Apple iPhone Gross Margins Will Approach 50 Percent

Ace Pace · Post by **Ace Pace** » 2007-01-18 03:28pm

Apple was laughing all the way to the bank during Q4 2006 when it enjoyed brisk holiday sales. The company saw its profits jump 78 percent from Q4 2005 and saw its iPod shipments grow 50 percent to 21 million. iPod sales alone accounted for $3.43 billion of Apple's $6.42 billion revenue for the quarter.

Apple may have an even better Q3 and Q4 once its iPhone is released in June of this year. According to iSuppli Corp., Apple will maintain nearly a 50 percent gross margin with the iPhone according to Bill of Materials (BoM) estimates.

The 4GB iPhone, which will retail for $499 with a 2-year contract, has estimated hardware and manufacturing costs of $245.83. The $599 8GB iPhone (with 2-year contract) has estimated manufacturing and hardware costs of $280.83. This results in gross margins of $49.3% and 46.9% respectively.

"With a 50 percent gross margin, Apple is setting itself up for aggressive price declines going forward," said Jagdish Rebello of iSuppli.

iSuppli notes that these figures are preliminary and that it may revise the estimates once a physical teardown of the actual devices are performed. The company does note, however, that gross margins in excess of 45% have been documented in the past for other Apple products including the iMac and iPod Nano.

RThurmont · Post by **RThurmont** » 2007-01-18 04:05pm

So what? Most commercial packaged software has gross margins in the 98% range, and downloaded commercial software is obviously an even more profitable proposition. I estimate that the gross margin on replacement iPod headphones is easily 70% or better ($29.95 for something that airlines, with their notoriously poor ticket margins [and therefore incentive to seek huge gross margins on add-ons like headphones] sell for at most, $5.00.

Praxis · Post by **Praxis** » 2007-01-18 04:26pm

To be honest I have a hard time believing that, comparing it to specs of other $599 PocketPC phones out there (the $579 w/Cingular contract iPaq, for example). Unless you're going to tell me that PocketPCs are marked up 400% or more.

How could Apple possibly make a device with a bigger screen and better hardware specifications than everyone else, and build it for a lower price?

If it is true, though, Apple'll be rolling in the money.

Xisiqomelir · Post by **Xisiqomelir** » 2007-01-18 05:42pm

Praxis wrote:How could Apple possibly make a device with a bigger screen and better hardware specifications than everyone else, and build it for a lower price?

Post by **Mr Bean** » 2007-01-18 06:01pm

Xisiqomelir wrote:
Praxis wrote:How could Apple possibly make a device with a bigger screen and better hardware specifications than everyone else, and build it for a lower price?

Ahh... so Apple has kidnapped Santa's elves and is forcing them to make high end electronics all year round, those poor people. It all makes sense now!

Or I think Xisiqomelir was saying that Apple was outsourcing it's workforce to very poor, but highly skilled workers and paying them tiny amounts of money.

RThurmont · Post by **RThurmont** » 2007-01-19 01:45am

If it is true, though, Apple'll be rolling in the money.

I'm sure that the gross margins on many of their other products are just as good, if not better. In particular, they're easily pulling 98% margins or better on software like iWork, Aperture, Logic Pro, and OS X. And of course, iTunes is likely quite profitable.

Ace Pace · Post by **Ace Pace** » 2007-01-19 02:23am

Praxis wrote:To be honest I have a hard time believing that, comparing it to specs of other $599 PocketPC phones out there (the $579 w/Cingular contract iPaq, for example). Unless you're going to tell me that PocketPCs are marked up 400% or more.

How could Apple possibly make a device with a bigger screen and better hardware specifications than everyone else, and build it for a lower price?

If it is true, though, Apple'll be rolling in the money.

Gross margins, not straight profit.

RThurmont · Post by **RThurmont** » 2007-01-19 03:44am

Well Ace, Gross margins don't hurt the bottom line at all. If you don't believe me, take a look at the airline industry...

Post by **Darth Wong** » 2007-01-19 04:34am

It's funny to think of how people were forecasting doom and gloom for Apple just a few years ago. Stephen Jarislowsky wrote in his book "The Investment Zoo" about formerly strong tech companies that underwent virtual meltdown, and gave Apple as one of his examples.

Mind you, before crowing at Mr. Jarislowsky's lack of prescience, one should note that he's a billionaire, and he does know what he's doing in general.

Netko · Post by **Netko** » 2007-01-19 05:13am

Its not difficult to see why he would make that prediction. A couple of years back Apple was a solely computer maker that had different PCs then the majority, but whose architecture (PPC) was slower then x86 PCs of the time and far more expensive since Apple was the one paying the costs of PPC development in the PC sector (IBM was interested more in server applications, while Motorola was acting pretty mercenary in the deal). If they didn't get something new and radical they would have died relatively soon when even the Apple dieharts realized that they are getting far less bang for the buck then on Wintel machines.

Then, however, the iPod and iTunes happened which saved the company, while the Mac Intel transition saved the computer buisness. Both of those were pretty radical shifts, and as such hard to predict. Good on Jobs and the team on making them.

Crown · Post by **Crown** » 2007-01-19 12:27pm

Fuck. It's not enough. I want the iEverything. A phone, an iPod, a PDA and a digital camera.

No I'm not joking, as someone who has traveled nearly all of Europe, I would have KILLED for this.

So now I still need my digital camera ... I can live with this ... I guess ...

Bounty · Post by **Bounty** » 2007-01-19 12:31pm

Fuck. It's not enough. I want the iEverything. A phone, an iPod, a PDA and a digital camera.

The iPhone already has everything.

Crown · Post by **Crown** » 2007-01-19 12:35pm

Bounty wrote:
Fuck. It's not enough. I want the iEverything. A phone, an iPod, a PDA and a digital camera.
The iPhone already has everything.

*snerf*

Tim · Post by **Tim** » 2007-01-19 02:04pm

Crown wrote:Fuck. It's not enough. I want the iEverything. A phone, an iPod, a PDA and a digital camera.

It's got the potential to be that iEverything. The camera's only 2MP, but we don't know the quality of the camera. Nokia's N70, I hear, takes pretty respectable pictures for being 2MP.

It seems to cover most of a PDA's functions, except for opening *.txt or *.doc files. Of course, it all depends on how that virtual keyboard suits you.

What are the chances of Apple releasing a word processor type program for iPhone?

Xisiqomelir · Post by **Xisiqomelir** » 2007-01-19 02:16pm

Darth Wong wrote:It's funny to think of how people were forecasting doom and gloom for Apple just a few years ago.

As a long-term zealot, I remember having seen this kind of nonsense in the tech rags ever since the 80s.

They started keeping track of the really stupid ones in 1995.

Mobius · Post by **Mobius** » 2007-01-19 04:41pm

Tim wrote: It seems to cover most of a PDA's functions, except for opening *.txt or *.doc files. Of course, it all depends on how that virtual keyboard suits you.

What are the chances of Apple releasing a word processor type program for iPhone?

i want Excel and Powerpoint support too (not to mention 3G support for Euroland) and third parties app if the iPhone should ever replace my E61

phongn · Post by **phongn** » 2007-01-19 07:38pm

Darth Wong wrote:Mind you, before crowing at Mr. Jarislowsky's lack of prescience, one should note that he's a billionaire, and he does know what he's doing in general.

Well, before Apple bought Next and returned Steve Jobs to CEO, Apple has suffered from a decade of disasterous management. If not for Jobs - something I think nobody could have predicted - I wouldn't have found it surprising at all if the company had gone under.

Durandal · Post by **Durandal** » 2007-01-22 12:15am

So let me get this straight. They don't have one, but they're willing to make projections as to the cost of a device whose CPU was unknown until a couple of days ago, has generated over 200 new patents, took 2 1/2 years of R&D (during which the engineers involved probably worked titanic hours), undoubtedly makes copious use of custom silicon? That's to say nothing of all the effort required to strip down Mac OS X and port it to this new architecture. Does anyone really think that all those nifty animations and AI come cheap?

Durandal · Post by **Durandal** » 2007-01-22 12:30am

Then, however, the iPod and iTunes happened which saved the company, while the Mac Intel transition saved the computer buisness. Both of those were pretty radical shifts, and as such hard to predict. Good on Jobs and the team on making them.

No, the iMac takes that credit. The iPod and iTunes catapulted Apple into its current success, but the company was far from dying. Generally, companies with several billion dollars in the bank aren't considered "dying". Apple's just special that way in that they've been dying for 20 years or so.

RThurmont · Post by **RThurmont** » 2007-01-22 02:42am

No, the iMac takes that credit. The iPod and iTunes catapulted Apple into its current success, but the company was far from dying. Generally, companies with several billion dollars in the bank aren't considered "dying". Apple's just special that way in that they've been dying for 20 years or so.

The iMac did indeed contribute to Apple's recovery, in that it got people interested in the Mac again, but I'm not sure if I'd buy the hypothesis that without the iPod Apple would be just fine today. Without the iPod, I suspect they would have been merger-fodder, and we would probably be reading every day in the WSJ about prospective Apple suitors attempting to woo Steve Jobs. Apple's Macs were, and still are, a niche product, and the iMac merely helped Apple to stabilize its marketshare and stop the continuing defections to Windows-based PCs (which, at the time of the iMac's initial unveiling, were superior in a number of respects).

The iMac was interesting, though, in that it was effective almost exclusively because of its industrial design. Unlike the iPod, there was no revolutionary interaction design, and the iMac continued to use the rather dour OS 9, which Apple had been trying to get rid of since the early 90s.

So let me get this straight. They don't have one, but they're willing to make projections as to the cost of a device whose CPU was unknown until a couple of days ago, has generated over 200 new patents, took 2 1/2 years of R&D (during which the engineers involved probably worked titanic hours), undoubtedly makes copious use of custom silicon? That's to say nothing of all the effort required to strip down Mac OS X and port it to this new architecture. Does anyone really think that all those nifty animations and AI come cheap?

You make the mistake of confusing fixed costs with marginal costs. The fixed costs, or sunken costs, are what Apple has spent developing the iPhone, whereas this article addresses the marginal costs of actually making the iPhone. It is possible, theoretically, to get a rough estimate of the price of someone else's device if you know the cost of the components (there will of course be some volume discounting that you have to guesstimate into your figures), and that's what this is. The fixed costs, are, at the end of the day, irrelevant, and I hate it when people attempt to use the argument that companies need to recoup fixed costs to justify exorbitant pricing.

Durandal · Post by **Durandal** » 2007-01-22 03:39am

RThurmont wrote:The iMac did indeed contribute to Apple's recovery, in that it got people interested in the Mac again, but I'm not sure if I'd buy the hypothesis that without the iPod Apple would be just fine today. Without the iPod, I suspect they would have been merger-fodder, and we would probably be reading every day in the WSJ about prospective Apple suitors attempting to woo Steve Jobs. Apple's Macs were, and still are, a niche product, and the iMac merely helped Apple to stabilize its marketshare and stop the continuing defections to Windows-based PCs (which, at the time of the iMac's initial unveiling, were superior in a number of respects).

It wasn't just the iMac. It was the introduction of a completely different product design philosophy, the initial result of which was the original iMac. Apple computers were slimmed down to 4 lines: iMac, iBook, PowerMac, PowerBook. No one product saved Apple.

You make the mistake of confusing fixed costs with marginal costs. The fixed costs, or sunken costs, are what Apple has spent developing the iPhone, whereas this article addresses the marginal costs of actually making the iPhone. It is possible, theoretically, to get a rough estimate of the price of someone else's device if you know the cost of the components (there will of course be some volume discounting that you have to guesstimate into your figures), and that's what this is. The fixed costs, are, at the end of the day, irrelevant, and I hate it when people attempt to use the argument that companies need to recoup fixed costs to justify exorbitant pricing.

And over 2 1/2 years, those costs can mount up to a lot. The big controversy here is over whether Apple is taking customers for a ride with a supposed 50% markup. Well they have to recover those sunken costs like anyone else, and this is new technology. Same thing happened with the iPod.

Aside from that, they don't know the components. They didn't know what the CPU was, they don't know how much RAM it has, they don't know if there's custom hardware handling the OpenGL implementation, etc ...

This just reeks of targeting Apple for publicity, which seems to have been happening a lot lately.

Ypoknons · Post by **Ypoknons** » 2007-01-22 01:17pm

I think I see people trying to take this one of two ways:

1) OMG Apple ripozx off our cash, or
2) $$$$!!! (analysts)

Praxis · Post by **Praxis** » 2007-01-22 08:15pm

It wasn't the iMac; it wasn't the iPod. If there was one thing that 'saved' Apple, it was Steve Jobs. The iMac and iPod are just derivatives of Steve-o's return. Slimming down Apple's product line was one of the first things Steve Jobs did, and the iMac was released the year after his return.