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

The article underneath is much more interesting!

[bunbuntheminilop]

quote

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!

That was actually surprisingly good article

[ceoyoyo]

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.

Re:That was actually surprisingly good article

[0racle]

This assumes its the job of an analyst to think. Despite what the word analyze means, it's not.

Re:That was actually surprisingly good article

[NineNine]

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.

That's not the point. Apple is a public company and has a duty to disclose to its' owners what the profit margins are on various products. That's pretty standard. If Apple doesn't disclose the margin of their primary product to their shareholders, I also wouldn't touch the company. In fact, it may even be an SEC violation.

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

[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

[BewireNomali]

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

But it is his place to have all the info possible at his disposal in order to advise his clients though, right?

At the end of the day, whether or not Apple is meeting the requirements for a publicly traded firm is not for Renck or his firm to determine. However, Renck can assert whatever he wants to his clients, as his revenue depends to some degree on the accuracy of his analysis. What it seems like he's saying his ability to assess is hampered by the admitted lack of disclosure, and this is enough to make him skittish about the stock.

His assertion does not seem unreasonable by any measure.

Re:That was actually surprisingly good article

[smallpaul]

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.

You are incorrect on two counts. First, Renck has the right to try to influence the decision of those people by publishing his opinion. It makes no sense to say that the only people who should speak of a decision are those directly involved. According to that logic, online commentators should not discuss Hamden because it is essentially between the Bush administration, the Supreme Court and a bunch of foreigners.

Second, the aggrieved party here is the shareholders, not the SEC, the auditing firm or the CFO. Renck is telling shareholders that they are taking on extra risk investing in a company that does not use transparent accounting. Not only is that his right, it is his job. He never claimed that they were doing something illegal. You're conflating the argument of an analyst (that Apple is a risky investment) and that of a Slashdot poster (that Apple may be breaking the law). Someone on Slashdot postulated that PERHAPS it was illegal. He also has a right to express his opinion.

So do I: it is totally ridiculous to say that Apple's 5% marketshare in PCs, it's much larger market share in music playing devices and its still larger market share in online music have "essentially the same future prospects." For example, the online music business is very vulnerable to changes in copyright law. The handheld business is potentially vulnerable to growth in MP3-playing cell phones (as someone else noted). And the computer business is vulnerable primarily to marginalization or dropping profit margins due to competition from Dell and other commodity PC vendors. I don't know enough about disclosure law to claim that Apple is breaking it, but I do know enough about Apple's business to say that one can easily imagine one of Apple's businesses going kaput while another soars and vice versa.

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.

Or maybe not.

[Anonymous Coward]

'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.

...or maybe that old stock analyst hasn't yet realized that those aren't the two seperate and distinct markets they used to be?

You can say that again!

[BasilBrush]

'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... '

Re:You can say that again!

[Ohreally_factor]

Oh, great. The Spanish Inquisition is doing financial analysis now. =)

Re:You can say that again!

[MBCook]

YES! Put the Apple accountant in.... the comfy chair!

That will make him talk.

Two Business Models: One for the rich and one ...

[Distinguished Hero]

'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...

Kinda Obvious.

[Fusione]

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.)

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. :P

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. :P

/2 cents

Computers now their own classification?

[MrCopilot]

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."

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.

Pills that treat every major disease costs $0.25

[Anonymous Coward]

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.

We love Apple

[timmy the large]

It's laughable that the stuffed shirt Wall Street types are saying that Apple needs to provide more infomation, but the "Information wants to be free crowd" here at Slashdot thinks that Apple should hide the information from everyone lest there competitors find out their margin. Apple competitors know that a consumer doesn't really care if you can beat someones margins they care if you can beat their pricing. This is just Apple hiding information because they can.

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.

Re:Two Business Models: One for the rich and one .

[IamTheRealMike]

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.

Hearsay and models

[fermion]

First, believing what a firm discloses without doing independent analysis is what routinely leads to catastrophic stock devaluation. Some might say that there is x billion in sales and x million in profit, and that is distributed along such lines as so, but who is say that those figures represent reality, or at the reality of the investor. Even if the number follow all SEC rules and standard accounting practices. At the very least, income and expenses can be creatively classified to maximize profit, not to mention other issue such as stock dilution and options backdating with can signficantly increase management compensation without the knowledge of the shareholders.

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.

What/who is going on...?

[djupedal]

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?

Re:Dev++

[Achromatic1978]

innovation isn't cheap

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.

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