Apple Makes $831 On Each AT&T iPhone

Ponca City, We Love You writes "The NYTimes reports that Gene Munster, an analyst at Piper Jaffray, has studied Apple's financial statements and come to the conclusion that AT&T is paying Apple $18 a month, on average, for each iPhone sold by Apple and activated on AT&T's network — up to $432 over a two-year contract. This shows how much incentive Apple has to maintain its exclusive deal with AT&T rather than to sell unlocked phones or cut deals with multiple carriers. Last week Apple disclosed that 250,000 iPhones had been purchased but not registered with ATT that Apple thinks are being unlocked so Apple has now taken action to curb unauthorized resellers by limiting sales of the iPhone to two per customer and requiring that purchases must now be made with a credit or debit card — cash will not be accepted." The latter article links to a US Treasury page explaining the incorrectness of the widely-held belief that cash cannot be refused for any transaction.

Comments

that math is wrong

[G Fab]

as correct as that explanation is for the 831 number, the math is wrong.

apple doesn't get iphones from fairies. They pay money to build them.

Re:that math is wrong

[mr_matticus]

The math is not wrong. Apple gets $831 from each iPhone. That doesn't mean it profits $831. It has a number of costs, from raw materials to labor to prorated warranty costs, all the way to packaging, shipping, inventory management, advertising, and ongoing software development; there's always then burden-shifting among products--some products may subsidize others and therefore have an apparently increased profit margin to cover the lower margins on a different product. Deducting all of these would be impossible for an analyst to do without intimate knowledge of Apple's overall operation.

It's better to report the total without them taking wild-ass blind guesses as to how much of that is profit (like iSuppli's crazily inadequate "what it costs" figures). Even if those numbers are right (and sometimes they just pull costs out of their ass because it's "close enough" to something they've seen before), that still only gets you to gross profit. And at the end of the day, gross profit is nowhere even close to the much smaller net profit.

Re:that math is wrong

[mr_matticus]

They're not reasonable figures, though, is the entire problem.

When they don't have data on a particular component, they use something they deem to be relatively similar. They extrapolate an approximate price based on what they feel is an appropriate price at a given (assumed) volume level. They never seem to account for time or place of purchase, either, which can be significant factors in volatile markets. For example, they used a run of the mill touchscreen price for the iPhone, without multitouch and without the daylight-readable backlighting.

Each step of the game is an approximation adding further error to the calculation, and by the end, they almost invariably end up at a "cost" figure that is below reality, sometimes significantly. I have some experience in various litigation involving some of the products they've assessed, and based on what we get in discovery, iSuppli's numbers are, in comparison, highly conservative and geared toward getting the highest possible gross profit rather than providing the most accurate figure. They generate the biggest stir when people think that actual manufacture costs peanuts, so it makes sense from their perspective, but it does a disservice to everyone.

Re:that math is wrong

[mr_matticus]

What is the value in utterly unreliable numbers? It provides absolutely no insight--products cost substantially less for the pieces than the finished good and retail price. Shocking!

Without being able to get within 20% in some cases of the actual materials cost, it doesn't inform any conclusion about the product. The general gross margin range they report is 25-50%--practically that entire variation is within their margin of error in reporting the figures in the first place. Thus, the assessments, apart from being nerd porn, are perfectly vacuous.

I think most people can figure out that almost nothing is sold without a gross margin of at least 20%, and that 50% isn't terribly uncommon either. Unless iSuppli shows up with a 75% margin one day, there's nothing useful about it.

Re:that math is wrong

[dedazo]

The math is not wrong. Apple gets $831 from each iPhone. That doesn't mean it profits $831

Then perhaps the obvious flamebait headline should have been crafted to reflect that simple fact. But in the age of one-liner evangelism, Apple Makes $831 Revenue (Though Not Really Profit, Mind You) On Each AT&T Phone Although That's Pretty Much Irrelevant To Everything, We're Just In It For the AdSense Revenue just doesn't work.

I'm having trouble trying to understand the mindset of people who think $831 or $8,311 represents "greed". If the market will bear it, that's the correct price. Otherwise Apple would have sold 1,000 iPhones instead of 100,000 or however many they've shipped so far.

Re:that math is wrong

[jollyreaper]

I'm having trouble trying to understand the mindset of people who think $831 or $8,311 represents "greed". If the market will bear it, that's the correct price. Otherwise Apple would have sold 1,000 iPhones instead of 100,000 or however many they've shipped so far. "Whatever the market will bear" is a two-way street. Businesses will try to whore their wares for top dollar but customers (I despise the label "consumer") will try to find the best deal possible. If they know that there's a shitload of profit built into a given deal, customers will try to beat down the vendor so they can pay less. And that's a fair move in capitalism. If a vendor I use is making a 15% markup, that may well be completely fair and just. If he's making a 75% markup, I want to know about it, and I'll certainly try to prevail upon his better nature or take my business elsewhere.

Re:that math is wrong

[Durandal64]

Except that iSuppli doesn't attach error bars to their estimates. They just state them as-is. Without error bars, estimates that have error are useless.

Re:that math is wrong

[eclectic4]

" And that's a fair move in capitalism. If a vendor I use is making a 15% markup, that may well be completely fair and just. If he's making a 75% markup, I want to know about it, and I'll certainly try to prevail upon his better nature or take my business elsewhere."

You don't understand... if something is marked up 75%, there most likely isn't business elsewhere. Is someone else selling iPhones besides Apple? Are they cheaper? Get the picture? If I told you Oil was being sold at a 100% markup, are you going to trade in the car for a bicycle as a show of "taking your business elsewhere?" No. You are either going to buy this "widget" for "this price" or you aren't. Supply and demand set the price, not it's known markup. If you are going to use markup in your purchasing decisions, know that it will have zero effect on everyone elses purchasing tends, and therefore will do nothing more than satisfy your strange needs to not give too much profit, even if demand supports it.

Good luck.

Re:that math is wrong

[jollyreaper]

You don't understand... if something is marked up 75%, there most likely isn't business elsewhere. Is someone else selling iPhones besides Apple? Are they cheaper? Get the picture? If I told you Oil was being sold at a 100% markup, are you going to trade in the car for a bicycle as a show of "taking your business elsewhere?" No. You are either going to buy this "widget" for "this price" or you aren't. Supply and demand set the price, not it's known markup. If you are going to use markup in your purchasing decisions, know that it will have zero effect on everyone elses purchasing tends, and therefore will do nothing more than satisfy your strange needs to not give too much profit, even if demand supports it.

Good luck. If you're talking about a unique vendor such as Apple for iphones, knowledge of what the markup is can still be very important. It can be one of the factors that convinces a competitor to enter the market to scoop up some of that profit. If the competitor thought the original company was operating on razor margins, they might figure it was a sucker's market.

Re:that math is wrong

[mr_matticus]

Getting to within 10% of the cost of goods sounds fantastic to me. Within 20-25% still sounds not bad. It's a lot better than a total guess, which seems to be what you're suggesting. (gross margins of between 20 and 50 %). Except that it's not. A range of 20% is no better than a total guess, and a range of 10%, while narrowing the gross margin gap by about a third, does not exceed "total guess" for net profit (which ultimately is the only one that matters). In what way do you consider it superior to a total guess?

An error of 20% on a parts bill will move you from one end of the gross margin scale to the other. In other words, the error of the estimated cost rarely does any better than the standard margins on products. Then there is absolutely no guidance whatsoever on net profit figures, which are what really matter. The company itself can be assessed, but it's pure folly to try to do it for individual products.

Let's take a product. Retail price $100, iSuppli guess: $58 for parts. That's 42% gross profit, and we will use your conservative and overly generous 10% range for accuracy. The possible gross margins range from 47% to 36%. What does this mean? That they fall in the normal range of 20 to 50%. What did we learn? Nothing. We already knew it was almost certainly going to be in that range, and regardless of where it falls, it's unremarkable because it's the normal range. The only place it would be noteworthy would be if iSuppli found figures grossly outside that range (e.g. 75% or 5%), and that basically never happens.

What do you gain by knowing that the product is within a normal range of markup? The "smaller iSuppli margin" product could easily be the bigger-margin cash cow, and an attempt to minimize the pocket-lining of corporations can't be undertaken with the information iSuppli supplies, if you'll pardon the pun.

When your margin of error covers the most of the basic spread of possibilities, you're not providing a service. Trying to peg it down to some quasi-accurate Ouija-board figure without any real knowledge gets us nowhere useful. iSuppli rarely, if ever, has provided anything better than a 20% range on a 20% range, which means it has never demonstrated or even rationally suggested that any given product is a better "value" than any other. It relies on faulty analysis for people to make that claim and gives them a quasi-factual, half-true basis to do so. This can only cause harm.

The entire system is highly variable from company to company, and even among products from a single company. Without details, it is impossible to get any accuracy beyond a massive range. Gross profits are usually 20 to 50 percent. Net profits for self-sustaining (i.e. not loss-leaders) products are usually 5 to 20 percent. Anyone offering you any level of accuracy beyond that without specific documentation is lying.

Re:that math is wrong

[dedazo]

If the producer is making significant profits, it's not the correct price.

Wrong. You know why? Because this is not bread, or baby formula or bottled water or heating oil. It's a fucking gadget. People obviously didn't have a problem with the price when they whipped out their credit cards by the hundreds of thousands and lapped these things up like candy because they wanted to be "hip". It's a cell phone. What's the difference if you suddenly figure out that Apple has a 75% markup on the thing? Or 400%? You obviously don't care, since you already agreed the price was fair by purchasing one.

If Steve Jobs' core talent consisted on taking a crap and putting it in an off-white plastic case with shiny lights and selling it for $2,500 a pop, who are you to complain? On the contrary, more power to him and the chumps who get bilked because they want to be fashionable.

Re:that math is wrong

[GaryPatterson]

Actually, I am an Apple fan, but some of the craziness about the iPhone is getting silly. There are many strawmen used in arguments, but generally a skeptical approach to anything brand new is a good thing.

Don't worry about security - I can handle anyone who types "M$" or who uses the phrase "From hell's heart in my parent's basement, I stab at thee!"

Freeing the Hardware

[snl2587]

The greatest piece of legislation that could be passed would be one requiring that software and hardware manufacturer's could not impose restrictions on how it is used. Not only would the iPhone situation be a non-issue, but the way would be clear for Linux developers to provide drivers without fear of prosecution by hardware manufacturer's. Of course, given greed, this is nothing more than a pipe dream...

useful information

[m2943]

People say things like "it's Apple's right" and "good for them". Of course, it's Apple's right to do those deals.

Nevertheless, where do you think this money is coming from? Do you think that AT&T is giving that to Apple because they are such good buddies?

No, you are paying for it one way or another (e.g., by paying a premium for their sluggish EDGE service).

Re:Too bad apples lawyers do not understand Law.

[mfnickster]

> YOU CAN NOT REFUSE LEGAL TENDER. That is a stone cold law from the 1800's.

Of course you can. "Legal tender" simply means that it is a legally acceptable form of payment, not that you must accept it.

I can demand live chickens and jelly beans as payment if I feel like it, and you waving cash in my face while threatening to call the police can't make any difference.

Exactly! also this exaplins a lot.

[goombah99]

I'm failing to see where the number 831 comes from. Exactly, the headline is rubbish. Apple does not make 831 per Iphone. They collect 400+431 over the 2 year contract. They "make" considerably less.

Now another way of saying this is I am paying 431 dollars less than the true sales price of the iphone. Or another way of saying it is, AT&T is giving me an $18 a month discount for using an Iphone on their network. All upside to me. Of course that mean I should be upset about the unlockers who are preventing them from giving me an even larger discount.

This seems to fit some other piece of the puzzle. For example, Why to UK iphones cost so much more? Presumably because of a lower subsidy. And why is apple booking the iphone revenue as deferred subscription income? Because they are probably not making any money on the sales, but on the 18$ per month.

Finally, this also helps axplain the anomolous $200 price drop. My original guess, which this reinforces, was that apple took a huge gamble on the technology. Craploads could have gone wrong. The screens might have scratched to easily, the batteries might have died prematurely, the OS might have blue screened. . So many untested things you can't really adequately Q/A before the roll out. Plus it might not have been popular. There were a few look-alikes in the pipeline, what if one had rolled out earlier?

So they had a huge risk margin built into the price. Once the risk dissipated they could remove that. But at the time this hypothesis seemed a little off. Sure a risk margin is there in any product but how could they overestimate by 50% of the propert phone price? that seems way too high. But now realize the true sales price of the phone was 1031$ and they lowered it by 20% to 831. Now it does not seem quite so absurd.

Re:They make money. So what.

[DavidShor]

"A business doesn't have to cater to what's BEST for the customer."

Your right, I don't expect a business to act in any way that does not maximize their own profit. Nevertheless, we need to pass laws and regulations to ensure that the actions of profit maximizing corporations do not interfere with the collective well-being of society.

Property laws, Anti-trust legislation, and contract enforcement are all examples of such laws. Without such measures, free markets would barely function, let alone be optimal.

Certain types of actions, such as carrier lock-in, creating Monopoly power, and exclusivity contracts, are very often the most profitable courses of action for a company (An extreme example would be forced enslavement and wide scale theft). However, these actions leave society poorer than it would have been had these actions been illegal.

The Free Market is a mathematical ideal, described precisely in the first Welfare theorem. It is a great ideal, and one that we should strive for as an utmost priority. However, the model assumes that these kinds of transactions do not exist.

So to support a business model based on depriving consumer choice is not free-market, it's Plutocratic.

Geez...

[LonghornXtreme]

I can't get over how many people think Apple should not be entitled to freedom of contract. Apple can do about anything it damn well pleases. If you don't like it, don't buy a stinking iPhone. They don't 'owe' the consumer anything. It's their goal to make as much money as possible. If their tactics for making said money are so egregious, vote with your dollars and go elsewhere. But don't talk about changing the law just because you can't have an iPhone exactly how you want it.

AT&T Is Getting Their Money's Worth

[gig]

All the stuff that Apple does for every iPhone user POST-SALE costs AT&T at least that much to do for themselves. AT&T is like a silent partner just printing money. You pay them every month but otherwise you deal with Apple. Over at Verizon they are doing all the Apple stuff themselves, but doing it badly.

The complaints about the iPhone never seem to come from iPhone users. The highest customer satisfaction in phones is iPhone at 82%, the next best is Blackberry at 51%, then ALL THE REST are below 50%. Everybody is paying a similar monthly carrier fee for their phone, but not everybody is getting the same value from it. So complaints about how much money Apple/AT&T are making while offering a single phone that has both the highest customer satisfaction and the most features really seem disingenuous to me. Complain about how much companies are making for selling phones that garner http://www.google.com/search?client=safari&rls=en&q=iphone+customer+satisfaction&ie=UTF-8&oe=UTF-8