A look inside the iPod nano and Apple's margins

Posted:
in iPod + iTunes + AppleTV edited January 2014
A recent take-apart analysis of the new iPod nano by market research firm iSuppli reveals that Apple's profit margins on the tiny flash memory-based player are consistent with the margins on earlier iPod versions.



According to a writeup of the iSuppli analysis on BusinessWeek, the $199 2GB iPod nano costs Apple $90.18 in materials and $8 to assemble, leaving a profit margin before marketing and distribution costs of about 50%.



These figures show Apple makes slightly more on each iPod than it does on other products. A similar Mac Mini teardown by iSuppli found the cost of material and manufacturing for the computer to be about $283, leaving a gross margin of 44% before marketing and distribution costs.



Research done by iSuppli also answers some other burning questions about the nano, such as who is supplying Apple with the primary components. The firm found that Synaptics has lost out to an Apple-branded click-wheel, which uses a 55-cent chip from San Jose, Calif.-based Cypress Semiconductor.



The Cypress chip appears to save Apple about 45 cents on a comparable Synaptics chip, which costs about $1, David Carey, president of Portelligent research firm, told BusinessWeek.



Despite tapping SigmaTel to supply the audio chips for its iPod shuffle player earlier this year, Apple has returned to its longtime supplier PortalPlayer with the iPod nano, said iSuppli. The move is expected to increase PortalPlayer's reliance on Apple, which already accounts for about 90% of its total revenue.



Based on reports that Apple has secured 40% of Samsung's NAND flash memory output for the rest of the year -- and at substantial discount -- iSuppli estimates that Apple is paying only about $27 per gigabyte. The report states that other manufacturers are paying nearly twice as much, giving Apple a 40% discount and advantage.



"The arrangement not only makes it tough for other manufacturers to compete on price but will also cause them huge supply headaches, since Samsung is the world's biggest flash memory vendor," writes BusinessWeek.



"How do you compete if you can't get the memory you need?" an iSuppli analyst added. "And even if you can get it, you're not able to sell the volume needed to negotiate a better price."

Comments

  • Reply 1 of 19
    Product costs are not only related to components and assembling. There is a large design/engineering cost, software development cost, integration, etc... Take those into account, so Apple does not really make 50% profit on each iPod it sells.
  • Reply 2 of 19
    Agreed; this is a very misleading report on cost. How many engineers did they have working on this product for 9 months to a year at 6 figure salaries? How do you figure in the tens of millions Apple will spend to promote the device? Distribution and warehousing while a small cost probably adds $5-$10 per device. All these little things add up over time.



    Oh and the winds are already picking up quite nicely, though Rita looks to give us just a glancing blow tomorrow night.
  • Reply 3 of 19




    Google "sunk costs definition" or "fixed costs definition"

    Take 4 courses in economics (as I did even though I am a civil engineer) and just maybe you will learn something, it's called common business practice.



    Although you would be correct IF we were talking about gross margins or profitability per business cycle (either quarterly or annually), but that is NOT what the article is referring to.



  • Reply 4 of 19
    a_greera_greer Posts: 4,594member
    Quote:

    Originally posted by podendo

    Product costs are not only related to components and assembling. There is a large design/engineering cost, software development cost, integration, etc... Take those into account, so Apple does not really make 50% profit on each iPod it sells.



    True, same with the intel $40 cpu thing, sure that is what it costs to make the chip, if you ignore the costs of R&D, and building the multi-billion dollar fabs...not to mention worker pay and health benifits.
  • Reply 5 of 19
    The article isn't really what I'm attacking; I ended up putting the cart before the horse. Inevitably people will be quoting this and saying "Apple builds the nano for $90, what a rip off those thieves." Just like they ended up doing with the iSupply article re the mini. Having now read this article they aren't doing this, but give it time.



    Just like when I was a kid I heard the rumor that it cost Nintendo $4 to build each cartridge; I'm sure that's probably about accurate for manufacturing, but doubtful that's what the actual game cost to produce. But of course that's not the story I was given as a kid.
  • Reply 6 of 19
    melgrossmelgross Posts: 31,391member
    The actual profit after all costs including taxes is more in the line of 10-15%. That is a good return.



    Remember that Apple's margins are about 30% overall.



    When we priced a product at my company, it was called "cost plus pricing". That's the way most manufacturers other than small boutique companies price their hardware.



    Software is another thing entirely. Profit from that could come to 70% if distribution and manufacturing is given over to the OEM as MS does with the computer manufacturers.
  • Reply 7 of 19
    Quote:

    How do you compete if you can't get the memory you need?" an iSuppli analyst added. "And even if you can get it, you're not able to sell the volume needed to negotiate a better price.



    I smell a lawsuit in the air. I'm not a laywer, but I'm sure they'll find some reason to sue. "It's not fair! "
  • Reply 8 of 19
    samsung by hooking up with apple virtually assured that they would not be stuck with flash memory overcapacity since they knew apple would make something that would MOVE those flash chips en masse... now apple+samsung are TOO successful *sigh* so other manufacturers are screwed because now they cant get enough cost-effective memory chips... weird huh... funny thing is, i don't remember many people going out to bat for apple when apple Macs were on this side of the equation (and still are - freescale doesn't think apple is a priority as we can see, and as the CEO himself has alluded to...)
  • Reply 9 of 19
    melgrossmelgross Posts: 31,391member
    Quote:

    Originally posted by DeaPeaJay

    I smell a lawsuit in the air. I'm not a laywer, but I'm sure they'll find some reason to sue. "It's not fair! "



    No, this is normal business practice.



    When I negotiated prices for my companies one of the biggest factors was; "how many". If you look in any electronics parts catalog you'll see that prices fall dramatically almost in an inverse pattern depending on volume. Volume is the "secret word".
  • Reply 10 of 19
    telomartelomar Posts: 1,804member
    Quote:

    Originally posted by DeaPeaJay

    I smell a lawsuit in the air. I'm not a laywer, but I'm sure they'll find some reason to sue. "It's not fair! "



    It's only not fair if you offer two different prices to two different companies for the same volumes. This is one of the things Microsoft used to do.
  • Reply 11 of 19
    jeffdmjeffdm Posts: 12,946member
    Quote:

    Originally posted by a_greer

    True, same with the intel $40 cpu thing, sure that is what it costs to make the chip, if you ignore the costs of R&D, and building the multi-billion dollar fabs...not to mention worker pay and health benifits.



    There is that, and I think there is a slight of hand when that article gave those stats.



    "Though Pentium 4s can sell for up to $637, Intel's average cost for making a chip comes to $40." Comparing the average manufacture price to the peak sell price nets no useful or informative comparison.



    Notice that they didn't say that the average cost to make a P4 is $40. Intel makes a lot of other types of chips too, graphics, I/O, some types of memory and such.
  • Reply 12 of 19
    I think is sad that other companies will not have a fair chance. If it was really fair samsung would sell their flash to other mp3 companies at the same price no matter how much they ordered, then you could call it fair. (but of course that would never happen).
  • Reply 13 of 19
    melgrossmelgross Posts: 31,391member
    Quote:

    Originally posted by Glamingo

    I think is sad that other companies will not have a fair chance. If it was really fair samsung would sell their flash to other mp3 companies at the same price no matter how much they ordered, then you could call it fair. (but of course that would never happen).



    That wouldn't be fair. The way it's done now is fair. It's all down to profit, without which we would still be back in the stone age.



    EVERY business model works this way. You buy more, you get a break. I'm sure that you have taken advantage of that as well.



    This works out well for the vendor. It's simply cheaper to sell one customer more of a product than it is to sell many customers the same total amount. Sales costs, bookkeeping costs. Inventory costs. Shipping costs. I could go on.



    There is also the cost savings involved in knowing where your product is going over a period of time. This way you can rationalize your manufacturing lines. Your own purchasing can then take advantage of lower costs for the above reasons from your vendors, and on down the line.



    The truth is that every other manufacturer together couldn't use as many chips as Apple is buying.



    Creative could have made the same deal Apple made before Apple made it. But it wouldn't have helped. Then Creative would owe a huge debt to Samsung, and probably go out of business. Ta ta!



    Only Apple will use all of the chips it has bought (most likely with an option to buy more at the same or even lower pricing).



    Samsung simply makes more profit (plus the other advantages mentioned) selling at this low price to Apple than selling at full price to anyone else. Apple, with its huge sales of products using these chips could have also gone calling to Hitatchi, or Toshiba (whose chips are also turning up in the product).
  • Reply 14 of 19
    hmm... creative might have done it but yeah, it would be a big gamble for creative and samsung might not have wanted to sell it to them, because samsung flashRAM execs probably have much more faith in Apple being able to move those 2gb modules as opposed to creative's poorer track record. plus samsung brand value increase off apple's halo might be better compared to creative...
  • Reply 15 of 19
    telomartelomar Posts: 1,804member
    Quote:

    Originally posted by melgross

    ... or Toshiba (whose chips are also turning up in the product).



    I have a suspicion that was because Samsung simply didn't have their line ready in time and Apple needed more than they could provide for initial orders. I'd expect that'll change.
  • Reply 16 of 19
    melgrossmelgross Posts: 31,391member
    Quote:

    Originally posted by Telomar

    I have a suspicion that was because Samsung simply didn't have their line ready in time and Apple needed more than they could provide for initial orders. I'd expect that'll change.



    It could be. I mentioned it because it shows that these deals aren't always exclusive.
  • Reply 17 of 19
    louzerlouzer Posts: 1,054member
    Quote:

    Originally posted by melgross

    That wouldn't be fair. The way it's done now is fair. It's all down to profit, without which we would still be back in the stone age.



    EVERY business model works this way. You buy more, you get a break. I'm sure that you have taken advantage of that as well.



    This works out well for the vendor. It's simply cheaper to sell one customer more of a product than it is to sell many customers the same total amount. Sales costs, bookkeeping costs. Inventory costs. Shipping costs. I could go on.





    This is how Wal-Mart has driven out competitors from its markets. It initially used its ability to order large amounts of products to get a lower price on a product, then charge less to its customers. Everyone wins! Well, everyone except the smaller business who can't even get the product for what Wal-mart SELLS it for, who then finds himself out of business.



    Of course, Wal-Mart changed later on, basically using their enormity to force manufacturers to offer them deep discounts (or else they won't sell the product, and then you're kind of screwed). Or going overseas to get some Chinese company to build them $50 DVD players for $2 apiece.



    But back to the Apple/Samsung deal. First, this isn't fact, its assumed. Second, another poster had it right. Its good business for Samsung, since they're able to know before manufacture that they'll have a market for their product, not just producing a boat-load of these chips and hoping someone will buy them.
  • Reply 18 of 19
    melgrossmelgross Posts: 31,391member
    Quote:

    Originally posted by Louzer

    This is how Wal-Mart has driven out competitors from its markets. It initially used its ability to order large amounts of products to get a lower price on a product, then charge less to its customers. Everyone wins! Well, everyone except the smaller business who can't even get the product for what Wal-mart SELLS it for, who then finds himself out of business.



    Of course, Wal-Mart changed later on, basically using their enormity to force manufacturers to offer them deep discounts (or else they won't sell the product, and then you're kind of screwed). Or going overseas to get some Chinese company to build them $50 DVD players for $2 apiece.



    But back to the Apple/Samsung deal. First, this isn't fact, its assumed. Second, another poster had it right. Its good business for Samsung, since they're able to know before manufacture that they'll have a market for their product, not just producing a boat-load of these chips and hoping someone will buy them.




    Right, I said that in the latter part of my post.
  • Reply 19 of 19
    placeboplacebo Posts: 5,767member
    This is obscene, considering how many problems they have. Heck, it's obscene even if they were perfect.
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