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Summary:

Ars Technica wrote an article about Macs and Blu-ray drives. That’s fine, but they did so under a misguided premise:  In the third quarter earnings call in July, Apple warned investors about an upcoming product transition that would eat away at the company’s cushy margins. However, in the intermediate, no new or […]

Ars Technica wrote an article about Macs and Blu-ray drives. That’s fine, but they did so under a misguided premise: 

In the third quarter earnings call in July, Apple warned investors about an upcoming product transition that would eat away at the company’s cushy margins. However, in the intermediate, no new or updated products have surfaced that look like they could be responsible for significantly reduced margins.

The article then dismisses the new “unibodies” for the MacBook and MacBook Pros, instead suggesting a “mystery margin-reducing product or feature” must have been intended. It goes on to postulate that Blu-ray was supposed to be that mystery feature, but that Apple decided against it. 

No way.

Forget Blu-ray, the new MacBook lines are the “product transition” in question. Here’s why I believe the Ars article was too quick to dismiss them. 

  • When Apple made the statement in their earnings call it was presented as fact. They didn’t say a product transition might impact margins, they said it will. This means the product(s) referred to were a done deal.
  • They wouldn’t make such a claim in an earnings call for something that wasn’t final; Apple is extremely secretive about new products. Even if they weren’t so secretive, an earnings call is hardly the venue they’d choose to have loose lips. 
  • While the unibody construction will likely reap great benefits (and savings) to Apple over time, right now there’s little question it’s more expensive to produce than the old method. How many factories were sitting around just waiting to cheaply blast a laptop unibody out of a block of aluminum? 
  • There’s the expense of the NVIDIA subsystem (Apple said they worked with NVIDIA on this), case design, new manufacturing process, glass trackpad, etc., which are far greater enhancements than a normal product refresh. These represent R&D investments yet to be recovered. 
  • Looking at the MacBook Pros, their prices are the same as before yet their production costs are undoubtedly higher as well. 
  • I think it’s revealing that the high-end MacBook is $100 more than before. Apple likes to keep price points the same while providing more value, and yet this model got a price hike. I believe it indicates the margin hit was extensive enough to justify it. 
  • Product refreshes usually tend to hit margins slightly (though not always), but this is far more than just a product refresh. It’s the first “next-generation” of the MacBook and MacBook Pros in years, and a major change. In fact, it’s a ground-up rebuild. 
  • Both lines being introduced together means the margin hit on one can’t be mitigated by “normal” margins on the other. They’re both taking their hit at the same time, in the same quarter.

I don’t know why some people are looking around for “mystery” transition products, you can easily find them on Apple’s front page right now.

  1. What about a New Mac Mini or Appple Tv with Blue Ray!!??? There are reports that the mac mini is not Dead!

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  2. I think it was the new enclosures. At the time of the warning, aluminum prices were much higher and looked like they could increase further.

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  3. I don’t know, I tend to agree something else was intended to be launched and was pulled at a very late time. Using the term ‘brick’ when they meant a slab never made sense to me. I don’t think Blue Ray has ever figured in their plans anyways — certainly they seem to be moving away from facilitating the use of media that they don’t distribute.

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  4. MarceloR,

    I don’t believe Apple claims lower margins are coming for something they had not yet absolutely decided to launch. They’re not that sloppy.

    Apple made a similar statement about product transitions and lowered margins last Summer. What was the product in question? The new aluminum iMacs, which at the same price as the previous models were clearly pulling in less profit. I’d bet the margin delta between old and new is greater for the MacBooks than for those iMacs.

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  5. You’re right, those looking for BluRay pulled at the last minute are wrong. LED screens in the Macbook are more expensive than CCFL screens. The iPod Touch dropped from $300 to $229, was the other factor besides unibodies.

    These conference calls are not places where companies can lie. They are legally liable for what they say. If Oppenheimer said the gross margins were supposed to be impacted by the unibody and iPod Touch price, then that was it. It was NOT blu-ray.

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  6. The changes in the Macbook and Macbook Pro lines are enough to be called a product transition. Apple had also stated along with this that it would be changes that only Apple could do. I think that’s where the trackpad and gestures come into play as I seem to recall that Apple was doing their own trackpads these days.

    For what it’s worth though the change in focus for the ipod touch from media to games could also be seen as a product transition to some.

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  7. just watch the macbook video first thing Ives says is we startred over from the ground up. That is not a refresh it as stated in the article the first member of the new generation of laptops which is going to leave the competition in the dust AGAIN

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  8. You make sound good and sound judgement calls here and you may indeed be correct on this, but, however, like many others, well….. I’m still hoping for more… something different, something really different and unique that will blow our socks off!

    Of course, if Apple does indeed have ‘something else’ up it;s sleeve, well the new MacBooks are still at least a great start. I just hope that’s all they are, the beginning and not the only or the final ‘transition’ product.

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  9. Don,

    Well, we can all hope for something that will blow our socks off, but what I don’t get is this feeling that somehow “product transition” means earth-shattering, mind-blowing product. It means nothing of the sort. It simply means they’re transitioning a product to something else (i.e., not just a simple refresh of the old package) so margins will be impacted. It really doesn’t mean anything more than that.

    If the aluminum iMacs last year were the last product transition Apple “warned” us about, then the new MacBook lines apply even more so.

    Finally, Apple has already stated their holiday lineup is set. No new stuff this year. There’s always MacWorld, of course, but there’s no way Apple talks about a MacWorld product transition in a 3Q earning call! No, the transition Apple spoke of is already here.

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  10. Hi Tom,

    Mostly in agreement with you. But what i take away from all this is that the new laptops were delayed somewhat (and so is the margin hit).

    At the Q3 earnings call they said that margins would be impacted in Q4 by a product transition. However in Q4 the margin was still very healthy and above guidance. The new laptops were not released/announced until Oct 14. I think the margin hit is coming in this Qtr as production of the new laptops ramps up, with higher initial tooling and component costs which should come down over time.

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