch with their market.
Some people want expandable storage. A lot do not care, or prefer onboard storage.
True, it’s a nothing burger of a AI article, but I’m not sure if the “failing to offer” customers a discount on cheaper NAND prices is color from Mr Owen (AI ariticle author) or was part of the financial analyst’s comments. The analyst’s comments had an interesting counter to the notion by saying that Apple hasn’t taken advantage of cheaper NAND pricing as they may have fixed NAND prices from long term multi year contracts with suppliers, and can’t take advantage of cheaper NAND prices just yet.
I wouldn’t say Apple’s profits come from storage tier pricing. Their profits come from making a great wholistic product first and foremost. The price tiers for different screen sizes, different storage sizes, and old vs new phones are just great ways to segment the product line to generate upsell and to offer clear choices for customers. This enables easier decisions for customers, cheaper costs for producing a product, etc. Ie, good business practice.
Also, the retail stores and service is big deal for mass market consumers, especially complicated tech products.
"Greed, for lack of a better term, is good"!
You could say that capitalism is alive and well in Cupertino.