Analyst: New products help Apple dodge effect of price hikes
Surges in the prices of displays and memory are expected to hurt Apple's profit margins in the current quarter, but a slew of new devices and well-timed product orders may help the company soften the blow, says a new note from PacificCrest Research.
Researcher Andy Hargreaves warned investors that struggles to match demand with supply in the LCD panel and NAND flash memory display markets was liable to hurt Apple as part manufacturers raised prices to help cool off the quantity and sizes of orders.
Flash in particular was suffering the most from the spike, with the prices for 2GB, 4GB, and 8GB on-the-spot orders jumping by $2.92, $3.29, and $1.71 respectively in July alone. Though they initially appear small, the climbs will have been significant enough to cut Apple's margins on iPods by about 3 percent by the end of the quarter, according to the estimates. Prices are only likely to climb further through at least the current quarter, Hargreaves said, potentially compounding the situation for the Cupertino, Calif.-based electronics giant.
Computer display prices have also seen a hit of between $5 and $11 for every LCD due to a similar shortage, he added. The climb upwards was predicted to reduce the margins on iMacs and MacBooks by as much as 5 percent if display prices continued to rise at their existing rate, especially for the premium screens found in notebooks.
But Apple has likely taken much of this into account, the analyst noted in his report. The company had already factored higher prices for components into its guidance for the summer quarter, suggesting that it had already prepared for the added expense. Apple's 2006 deals with multiple suppliers such as Samsung and Toshiba may have given it a competitive advantage by allowing it to buy in advance or to secure discounts through the sheer volume of orders.
"Given the company's expectations, it is possible that Apple purchased components in bulk ahead of, or in the early stages of, the current price increases," Hargreaves said, "which would minimize the negative gross-margin impact."
The firm may also have hedged its bets with a string of new products that have shipped or will ship in the near future, including the iPhone and new iMacs, a possible new video iPod, and the already scheduled October launch of Mac OS X Leopard. The long-term success of possible subscription-based services and an increase in corporate Mac sales could also lessen short-term concerns, according to the report.
And despite the threat of reduced profits, Apple was described as having a unique amount of resistance to fluctuations in component costs that lets it set prices on its own terms.
"Apple is one of the premier brands in consumer electronics, which, along with its unified user experience, gives the company very strong retail pricing power," Hargreaves noted. "We believe that iPod's ability to maintain unit share of the MP3 [player] market despite premium pricing is evidence of this."
Researcher Andy Hargreaves warned investors that struggles to match demand with supply in the LCD panel and NAND flash memory display markets was liable to hurt Apple as part manufacturers raised prices to help cool off the quantity and sizes of orders.
Flash in particular was suffering the most from the spike, with the prices for 2GB, 4GB, and 8GB on-the-spot orders jumping by $2.92, $3.29, and $1.71 respectively in July alone. Though they initially appear small, the climbs will have been significant enough to cut Apple's margins on iPods by about 3 percent by the end of the quarter, according to the estimates. Prices are only likely to climb further through at least the current quarter, Hargreaves said, potentially compounding the situation for the Cupertino, Calif.-based electronics giant.
Computer display prices have also seen a hit of between $5 and $11 for every LCD due to a similar shortage, he added. The climb upwards was predicted to reduce the margins on iMacs and MacBooks by as much as 5 percent if display prices continued to rise at their existing rate, especially for the premium screens found in notebooks.
But Apple has likely taken much of this into account, the analyst noted in his report. The company had already factored higher prices for components into its guidance for the summer quarter, suggesting that it had already prepared for the added expense. Apple's 2006 deals with multiple suppliers such as Samsung and Toshiba may have given it a competitive advantage by allowing it to buy in advance or to secure discounts through the sheer volume of orders.
"Given the company's expectations, it is possible that Apple purchased components in bulk ahead of, or in the early stages of, the current price increases," Hargreaves said, "which would minimize the negative gross-margin impact."
The firm may also have hedged its bets with a string of new products that have shipped or will ship in the near future, including the iPhone and new iMacs, a possible new video iPod, and the already scheduled October launch of Mac OS X Leopard. The long-term success of possible subscription-based services and an increase in corporate Mac sales could also lessen short-term concerns, according to the report.
And despite the threat of reduced profits, Apple was described as having a unique amount of resistance to fluctuations in component costs that lets it set prices on its own terms.
"Apple is one of the premier brands in consumer electronics, which, along with its unified user experience, gives the company very strong retail pricing power," Hargreaves noted. "We believe that iPod's ability to maintain unit share of the MP3 [player] market despite premium pricing is evidence of this."
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Surges in the prices of displays
Computer display prices have also seen a hit of between $5 and $11 for every LCD due to a similar shortage, he added. The climb upwards was predicted to reduce the margins on iMacs and MacBooks by as much as 5 percent if display prices continued to rise at their existing rate, especially for the premium screens found in notebooks.
Well, well, well, it seems that Apple do take a bit of a hit bundling displays. Now since new products seem to help the situation, some people may be led to believe an ideal solution would be a new product that just possibly doesn't bundle a display. Just when that idea hits home is the question.
There's no worry on the laptop side of course - Apple don't put premium quality displays in them.
And despite the threat of reduced profits, Apple was described as having a unique amount of resistance to fluctuations in component costs that lets it set prices on its own terms.
There's no worry on the laptop side of course - Apple don't put premium quality displays in them.
I'd argue that the notebook displays are of higher quality than the displays in the new iMac... if not backlighting. The high pixel density displays in the notebooks are probably more expensive than the low density ones in the iMac... otherwise both use TN, so that shouldn't be an issue.
/Adrian
It's called - "Premium"
I can buy cola at my grocery store and call it "Coke®", but we both no it's not. Does it fizz? Yes. Does it have that dark black, caramel look to it? Yes. Does it taste like "The Real Thing" - No, both in your mind and in reality.
As a Mac user, I'm not "tied" into anything and you hit the operative words in your post, and that is, ""if you choose". Sure, if I want the Mac OS, I have to buy Apple hardware. But that's like saying I want a Corvette but Chevrolet has me tied to a V8 motor when I prefer an envrionmentally better V-4 engine! There's no smoke and mirrors in either case about what you are getting into unless you are doing so with your eyes shut.
That's pretty unique but not a commendable quality.
I prefer the hand craftsmanship interior of a Rolls Royce, but I can't go to my local Dodge dealership and pick out a 'Charger' and expect to find the same thing. If I want my Rolls-Royce luxury interior, I'll have to buy a Rolls-Royce!
And it's not that unique... If I want wider seats and more space on an airline, I'll go first class, otherwise, I'm tied into traveling coach. If I want to be served by a waiter in a tuxedo, I'll dine at a five star restaraunt, otherwise, I'll be tied into seeing a name-tag on a sportshirt by a guy wearing a paper hat or ball cap when I dine fast food... I could go on. It's not about a commendable quality. It's what the customer desires and is willing to pay. I'm not rich, so forget box seats, I'm tied to sitting on the bleachers. But I'm not that poor that if I want a top of the line Power Mac or iMac so I can use the Mac OS, I can save and pay in full or put on credit card and make the monthly payments just like I do for other monthly expeditures like car payment, house payment, etc.
It's called - "Premium"
But that's like saying I want a Corvette but Chevrolet has me tied to a V8 motor when I prefer an envrionmentally better V-4 engine! There's no smoke and mirrors in either case about what you are getting into unless you are doing so with your eyes shut.
Vette's routinely get over 30 mpg, but for the rest of the lineup of GM cars, that is another story...
I want a Corvette but Chevrolet has me tied to a V8 motor when I prefer an environmentally better V-4 engine!
I don't think you deserve a vette if you want a V4 engine in it.
We choose to use the 'system' because as a whole it's more useful which is both unique and commendable in a market of mediocrity. What brainwashed fool would separate hardware and software when they're both so interdependent?
McD
I thought Apple had secured a multi-year deal with a prominent flash memory supplier. These price increases and shortages should have no effect on Apple.
Multi year deal does not mean no price increases. That's a negotiation - you can easily see how a deal could be structured to guarantee supply to Apple before any other customer, and even at a certain price relative to the market price, but only a fool would, at the moment of greatest pain, sign a 2 year deal to sell their commodity fixed at the cheapest price of the cycle. Flash makers have been here before, it's a boom/bust cycle, and I'm sure that they foresaw that the oversupply would eventually switch to under.
Commendable, definitely
High prices? Apple doesn't make the mistake of selling price over feature. That only forces the maker to cut costs elsewhere and run on slim budgets. Unlike other PC makers that buy boxes & components off-the-shelf, Apple designs all of their products to their specs and design standards. Putting a fancy faceplate on a generic IBM AT box isn't big budget industrial design. Making a notebook computer that is less than 1" thick and keeps all of its components (Sony marketed a VIAO which they claimed was less than 1" thick, but that was after undocking (removing) the optical drive), makes for higher cost to precisely fit each component and creatively manage heat transfer so that it doesn't meltdown.
The fallacy that Apple locks customers into iTunes-iPod is incorrect. All DRM audio files limit the user's ability to freely choose their player of choice. This makes sense since digital downloads are less than 5% of the music retail market. Portable DRM would be too easy to circumvent and difficult to fix. The "locked in" DRM model permits the software to be updated when an exploit becomes public, which is what the record labels favor. Afterall, their contracts with Real, Apple, microsoft & others allow the music label to pull their music from these online retailers if they cannot fix a DRM exploit within a short period of time.
Any MP3 file can be added to an iTunes library
Any MP3 file can be played on an iPod
MP3 is a popular audio file format
WMV is a proprietary microsoft file format, which, like all of microsoft's software, it designed to lock consumers into a microsoft only environment
The Mac Mini, recently refreshed and upgraded, is not bundled with a display. it never has. Though using a second rate PC monitor won't enhance the Mac user experience at all
Cheers!
Well, well, well, it seems that Apple do take a bit of a hit bundling displays. Now since new products seem to help the situation, some people may be led to believe an ideal solution would be a new product that just possibly doesn't bundle a display. Just when that idea hits home is the question.
There's no worry on the laptop side of course - Apple don't put premium quality displays in them.
The fallacy that Apple locks customers into iTunes-iPod is incorrect. All DRM audio files limit the user's ability to freely choose their player of choice.
So your explanation on why it's a fallacy is that everyone else does it too? Lock-in is lock-in, regardless of whether everyone else does it or not. Maybe there's a fallacy in saying that only Apple does it, but I don't remember anyone saying that Apple is the sole perpetrator.
At least iTunes DRM is among the weakest, but if you decide to jump ship with a lot of bought tracks, it's still tedious to convert it.
This makes sense since digital downloads are less than 5% of the music retail market. Portable DRM would be too easy to circumvent and difficult to fix.
Audio DRM can never truly be fixed.