The Cost of the iPod

An anonymous reader writes "The New York Times is running an article today entitled Apple's Got a Secret. They discuss the cost behind making the ever-popular iPod ... a secret the company is keeping close to its chest. As a result of the company's signature secrecy and antiquated way of tracking profits, analysts are beginning to question the 'trust me' nature of buying Apple stock." From the article: "Geographic disclosure was adequate when pretty much all Apple sold were computers, Mr. Renck said. But the iPod has changed everything. Sales of Macintosh computers now trail those of iPod, which last year made up 46 percent of revenue. 'Apple clearly has its feet in two separate and distinct business models, namely computer manufacturing and software creation, and the consumer electronics industry,' Mr. Renck said."

Comments

So Mr. Renck never heard of iSuppli....

[Anonymous Coward]

If Robert Renck actually attempted some investigation into the matter, he'd know that there are things like iSuppli.
They rip apart hardware and analyse every part (and where you can buy them at what price).

Add to that the fact that Apple does tell how much of the different types of hardware it sells and you can guestimate away!

Re:That was actually surprisingly good article

[pedalman]

Isn't that type of information available here?

Particularly under the "Financial History" tab? I'm not a stock broker, but I would think the annual reports required by the SEC would cover this.

Re:That was actually surprisingly good article

[SerpentMage]

No they don't cover it in the SEC filing. They cover what everything costs, and do not do a breakdown.

Re:That was actually surprisingly good article

[TubeSteak]

Apple is a public company and has a duty to disclose to its' owners what the profit margins are on various products.

Not quite correct. The disclosure rules apply to portions of the business that generate more than 10% of a company's revenue.

From the marketwatch article

"Commenting on the issue, in a statement on current accounting and disclosure issues, the SEC staff has said it believes segment information should be broken out unless "separate reporting of segment information will not add significantly to an investor's understanding of an enterprise [because] its operating segments have characteristics so similar that they can be expected to have essentially the same future prospects."

Renck is complaining for one of two reasons:

1. He's an analyst & they cry when companies don't give them all the info they want.
2. Renck doesn't think that all Apple products "have essentially the same future prospects"

It's not really Renck's place to make that conclusion on Apple's behalf.

The determination is between Apple's CFO, Apple's auditing firm, and the SEC.

Re:That was actually surprisingly good article

[Anonymous Coward]

The 10Q is a PDF, so there's no way to easily search to find that info.

Are you using some kind of obscure PDF reader that does not have a Find command? Heck, even Google searches PDFs now.

Re:Kinda Obvious.

[Mattintosh]

The fact that apple doesn't want to tell what they cost to produce makes me think that their margins are pretty obscene, and they know it would make people angry to know just how much they're pocketing.

Apple has quarterly financial meetings for their shareholders. They always mention their product-by-product profit margins, and they're almost always around 25-30%. Lower (25%) on Mac Minis and iPods, and higher (30%, and even as high as 35% sometimes) on high-end systems like MacBook Pros and G5 towers. Software is a different story. They usually just pick a reasonably low price point and market it regardless of their development costs. I doubt they lose money, but it's certainly not high-margin like the hardware.

I've known these stats for years (along with the stats given by retailers showing that they make less than 10% on every sale) and still have no problem shelling out for Apple hardware.

Re:That was actually surprisingly good article

[jcr]

Apple does say what the revenues and the profit margins are on the Mac. They just don't report each model separately.

-jcr

Re:That was actually surprisingly good article

[JulesLt]

Apparently not. It is just something that many companies choose to do, in the spirit of best practice. The only people who could force Apple to disclose those figures would be a large group of unhappy investors, or if they felt they had to to gain further investors. At the moment, neither of those things are likely, although inevitably at some point hubris will enter the picture.

I think it's right for analysts to draw attention to this, as a warning to investors that they are taking a gamble on opaque accounting; on the other hand, there is an implication to the analysis that the iPod is carrying an ailing computer business which I think is misleading - he is particular wrong in one major respect :

'Apple clearly has its feet in two separate and distinct business models, namely computer manufacturing and software creation, and the consumer electronics industry'

Besides lumping two things together that most companies keep separate (computer manufacturing and software creation), it also utterly fails to comprehend that it has been Apple's ability to develop it's own software than has resulted in it's success in the consumer electronics business. Most CE firms don't have that level of software engineering in-house (many don't have hardware engineering either, but that has traditionally been where companies like Toshiba or Sony have invested their R&D)

As an example - I've just bought a new Fuji camera (on grounds of it being able to do reasonable ISO 3200 shots). Nice bit of hardware - you can even go to manual mode and set your own exposure or aperture settings, which isn't bad for a consumer level camera. The interface on the camera is good - a really nice touch I noticed was that in just doesn't display any of the advanced options if you have the camera set in 'Auto' mode, set my a manual dial on top. Nice solution to balancing functionality and simplicity.
Guess what happened when I tried to install the supplied software - not only did it fail to install, the installer completely crashed the system (XP), resulting in a hard-reset (causing a boot-up disk scan).I can't even comment on the quality of the software because I couldn't install it. That is my 'out of the box' experience.

Re:What secret?

[mabhatter654]

My experience is when a company reveals their margins, the "Street" just beats them up until they don't have any profit anymore. If Apple can make a product every body wants at a price people are willing to pay, then more power to them if they make extra profit.. that's what business is all about. It's right back to the "pen" game in Junior Achivement class. Apple is doing exactly what the makers of that game suggest... you get peanilized for all sorts of things, not enough R&D, too many units, too few, etc.. Apple is riding the supply & demand curve almost exactly. What really saves them is that they NEVER have sales! They move product down the food chain, but they maintain their price points and add features... not lower the price and sell more units like Sony, Dell, etc... It's an enviable place to be in... and a mark of REALLY good business.

Re:Market != Business Model

[Distinguished Hero]

Oy vey! I accidentally pressed submit instead of preview, and forgot to change HTLM Formatted to Plain Text. My post, presented in a more readable format, follows:

We were referring to business models, not markets. It is possible to use the same business model to service different markets. For example, the markets for computer programming books, popular psychology books, fashion magazines, and soft-core pornography is quite different, yet all these can be delivered to the consumer using the same business model (from the perspective of a book store), and in fact, you will find book stores stocking all these items. Similarly, in the US, Wal-Mart sells all sorts of different products that appeal to different markets using the same business model. Furthermore, I understand that whereas in the US, Wal-Mart primarily sells non-perishable products manufactured in China, in China, Wal-Mart sells primarily perishable products; however, their business model is more or less the same in both countries. To further illustrate my point, the market for desktop computers may be different from the market for laptops, yet Dell et al. sell both using the same business model.

Returning to Apple, all the products they sell (PC software, desktop PCs, portable PCs, ultra-portable PCs (iPods)) are either computer hardware (marketed as consumer electronics) running computer software, or stand-alone computer software for those product. From a business model standpoint, there is little difference between producing an iMac or an iPod. In fact, if Apple's business model is to be decomposed and bisected, we would find that the greatest difference in business models employed probably lies between their hardware production division and their software production division, and not in fact their Mac division and their iPod division.

Furthermore, as portable music player users are a perfect subset of computer users, it behooves Apple to attempt to synthesize the two markets. This is in the same vein of Apple providing both PC hardware and PC software as PC software users are a perfect subset of PC hardware users (though in this case perhaps not a strict subset). Similarly, Microsoft employs a similar business model in both their PC operating system division and their office suite division (the office suite market being a perfect subset of the PC operating system market), and this has allowed them to dominate both of those markets and maintain that dominance through a feedback mechanism.

Re:That was actually surprisingly good article

[siriuskase]

Sorry to but in, but I do have info to add.

Up until they passed a disclosure law a few years back, companies would frequently accidentally or on purpose play favorites by giving some analysts exclusive access to some information. I suppose these analysts would then release the information in a manner that wouldn't cause the stock to dive, maybe by only giving it to their favorite customers. As you might see, this is bordering on insider trading, which is illegal.

In the olden days, an analyst would contact a company and arrange private meetings and tours with management. This is how they would find out things before the public or other analysts. They can still meet privately, but if it is discovered that they are getting exclusive info, that is illegal. So, a lot of companies will not meet privately with only one or two analysts any more. If one calls up and asks for information that isn't publicly available, the company must either have a meeting with a bunch of analysts or they must issue a press release.

I'm sure the law has a catchy name, but I haven't a clue.

Re:That would be Regulation FD

[siriuskase]

That would be Regulation FD (stands for Fair Disclosure)

Here's some links:

SEC's Fact Sheet:http://www.sec.gov/news/extra/seldsfct.htm

On December 20, 1999, the Commission proposed new Regulation FD - for "fair disclosure" - to combat selective disclosure. Selective disclosure occurs when issuers release material nonpublic information about a company to selected persons, such as securities analysts or institutional investors, before disclosing the information to the general public. This practice undermines the integrity of the securities markets and reduces investor confidence in the fairness of those markets. Selective disclosure also may create conflicts of interests for securities analysts, who may have an incentive to avoid making negative statements about an issuer for fear of losing their access to selectively disclosed information.

How one corporation explains it on its website:http://www.investor.jnj.com/guidelines.cfm

How Wikipedia describes it:http://en.wikipedia.org/wiki/Regulation_FD