iPad Price Gouging? Not Quite

16 Comments

iSuppli, the market research and analysis firm, came out with its final report on how much it costs Apple (s appl) to make an iPad, and the magic number turns out to be about $260 for the baseline 16GB model, which sells for $500 at retail. Apple haters are surely whining that Apple is gouging customers with these prices while getting away with huge margins.

The reality is different. Apple wouldn’t make any money if it just charged slightly higher than the manufacturing costs. Apple has to pay for both hardware and software development, plus the costs of launching a completely new product. It also has to pay its employees, both at the Apple retail stores and at Cupertino itself. With these extra costs in mind, the price of the iPad doesn’t seem as high (many Apple analysts were actually predicting that the iPad would cost $1,000 or more). Apple’s margins are actually far less than other commodities like CDs, which cost about $1 to manufacture, yet are sold for around $10 at retail.

Apple gets these margins for each version of the iPad:

Model Retail Price Hardware Cost Margin
iPad 16GB $500 $260 48%
iPad 32GB $600 $290 52%
iPad 64GB $700 $350 50%

As you can see, the margins stay about the same as the hardware costs go up. Apple’s margins for new products have historically been around these numbers as well, so if you are being gouged (and you’re really not), at least you should be used to it by now.

16 Comments

AndroidGold - Android Tablet PCs

As a business, Apple has done an amazing job at making profit margins in electronics that used to be the standard but for the past 25 years has been unheard of. A few years back, Panasonic was making a major push to their profit margins up from 5% to 10%, which is more typical for a successful electronics company making computers, DVD player, TVs, and so on. A major reason being that these electronics are almost commodities and low price manufacturing allows nearly anyone to compete on basic functionality, driving prices and profits lower and lower.

However,mobile handset (in America anyway) have been so dominated by wireless carriers that their OS have been slow to evolve and evolved somewhat disjointedly from manufacturers. Tablets just didn’t catch on with full-blown computer OS, and Apple hit a home-run (again) with the notion of a tablet (or slate) with essentially a mobile OS. Of course, this means for 3G use, we have the wireless carriers in the picture again, but for the Wifi version it seems $500 is a fair price, though international demand has driven the price of iPads in China and the Middle East upwards of $1000 apiece.

Cheap Android tablets are the best contrast, and for under $300 (I’d expect that to drop to $200 by Christmas) you can get a decent Android tablet pc that does many of the things an iPad can do with obvious flaws (poor touch screens, disjointed app market with less consistency, and who knows for service) and some nice improvements (flash player, use multiple apps at once, don’t have to use the iStore).

What’s interesting about the tablet market is that these devices do not really need wireless service, and so the price-protection that iPhone and Blackberry phones (and even brand-name Android phones) get in the mobile handset market will not exist to the same degree in the tablet market. I would expect to see both high-end (Galaxy Tab) and low-end (“aPad”) Android tablets flood the market next year and it will be interesting to see how both Apple and Google itself react to the onslaught of devices that operate with no intention of joining or catering to their carefully manicured proprietary markets.

Logan Abney

While I completely agree with Apple requiring costs to support software development and pay its employees, it still doesn’t quite justify the prices. I personally feel that Apple has dropped its roots as the underdog, and now everyone is paying for the brand. Why does it cost $500 to put out a 16GB iPad, while the estimated cost of the new Adam Tablet is $330 at basic, with superior specs.

clayton

I agree at first the cost of employees, research, shipping and handling are all cost that may not be associated with the cost to make an ipad. However, the largest part of this cost is research and development. BUT, once the product is made the bulk of the research is done. So, eventually you will see a drop in price once the R&D costs are recouped. As with almost every other technology that has been invented. Take for instance the iphone, it debuted at a price of about 700USD now you can get a 3G from walmart for around 200 USD. The advantage is in the wait anyways. if you wait, the price comes down and you get a better product as the second and 3rd generations come out with the bugs worked out and existing things that work are refined and made better…..But that’s the way we’ve seen most technology work…

Mhu Cao

Nice piece of hand-waving. Fifty percent margin is fifty percent margin – the finished device price is doubled. Do you mean to tell me that the 64GB WiFi+3G iPad has a manufacturer’s cost of over $400? Sorry. I know a bit more about the industry than you apparently do.. Your evangelizing doesn’t change the fact that Apple is getting substantial profit from their products.

With that said, there is nothing wrong with a healthy margin. It’s not “Apple haters” that “whine” about the price, it’s the self-entitled socialists who cry. They want something for nothing.

The market dictates price, as it should. If people will pay $800 for an iPad, then that’s the price. If sales volume drops, Apple will drop the price to match (as they have for past products).

I learned a very long time ago to let the early adopters find the bugs and unacceptable limitations, and pay for additional revisions and development.

Is Apple gouging? No. They are letting free market forces set the price. It will drop in due course for many reasons. The “haters” can go to Venezuela or China for their cheap People’s iPad.

My price point for this incarnation is about 40% below the current price. So, y’all enjoy yourselves. Don’t drop it and don’t let it get beyond arm’s length.

skips

iSuppli states that the hardware cost is $260 for the $500 iPad. That statement is not the same as stating that the margin is $240/$500. There are other costs that are part of the “cost of goods.” In particular all of the labor costs to assemble the item are part of the cost of goods. In addition, some of the shipping costs are part of the cost of goods. (The cost of shipping the goods to a customer or a retailer, who is considered a customer of Apple, is part of the cost of goods for the customer and not Apple.) For instance, the cost of shipping components to the factory in which the item is assembled are part of the cost of goods.

These rules are not arbitrary or capricious. They are related to the Generally Accepted Accounting Practices (GAAP) definition of a sale. The expenses that are directly attributable to bringing an item to the point of a sale are considered part of the cost of goods. Any costs that cannot be directly attributed to an item (e.g., research and development, prototyping, or advertising) or occur after the point of sale (i.e., shipping to the customer) are not part of the cost of goods, but are accounted as operating expenses.

It appears to me that most of the articles that have been produced by iSuppli about Apple’s products seem to be aimed at damaging Apple’s reputation.

marshall

Except that I just bought 25 blank dvd’s for $30 Canadian.

It really doesn’t matter how you slice it, you are overpaying for a piece of shit, does it really matter how much you overpay if you are stupid enough to buy one in the first place? I wouldn’t take one for free to be honest.

BobbyD

Marshall –

To assume that nobody has a use for an iPad because YOU don’t is pretty shortsighted. You don’t want one, fine. Saying everyone who does is stupid – that’s stupid.

Lots of people out there. Many of them aren’t like you.

Richard Walsh

I agree with you Alex on the post, but I agree with Todd regarding the CD example. I make music and release cd’s and never has it costed me 1$. Maybe for the medium alone, but you qualify your post with adding the software and hardware to go into making the iPad.

A CD you need to think the same costs, the costs of operating the business and employing artists, and staff, etc. Maybe you were refering to the manufacturing of a blank cd versus a record label cd with content on it. Than that makes sense.

Todd

Anyone else think that a CD is about the worst possible example they could have used for contrast?

A CD is just the medium – the CONTENT on the CD is what makes it $10.

Quark

“A CD is just the medium – the CONTENT on the CD is what makes it $10.”—I think that was Alex’s point. The “music” (software, promotion, development, etc) is the missing costs from iSuppli’s report.

Dan Hallock

It’s not really accurate to say flat-out “Apple gets these margins…” iSuppli estimates 50-60% margins for Apple product after Apple product; and every quarter Apple announces their margins, which are always around 30%. Clearly iSuppli is not painting an accurate picture, and you should heavily qualify anything they say.

That table of margins is based on iSuppli’s claim to know costs that they do not really know, and excludes all costs besides the hardware itself.

Himanshu

andrew is right … there are lot more costs involved than just the hardware … stocking, transporting, costs incurred in R&D, dealer profit margins, warranty cost backup, advertising, and lot others … i guess after all this, apple would have saved less than 10% …

Andrew

Other way around!

Wikipedia: Gross Margin Percentage = (Revenue-Cost of Sales)/Revenue

($500-$260)/$500 = 48%
($600-$290)/$600 = 52%

Of course, the net profit is going to be some way less. There will be significant other costs incurred to get this kit in our greasy mitts.

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