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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."
SMOOTHIES FOR THE ROAD Why would anyone want a blender powered by a bicycle? "Because human beings love human power," according to the Web site for the Byerley Bicycle Blender, or B3.
Cool!
Instead of just telling us about how this "analyst" is irritated that Apple won't tell him what he wants to know they include a little bit of balance, in the form of a quote from a poster on his blog:
"How about actually doing their job and analyze the company they are covering? What a thought -- actually doing some independent research without the companies giving them all the information on a platter."
He's got a point. It shouldn't be too hard to figure out what an iPod costs to make, within a margin of error, of course.
'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.
'Apple clearly has its feet in two separate and distinct business models, namely computer manufacturing and software creation, and the consumer electronics industry.'
'Apple clearly has its feet in three separate and distinct business models, namely computer manufacturing and software creation, and the consumer electronics industry... and the music download industy.'
'Apple clearly has its feet in four separate and distinct business models, namely computer manufacturing and software creation, and the consumer electronics industry, and the music download industry... '
'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."
Yeah, it's not like iPods ("consumer electronics") would ever interact with computer hardware or software in any way. It's also not like iPods themselves are computer hardware that run computer software...
Uttering logically derived and empirically supported truths to the disciples of the orthodox establishment.
If people know how much money you're making on a sale, then they feel bad about paying for it. They see the value of the item as what it actually costs to produce, not what it is being sold for. .e.g If my friend gets a great deal on a bucket of apples (say 5$), and offers to sell them to me at 10$ a bucket.. I won't feel too happy about that, knowing full well he is taking advantage of and making profit off my skin. If I don't know how much he paid, then I assume he is keeping my best interest in mind, and don't feel harshly towards him for selling me the apples (which at 10$ a bucket is still a great deal.)
:P
:P
/2 cents
I had this problem myself when I was selling speedstream DSL modems. I had purchased a gros (144) for 9$ each. I made the mistake of telling people what I had paid for them, and everyone wanted them for ~10$. They were selling for 120$ retail at the time, or 10$/mth with the ISP. No one wanted to pay 50$, even though it was a great deal, because they knew what I had paid for them, and how much profit I was making. I ended up only breaking even, because word got around what my profit was on each sale, and everyone wanted to bargain me down to what I had paid.
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.
Computers (and peripherals) are Consumer Electronics. You see inside that tiny Consumer Electronic Ipod thingy your kids have there is a tiny computer running tiny software. Ipods are specifically a peripheral to a computer, be it Mac or PC. Same business model, Apple makes attractive easy to use consumer electronics. (Covers up Newton>) BTW, why not just link to the artcle three links and two blogs deeep. http://www.marketwatch.com/News/Story/Story.aspx?g uid=%7BEE4732BB-BCFC-49FE-9CA3-6E11FC25122D%7D&sit eid=mktw&dist=
FTA:
Accounting standards, he adds, require that segments generating more than 10% of a company's revenue be broken out by several metrics, including sales, profit and assets. The iPod first passed that threshold in early 2004. 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 goes so far as to say he believes Apple should do a separate breakout for computers, iPods, music-related products, peripherals and software and service. "Their business has changed and they should be doing it differently," he says. "Transparency is what everyone wants, and they don't want to be transparent."
Dude, I want a transparent Ipod too.
OSGGFG - Open Source Gamers Guide to Free Games
Pills that treat every major disease costs $0.25 to make. But the first pill cost $1,350,000,000.
R&D costs money. So does good design.
It drives me up a wall how this company always gets a free pass on this and other sites. Apple is not the greatest computer company ever. They are certianly not Open Source or even close to it. They make pretty boxes for a lot of cash, and now there boxes are just another PC brand.
Atleast they are built better than Dell, I'll give you that.
The fact that they're technically similar doesn't mean they are similar businesses in similar markets. Clearly the Mac is in a very different kind of market to the iPod, as evidenced by one having like 3% market share and one having 50%+ ... and that's what matters to the shareholders.
Shareholders should really have this information; the iPod is going to start facing tough competition from the mobile phone manufacturers soon, and knowing how much they could slash prices by to maintain market share is important. I myself use my phone rather than a dedicated mp3 player these days .... the iPod is probably a better music playing device but it's not that much better, and it's not worth it to me to carry about two devices when one + a pair of headphones is nearly as good. And the phones will only improve.
Therefore it seems to me a major part of the analyst job is at least to smell check the numbers released a firm, and in reality to generate independent data on major products services. Instead of complaining that Apple is not releasing profit margins, any analyst should be celebrating that Apple is now using mostly off the shelf compenants with widely known acquisition and integration costs. Furthermore, manufacturing costs should not be impossible as these seem to be also widely known in the competative market.
As far as the markets, Apple has for a long time produced solutions. They produced a solution for graphic artists, a solution for home users, etc. This is why the fact that the mac was closed was not a big issue. When one bought a mac, it was a solution. Now apple has found some success with music and video solutions. It is not new becuae it is applying integrated technology, both hardware and software, to solve a problem. Some analyst get confused about solutions becuase they have been raised with MS philosophy of suppling components that others will turn into solutions. Compenents work for some people, but most of us buy a completed car, a completed refrigerator, a completed TV, and don't expect the manufacturer to deny responsibility because a component is made elsewhere.
The only thing that has changed is that computing technology has become consumer technology, not the Apple has all of the sudden become a consumer technology company.
"She's a scientist and a lesbian. She's not going to let it slide." Orphan Black
Investors will make decisions to buy or sell Apple stock based on a number of factors, the least of which revolve around gross margin disclosures to investors or just how much information Apple executives are willing to share outside the company. Analysts can and will examine, regurgitate and then pontificate about the most minute information available on a company, but the only meaningful question investors should have about buying or selling Apple stock is, "Will I make money if I buy this stock?" or, "Will I make more money if I sell this stock?" It really is that simple, and it doesn't take an analyst to figure it out.
What analysts may know or not know about Apple's business is secondary and, in most cases, immaterial to calculating the profitability of owning Apple stock. If you trust that Apple's management team knows what they're doing, than buy the stock, even if the executives won't tell analysts how much money Apple makes every time an iPod is sold. If you think Apple is hiding crucial information that affects your own profitability as a stockholder, than your best move is to unload any Apple shares you currently have and not to buy any more. Stock tips from the New York Times are worth about as much as you've paid for them, and it shouldn't take a rocket scientist with reams of mathematical proofs to demonstrate such an obvious fact.
But how is development costs affecting price once you have sold 1,000,000,000 at $25 a pop? The development cost have been repaid over 20X. Oh we have to pay for the costs of the ten drugs that didn't make it to market? Not entirely true. An ugly fact is most of the development money goes to finding new drugs to replace drugs that patents have run out for so they can go back to charging $25 a pop until that patent runs out. It's not about helping people it's about charging as much as possible at all times.
Last week it was the trumped up claim that the iPod factory in Shenzhen is a hell-hole, which it isn't -- this week it is foggy data giving stockholders the creeps, and we all know that in the end, stockholders listen to their gut. Anyone suspect a trend? What/who is in the background trying to weaken Apple's public reputation?
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.
Anything to back that one up? I can't and won't say it's wrong, but that's one hell of a sweeping statement to throw out there without even hinting as to its origin.
Slashdot - where whining about luck is the new way to make the world you want.
Bingo.
When you release too much information, everybody on the Street decides they can play Monday-morning quarterback, and tear you apart with second-guessing.
What Apple is basically saying, by only releasing the minimum amount of information is, "we're going to run this business as best we know how, and you can trust us or not, based on our past performance." Some people -- a lot of people, apparently -- are willing to trust them and buy the stock. Some people aren't; which is fine. This guy apparently falls into the second camp. (I don't think I have to point out though that if he says 'sell' when he should have said 'buy,' he's going to be out of a job.)
However I think Apple's recent past performance is enough to justify to a lot of people that they're a 'buy,' without trying to micromanage or out-guess the management team.
Plus, there is always the issue of competition. If I was a major Apple shareholder, I'm not sure I'd want them to disclose to me a lot of information just to satisfy my curiosity, if it would also mean disclosing that information to the competition, and affecting the long-term profitability of the company. Maybe if I was just in it for the short term, and didn't give a shit if the company went under in a year, I'd still want to know, but those aren't the sort of investors that Apple wants to attract anyway.
"Ladies and gentlemen, my killbot features Lotus Notes and a machine gun. It is the finest available."
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.
Uttering logically derived and empirically supported truths to the disciples of the orthodox establishment.
Please tell me why anybody would want an Apple DVD player, I mean, honestly, how much sexier do you need to make a DVD player?
Every DVD player I've used to date still has a shitty interface. If Apple came up with a DVD player with an interface as good as the iPod's, I'd buy it in a heartbeat. Throw in some computer capabilities, like automatic detection and playback from streaming sources courtesty of Rendezvous, I'd even buy my friends some.
which I think has been their greatest failure to date.
If by failure, you mean something that has made them a buttload of money. So they can't be number one, so what? The mac market is growing in size every day, and is more vital today than it has been in a long time. It's made a lot of users happy, and supports a decent sized third party software industry. It's not a monopoly with 99% of the market, sure, but that doesn't make it a failure.
Now they gone and made a Macintel, a Mac that most people want desperately so they can run Windows on it.
That's true, but it doesn't mean what you think it means. Do people want Intel Macs because they prefer Windows? Of course not. If they did, they'd just by any of a number of machines that run Windows. The reason they want Intel Macs is because they prefer OS X. Now that Windows can be virtualized on Macs, people who want to use OS X as their primary platform can now do so without compromising their ability to use Windows-only applications. Many of these people would not be able to use a Mac otherwise, no matter how dissatisfied they were with Windows. And of course they were dissatisfied with Windows, because if they were happy with it, they wouldn't give Intel Macs a second thought!
The iPod is basically subsidizing their Mac line up.
Macs still make up 50% of Apple's revenues, and they still have very healthy profit-margins on those machines. The iPod doesn't subsidize Mac development any more than Mas subsidize iPod development. What it does do is insulate Apple's bottom line from the vagracies of the computer market, and allow them to persue a more aggressive strategy with the Mac. You're on to something about the Mac Mini, but you misinterpret what it represents. It doesn't represent a "don't care" attempt, but rather a high-risk attempt at expanding the Mac market in key areas. Before the iPod gave Apple a safety net, they couldn't have taken the risk of making a low margin machine. The Intel switch, too, represents Apple's continued focus on the Mac. Apple's doing it because it allows them to make more competitive Macs. The success of the iPod doesn't make the success of the Mac any less important, what it does is give Apple the flexibility to really push the Mac platform without worrying so much about the risk.
A deep unwavering belief is a sure sign you're missing something...
I know this is a slight oversimplification, and bound to get me modded down, but just how innovative are iPods, really?
BW screen? I know, we'll make the screen colour.
10GB hard drive? I know, we'll make the hard drive 20, 30, 40, 60GB.
The iPod is too big? We'll make a smaller one with a 1.8" HDD, not a 2.5".
The iPod mini is too big? We could use these CF card and flash memory chips that the digital camera industry have turned into commodities and make one based on that.
Music is boring! We'll add video support.
These aren't "innovations" in any sense of the word. It's systematic small tweaks and mods - don't read me as saying they've not been getting better, they have - but it's not the "OMG!!! APPLE HAVE REVOLUTIONISED THE INDUSTRY BY GOING FROM A 40 TO A 60 GIG DRIVE!" that some people like to believe.
It was just last year that the music labels not only wanted to raise the price of downloadng music but they were talking about demanding a percentage of iPod sales. It would not be paranoid to suspect that the labels would use any iPod profit disclosures against them - and with some prejudice.
If Apple showed a 50% percent profit on iPod sales, labels could demand a percentage of that 50% without regard to how iPod sales cover losses in other areas. This article already shows a penchant for dividing iPod from Apple computer sales. In the event of label demands and/or legal actions Apple could end up getting hung with its own rope.
Of course Apple could always use a shell game to manipulate profits. How many Hollywood films ended-up not showing a profit after some "broader" accounting. Not providing info while also not shape shifting any books is probably a prudent to way to go even is it looks bad in a narrower context.
Consumers always want to pay less. Companies always want to make more money. It's not like there's some vast conspiracy.
Who cares how much it costs them to MAKE the iPod, if the actual value of the device for the consumer is not equal to the price point then people won't buy it. The iPod seams to have crushed all the other music players, so obviously it's at a good price point for most people.
Personally I think the iPods are over priced, so I won't get one. Pretty simple.
...and then reality kicks in.
Analysts are there to guide investors on what is value, what is growth. Apple is clearly not "value". Analysts that said "sell" Apple stock in 2004 and kept saying it stubbornly in the face of such performance should be out of work.
-Stu
Here's some links:
SEC's Fact Sheet:http://www.sec.gov/news/extra/seldsfct.htm
How one corporation explains it on its website:http://www.investor.jnj.com/guidelines.cf
How Wikipedia describes it:http://en.wikipedia.org/wiki/Regulation_FD
If you must moderate, please moderate as irrelevent, not something bad, because I'm sure someone will find this interest