iPad2 manufacturing cost

[amirm]

Next time you want to complain about the cost of high-end audio, keep the following in mind. Typical mass market audio/video products and PCs are sold at +-5% profit. Here is how much profit Apple has in every device: http://news.cnet.com/8301-13579_3-20042657-37.html?tag=cnetRiver

"In this case the estimates are for the 32-gigabyte, 3G version of the iPad which sells for $729, and there are two estimates, one for the AT&T version--$326.60, and one for the Verizon Wireless version--$323.35. "

In other words, Apple's gross profits are 55%! This is fairly typical for Apple by the way when it comes to any of the "i" products. Some go as high as 65% even!

 

[JackD201]

Every stockholder's dream. At the very least they should declare dividends regularly.

 

[audioguy]

Next time you want to complain about the cost of high-end audio, keep the following in mind. Typical mass market audio/video products and PCs are sold at +-5% profit. Here is how much profit Apple has in every device: http://news.cnet.com/8301-13579_3-20042657-37.html?tag=cnetRiver

"In this case the estimates are for the 32-gigabyte, 3G version of the iPad which sells for $729, and there are two estimates, one for the AT&T version--$326.60, and one for the Verizon Wireless version--$323.35. "

In other words, Apple's gross profits are 55%! This is fairly typical for Apple by the way when it comes to any of the "i" products. Some go as high as 65% even!

I was with a company for 10 years (VeriFone that was eventually bought by HP and then sold off)where most all of the products gross margins exceeded 50%. That is not at all uncommon in many, many, many businesses.

Tell me how again how gross margins of 50% should keep me from complaining about the high costs of high end audio? Do you really believe the gross margins on $10,000 per 8 foot speaker wire is only 50%. Or a $185,000 CD player? Or ........

There is no comparison in my opinion.

 

[Gregadd]

Microsoft is operating at a lost! Do they make any hardware/

 

[Phelonious Ponk]

Yeah, 55% margins are not unusual at all, but they are unusual in the computer business.

Tim

 

[Jay_S]

55% not a profit percentage and is not comparable to the 5% figure quoted for mass market audio / and PCs. The 5% figure is closer to the overall operating margin for those businesses. But as the CNET article points out, the 55% percentage reflects only materials cost. Although not an expert, I would guess that for many high-end products, the cost of materials is no more than 20 - 30% of retail price.

 

[Steve Williams]

Next time you want to complain about the cost of high-end audio, keep the following in mind. Typical mass market audio/video products and PCs are sold at +-5% profit. Here is how much profit Apple has in every device: http://news.cnet.com/8301-13579_3-20042657-37.html?tag=cnetRiver

"In this case the estimates are for the 32-gigabyte, 3G version of the iPad which sells for $729, and there are two estimates, one for the AT&T version--$326.60, and one for the Verizon Wireless version--$323.35. "

In other words, Apple's gross profits are 55%! This is fairly typical for Apple by the way when it comes to any of the "i" products. Some go as high as 65% even!

so what's your gripe Amir?


I don't see any problem with the profit margin. That's why I own Apple stock and not Microsoft

 

[The Smokester]

Could anyone explain how to get from the retail sales price and an estimated unit cost of materials to profit? (I like AAPL too.)

 

[Phelonious Ponk]

so what's your gripe Amir?


I don't see any problem with the profit margin. That's why I own Apple stock and not Microsoft

Me too. I bought it many years ago and I keep looking and telling myself it's time to sell, that it can't possibly keep performing like this, and they keep finding categories with weak offerings and massive potential, reinventing them, taking dominant market share, and staying a couple of generations ahead of the competition.

Tim

 

[JackD201]

Microsoft is operating at a lost! Do they make any hardware/

MS is still huge in console gaming. The kinect is a blast, the kids totally ignore the Wii now. Uh-oh my bro-in-law is a S-Veep at Sony. It burns his bum I'm an Apple user, now he'll know I'm X-Box 360 and not PS3!

 

[amirm]

Not sure how this thread became about me . But I will answer the questions put to me.

so what's your gripe Amir?

The gripe is this: Apple has taken all the profits in the supply chain and made it for itself. It sells music at essentially break even point. This means no one can compete with them to sell it profitably. So if one day you wake up and the only thing available is downloads of 256K AAC through Apple site, you know who to blame.

Worse yet, they attempt to mold other content in the same manner. Since they make so much money on hardware, it simply is not important to them if there is money is made from software. That said, they have not yet managed to get away with that in video and newspaper but they sure are trying.

I don't see any problem with the profit margin. That's why I own Apple stock and not Microsoft

Well, I do. As a consumer, I am used to buying a DVD player for $25 and spending the rest of my money on software (movies). As long as Apple continues to want to run its business this way, our "i" appliances will be expensive.

Now, the other extreme is crazy too with profit margins sucked out. But there is a happier place in the middle.

Unfortunately, as long as folks like yourself are cool with what they are doing, Apple will have no motivation to change anything. Google is our only hope.

As to Microsoft, their profit margin is far better as they don't have any cost of goods. Dell ships a PC and sends a check to them. Unfortunately, a typical user keeps his PC for four years and pays Microsoft $50. That is only $12/year/customer. That is a hell of a lot less than Apple is extracting from its customers. FYI, Google monetizes each person visiting google.com on the average for $20/year through advertising!!!

 

[amirm]

Microsoft is operating at a lost! Do they make any hardware/

As I noted, from margin % perspective Microsoft is actually ahead of Apple. Microsoft hardware business is actually quite profitable even though boring. I am not sure if the numbers are public so I won't venture to say how much. Kinect by the way was designed in that group.

 

[amirm]

I was with a company for 10 years (VeriFone that was eventually bought by HP and then sold off)where most all of the products gross margins exceeded 50%. That is not at all uncommon in many, many, many businesses.

It is very typical in high-end specialized fields. When I worked for companies building broadcast TV equipment, we had 65% margin. That was for very low volume products though. It is practically unheard of in business that sell millions of units for such high dollar/per unit costs. Maybe drug companies do the same but in electronics, it is without rival.

Tell me how again how gross margins of 50% should keep me from complaining about the high costs of high end audio? Do you really believe the gross margins on $10,000 per 8 foot speaker wire is only 50%. Or a $185,000 CD player? Or ........

Well, let's not go to extremes . But keep in mind that they have a very expensive distribution margin. Between distributors/reps/dealers, 50% of the profit is taken away. And with their low volumes, they will need to amortize their manufacturing costs over very few units.

Apple's situation is very different. They sell at very high volumes and don't have the same distribution costs. They have their own stores so if BestBuy, etc complain about the terrible margins they give them, they show them the hand and say they can sell all they want in their own stores. At Christmas time, this becomes deadly as iPad/i* sales bring people into the store. Apple's standard practice is to threaten to hold back units during that time if the retailer doesn't play ball and retailers cave. Typical margins for Apple products in retail channel was 20 to 22% compared to standard 30 to 35% they routinely get. Only Apple gets away with this (and game console makers).

BTW, I was not sure if you were agreeing or disagreeing with me so the above hopefully is inline with what you were saying .

 

[amirm]

MS is still huge in console gaming. The kinect is a blast, the kids totally ignore the Wii now. Uh-oh my bro-in-law is a S-Veep at Sony. It burns his bum I'm an Apple user, now he'll know I'm X-Box 360 and not PS3!

Problem Microsoft has had traditionally is that as soon as they reduce their cost of the console to make any money, Sony would reduce the retail cost of their box and Microsoft would have to match and go into red. I don't know the situation with Kinect but outside of that, the whole business of Microsoft getting into game business has been a huge negative for the company, causing them to lose billions of dollars since inception. All of that talent could have gone into competing with Google or Apple and instead, is focusing on a never ending, money losing business.

 

[kma100]

Yes, but these costs are (1) an *estimate*, and (2) don't factor in the cost of R&D, overhead, etc. etc. I am not arguing they are too high or low, just that all the factors are not included.

 

[Steve Williams]

Yes, but these costs are (1) an *estimate*, and (2) don't factor in the cost of R&D, overhead, etc. etc. I am not arguing they are too high or low, just that all the factors are not included.

I agree

 

[amirm]

Yes, but these costs are (1) an *estimate*, and (2) don't factor in the cost of R&D, overhead, etc. etc. I am not arguing they are too high or low, just that all the factors are not included.

I have been on both ends of this: having contracted iSupply to tell us the cost of a product, and having them estimate the costs of the products we were selling.

On technology that is mainstream, they are withing 10% of the actual cost. I consider iPad2 mainstream. It does not rely on components that have never been available before and are at prototype stage. In this sense, then the cost of iPad2 is from $300 to $360 -- not enough to make the numbers that different.

Where they miss and miss big is a) when it is in prototype such as blue-laser costs when PS3 came out or b) when the company has significant leverage in buying components such as Apple has. There is no question in my mind that Apple is getting some parts at or below manufacturing costs of the supplier. Reason is simple: you can leverage the halo effect of "we supply parts of iPad" to sell a ton of parts to other companies. If God (err, Apple) saw fit to use your parts, then surely it has great merit. As an example, there is no way anyone can match the buying power of Apple in Flash memory. I have talked to companies that make flash memory and their internal cost for flash is far above Apple's! So on this front, iSupply numbers are too high.

As for R&D, I have experience with that too . There are companies who you hire and they will get you the headcount of any project at any company. Don't ask me how they do it. OK, I confess . There are always stupid people who give out the goods if you know how to ask them and these guys know how! Anyway, we got the headcount for various Apple projects and they are exceptionally low. They run a lean ship.

My estimate is that they have about 200 people all up working on all of these products. Using a round number of $250K per head, that is $50M/year. Salaries tend to 70% of the total R&D expense so adding the rest to it, we are at $65M/year. Let's add $20M for capital equipment and major tooling and such ad we are at $85M. Sounds like a lot but amortized over all the "i" products, it is a drop in the bucket. Apple sold 7 million iPads in 2010 so even if that product alone had to fund all of this R&D, you would have a per device cost of $12 -- drop in the bucket. Damn big bucket!

Net, net, this is a cash machine the likes of which has never existed.

PS I own no Microsoft shares. My banker has invested in Apple stock for the last two years although without asking me .