The Profit Margin on the iPod nano

Ant writes "BusinessWeek Online reports that researcher iSuppli took a look inside the iPod Nano to find out how much Apple is making off it, and who supplies its parts. From the article: 'Apple has sold some 16 million iPods in the first nine months of fiscal 2005, and 21 million since its inception. Thus far in fiscal 2005, the iPod has brought in $2.6 billion in revenue, accounting for about 25% of Apple's total.'"

Comments

Tooling? Investment?

[troon]

It costs Apple $90.18 in materials to build the unit and $8 to assemble it, leaving a profit margin before marketing and distribution costs of about 50%.

The article is light on details. I hope they took account of amortization of any tooling or plant investment. It's this sort fo thing that stops the small players, hobbyists and enthusiasts producing anything similar for reasonable money.

Re:Tooling? Investment?

[ChrisF79]

The article is light on details. I hope they took account of amortization of any tooling or plant investment. It's this sort fo thing that stops the small players, hobbyists and enthusiasts producing anything similar for reasonable money.

Those costs would be included in Overhead, which is below the gross margin line on the P&L so they are likely not included. There's a lot in between gross margin and net margin.

Too bad that's so simplified

[EggyToast]

Sure, parts cost that much. Does anyone honestly believe that the rest of that is pure profit?

Of course, R&D costs nothing, fabrication is free, paying employees for design and support is volunteer based, and filing the patents and copyrights by lawyers are all pro bono.

How is this useful? So now we know how much the pure hardware costs for the Nano? Big deal. It's probably on par with pretty much any MP3 player, especially flash based ones. Is this supposed to convince people that "Oh noes, look, Apple really DOES make money on its hardware!"

Duh. We know Apple makes money on its hardware. So does every other company that makes hardware. But this says nothing for the actual cost to Apple of the device, without consideration for, you know, actually designing and creating the thing.

Sad.

[hungrygrue]

Apple is currently the most innovative computer company around, with an operating system that makes the current market leader look like a dinosaur. The fact that a quarter of their profit comes from a damn mp3 player is just sad.

In other news, houses are free

[Kombat]

In a related story, researches have discovered that new home construction costs practically nothing at all, as the wood was taken from trees that were growing there anyway. Wood costs nothing to fabricate, as mother nature provides it for free (given enough time). The foundation is poured from concrete, which is just rocks, sand, and water, all of which are freely available. Thus, new home construction is 100% profit.

Engineering costs?

[Anonymous Coward]

What about the engineering costs? That hardware doesn't design itself. The software updates don't write themselves.

I'm not saying marketing and distribution are legitimate costs, just that they seem to have overlooked a major one.

Re:Engineering costs?

[Total_Wimp]

Engineering and development costs per unit get smaller and smaller as more units are sold so they can't be predicted on a per unit basis until we know more about sales numbers. The article says Apple has sold 16 million iPods in the first nine months of this year and based on the rave reviews of the nano and the huge yearly growth of the iPod market, we might expect to see numbers like that for the nano alone next year. If that's the case, engineering costs per unit will likely dwindle to an insignificant figure. That is unless you expect that those costs have greatly exceeded, say, 16 million dollars.

TW

Re:Engineering costs?

[soft_guy]

Yes, that's why they need to double the materials price. They *do* generally have to pay for things like:
- The contract manufacturer's profit
- Shipping (although sometimes the contract manufacturer pays for this)
- Marketing, advertising, sales promotions
- Warranty repairs/replacements
- Returned units
- Keeping the retail stores open and paying the people there
- Engineering costs
- Other fixed costs of running Apple (keeping the lights on at 1 Infinite Loop)
- Steve's turtlenecks don't pay for themselves :-)

In the meanwhile...

[Willeh]

Apple retailers get reamed right in the ass. I've seen lists of the costs of the various products a year ago when i used to work in the field, and they ain't pretty. Think of the Apple lineup from a year ago. An Apple reseller (excluding Apple stores, they don't have any in my country) stood to make a whopping 10 off of every eMac sold, up to about 50-80 off of an iMac (the lampshade version iirc). Margins were pretty much razor thin from a retailer perspective. Then again, Apple have been known to want to eradicate 3rd party dealers and go Apple Store only, but in a country with no Apple Stores? Why limit access to your stuff at all?

I could understand (evil as it may be) Apple wanting to control distribution if they were the top dog in the computer business, but as it stands i think Apple would do well to play friendly with everyone who wants to push Apple products to the masses (iPods excluded, they're all over the place).

Software development

[Dexter77]

With that formula Windows' profit margin is about 99.9%, because CD only costs 10c to make.

As a software professional, I've never been able to calculate real profit margin of any product that contains any kind of a software. Especially in a big company, you got different software modules from different products linked together. For example if software module A costs $500,000 to develop and it's sold with $1000 per license. Then you have a software module B that cost $2,000,000 to develop, and sold $100 per license. Both of those modules are sold separately, but then you decide to use both of their technology to develop a product C. It costs additional $100,000. All of those modules continue to sell separately. What is profit margin of product C? Do you count in only the $100,000 or that part of A and B, which haven't been covered by license sales? What about company's administration costs, marketing costs, etc.

And that was an extremely simple example. Old company has thousands of software modules, all linked to each other in some way. You can never really point out the actual cost of a product in software business.

My point is: The only way to know the real margins of a product, is to see how good salaries are in that company (as long as it is profitable)

PS. I bet iPod family's UI design has cost ten times more to develop than any other competitor's product's. There are countless number of factors that you can't even imagine when considering those margins. (But as a software manager, I consider it an advantage. No matter how bad failure a development project is, you can always trick those business directors to believe that it actually was a success. You'll just sweep those man-months under the carpet (of some other project/product) and say you used a software module that was developed by other project.)

Re:Get a look at Apple's misdeeds & mischief

[mh101]

For your illustration to work, you have to assume the iPod only works with iTunes. I won't list them here, but there are several other third party apps that people can use to transfer stuff to their iPod with.

So... it is the same as with scanners. Apple bundles their own software that they developed, but you're free to use whatever other program you find that can speak to the iPod.