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The new iPod Nano family sports a healthy hardware profit margin.  (Source: Apple)
The new iPod is very cheap ... for Apple: the new iPod Nano makes a handsome profit

Apple Inc. is apparently profiting handsomely off its new "fat" iPod Nano. DailyTech announced the arrival of the new "fat" iPod Nano earlier this month after weeks of rumors.

Retail analyst iSuppli estimates that Apple's new "fat" iPod Nano 4 GB, priced at $149, costs just $58.85 to make, while the 8 GB model, priced at  $199, costs $82.85 to make.  iSuppli tore down the Nanos and took a piece-wise inventory of the hardware components to create these estimates.

These estimates indicate that Apple will make a profit of over $90 dollars per unit on the 4 GB model  (about 60% profit), and a profit of over $113 dollars per unit on the 8 GB model (about 57% profit).

ISuppli estimated the cost of parts to be $13 dollars per unit cheaper than the old 4 GB nano, and $31 dollars per unit cheaper than the original Nano, introduced in September 2005.

It is important to note iSuppli's estimates don't account for non-hardware costs, including software development, intellectual property, packaging, final assembly and distribution.

The larger profit margins may add up to big profits for Apple -- 41 million iPods sold over the last three quarters, and iSuppli conservatively estimated 23 million nanos to sell in the 2007 fiscal year and 28 million in 2008.

iSuppli analyst Chris Crotty claims that Apple is a master of forcing suppliers to compete with each other, in order to drive down prices.  For example, the touch wheel was originally supplied by Synaptics, then in the last generation, Apple switched to Cypress Semiconductor, and now Synaptics has outdone Cypress to regain its position in the new "fat" Nano.  The total saving to Apple was relatively paltry, $0.13, but those little cost cuts add up.  The power regulation circuitry was previously supplied by NXP Semiconductors, but is now supplied by smaller German firm Dialog Semiconductor.

Perhaps Apple might have saved a bit too much money on the screen, as there have been significant early complaints concerning it including serious problems with the display's black levels leading to images "bleeding" and otherwise artifacting, as reported at DailyTech.

Despite its critics, Apple's iPods remain wildly popular, and Apple's iPhone is selling significant numbers.  Apple seems to be following in the footsteps of the Nintendo Wii in creating hardware that has a large profit margin, while staying cutting edge. 

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A rather important distinction.
By masher2 (blog) on 9/24/2007 9:54:06 AM , Rating: 6
quote:
It is important to note iSuppli's estimates don't account for non-hardware costs, including software development, intellectual property, packaging, final assembly and distribution
Nor hardware development costs or warranty repair costs, retailer profits, sales/marketing overhead, or a few other factors.

Judging profit from BOM costs alone is risky. Cooking food is a much simpler business than making consumer electronics, but most restaurants mark up the wholesale costs of their foods by at least 400%. Many of them still lose money and go out of business.




RE: A rather important distinction.
By retrospooty on 9/24/2007 10:06:33 AM , Rating: 3
You are exactly right, it doesn't count "hardware development costs or warranty repair costs, retailer profits, sales/marketing overhead, or a few other factors."

Is it just me, or is seeing the costed BOM pointless to me on a tech news site. I mean who cares (other than Apple's primary shareholders)? In the end its all about retail price and your choice is is it worth for you to buy it based on retail price, not the BOM.


RE: A rather important distinction.
By TomZ on 9/24/2007 10:13:28 AM , Rating: 2
No, I wouldn't say the BOM cost is pointless. It at least gives some indication of the cost of the manufacture and whether the device is profitable even if it is not perfectly complete or accurate.


RE: A rather important distinction.
By retrospooty on 9/24/2007 10:16:15 AM , Rating: 5
OK, so you know the costed BOM minus all of the hidden engineering, support, etc costs. What are you to do with that info? I mean your choice is to buy it or not to buy it and that choice is based on whether or not you want it and if the final price you pay is worth it to you.


RE: A rather important distinction.
By TomZ on 9/24/2007 10:44:46 AM , Rating: 2
iSupply doesn't do tear-downs and BOM estimates to educate consumers. This information is useful for shareholders of Apple and its competitors, directly by Apple competitors, and other electrical engineers who might be curious about the design of the device. I see these types of tear-downs all the time in the trade rags.


By theapparition on 9/24/2007 3:37:15 PM , Rating: 2
Exactly,
If I saw that the material cost to manufacture a $149 ipod was $130, there is no way I would invest into apple. But when your getting to 60% margin, that's pretty good.

Yes there are other costs involved, but for high run (millions) manufactured electronics products, a 30% margin is usually acceptable.


By adam92682 on 9/24/2007 11:02:57 AM , Rating: 2
Maybe he wants to buy all of the parts and assemble them himself?


RE: A rather important distinction.
By xsilver on 9/24/2007 10:48:17 AM , Rating: 2
I think what is pointless is not the BOM but how these articles against apple always portray the profits as "handsome" or the BOM as "just $xxx"

bit of tall poppy syndrome imo


By retrospooty on 9/24/2007 11:19:12 AM , Rating: 2
I think I agree with you, but I am not sure what tall poppy syndrome is.. LOL =)

Apple, or any other company is perfectly within their rights to make as much money as they can with thier products. No issues at all with that, or charging $600 for an iPhone. I cant say I think the early adoptors are too smart, but if I were Apple I would do the same.


RE: A rather important distinction.
By dude on 9/25/2007 12:12:08 AM , Rating: 2
True, BOM means nothing. It still cost alot of money to develop, manufacture, distribute, advertise, and support such a product.

If BOM means anything, I have a LV wallet that was slightly over $400 with taxes and bought someone a 1250 LV purse. The BOM is probably $10 for the wallet and $20 for the purse. LV makes a hell of alot more than Apple ever will because in between, there isn't that much to handle or support.

compare to a car, such as a Toyota or Ford. The BOM is fair for the profit they make, however, because of sheer volume, Toyota makes money, while Ford, is losing money on most of their vehicles. Ford actually makes vehicles for less money because of their more stream-lined assembly processes compared to Toyota.

Same things, but totally different.


RE: A rather important distinction.
By JasonMick (blog) on 9/24/2007 10:24:54 AM , Rating: 5
quote:
Nor hardware development costs or warranty repair costs, retailer profits, sales/marketing overhead, or a few other factors.


Very true, but at $90-$113 dollars profit per unit (appr.) thats a lot of money to go around.

Packaging, IP, and distribution might take $20 conservatively.

Assembly might take $5, as it is massed produced.

Warranties, marketing, etc. will take up more, but it would be pretty amazing if Apple doesn't end up with a nice profit.

quote:
Cooking food is a much simpler business than making consumer electronics, but most restaurants mark up the wholesale costs of their foods by at least 400%. Many of them still lose money and go out of business.


Food business is a far cry from the electronics business economically. First, food business often does not implement a full mass production model. For example in many restaurants, cooks individually cook your meal, seperate from others meals. Most electronics are massed produced, with only some of the production requiring human attention (as opposed to the fully human made food prep.).

Also, 400% mark-up at a restaurant may be from $3.00 to $12.00, but although a higher percentage $9.00 is a much smaller profit compared to a $100 electronics profit. It's owerer price, lower profit, sort of concept. Restaurants' also face the problem of paying the rent. Much of their profit typically goes to paying the bills to rent space for their restaurant. This is a key reason why they often go out of business. If they don't get enough customers, they will be unlikely to pay their cooks fees and the rent. Electronics, on the other hand get to distribute their wares for free at retailers. Warehousing costs, etc. just don't equal out to the cost of renting space for a food prep business, which is the key reason in my mind why these models are incompatible.

Anyways, Apple should profit, and food prep IMO isn't a very good analogy.

You do raise some good points though.


By masher2 (blog) on 9/24/2007 10:40:47 AM , Rating: 3
> "Very true, but at $90-$113 dollars profit per unit (appr.) thats a lot of money to go around."

Agreed, and Apple is certainly making a profit on each unit. But if anyone intends these figures to suggest they're somehow making an unfair profit, then I have a problem. Apple's true profits are probably in the range of $35-$45/unit, which isn't out of line and, even if it were, its still the wrong metric to judge by.

How it compares to other players in the $150 price bracket is all that really matters. Whether Apple makes a huge profit or loses big on each one is irrelevant.


RE: A rather important distinction.
By TomZ on 9/24/2007 10:43:04 AM , Rating: 2
Actually, Michael's not far off. We also develop and sell electronics products (lower volume, however), and having the sell price at 3-4x BOM cost is pretty normal in our industry. BOM cost is a useful measure because it is easily measured and can be estimated pretty early in the program.

Also, in restaurants (as in many businesses), the labor costs tend to dominate.


By JasonMick (blog) on 9/24/2007 11:28:49 AM , Rating: 2
No, I agree with that part of his assertion, just the business models are very different.

I agree with you that BOM are useful measure as well

Unlike restaurants that pay lots for chefs, Apple has some pretty cheap labor, apparently according to wikipedia:

On June 11, 2006, the British newspaper Mail on Sunday reported that iPods are mainly manufactured by workers who earn no more than US$50 per month and work 15-hour shifts.[50] Apple investigated the case with independent auditors and found that, while some of the plant's labour practices met Apple's Code of Conduct, others did not: Employees worked over 60 hours a week for 35% of the time, and worked more than six consecutive days for 25% of the time.

Links:
http://en.wikipedia.org/wiki/Ipod
http://www.newsfactor.com/story.xhtml?story_id=131...

...kind of interesting. Of course, that is pretty standard practice in the electronics industry.


RE: A rather important distinction.
By Richlet on 9/24/2007 1:04:29 PM , Rating: 3
I agree that the restaurant business comparison is a poor one. Most restaurant's 400% markup yields only a 3-5% profit. The rest of the cost goes to what others have mentioned earlier, among other things. And it should be pointed out, electronics don't go rotten after 5 days unsold. Perishable food does. Believe me, the service industry is *anything* but simple.


RE: A rather important distinction.
By masher2 (blog) on 9/24/2007 10:57:55 AM , Rating: 3
> "Electronics, on the other hand get to distribute their wares for free at retailers."

I missed this bit the first time around. Depending on item, the retailer generally gets anywhere from 10%-50% of the retail sale price. I wouldn't call that "free".


By JasonMick (blog) on 9/24/2007 11:23:44 AM , Rating: 2
True, I guess it would be more accurate if I said, when compared to the % of income spent by restaurant owners on space, retailer space/carrying fees (as you said 10%-50%) are a smaller respective fee, particular when the retailers are paying their employees to try to sell you the company's product, as opposed to a restaurant where they have to pay themselves for waiters, who don't produce anything, but simply interact with customers and sell products. Off course waiters don't get paid much, but it deducts from restaurant's profit margin.

Definitely there are fees on the retailer side, but like we both agreed, a lot of people should end up with a nice share of profit, which was the main gist of the story.


Comparison to previous model irrelevant
By Anonymous Freak on 9/24/2007 12:58:15 PM , Rating: 2
[quote] ISuppli estimated the cost of parts to be $13 dollars per unit cheaper than the old 4 GB nano, and $31 dollars per unit cheaper than the original Nano, introduced in September 2005. [/quote]

Do you really think Apple was paying the same amount for the parts in the previous nano at the end as they did when it was first released? Or that Apple would be paying the same amount for the original nano as when it was first released? No. Part of the cost reduction comes from the fact that the parts themselves have gotten cheaper. I would like for iSuppli to have done an estimate of the cost of the previous nano's parts prices AT THE SAME TIME as they did the price estimate for the new nano.

Among other things, this would show the cost savings over time, as they would then be doing these comparisons both at the beginning and end of the product's lifecycle.




By theapparition on 9/24/2007 3:45:18 PM , Rating: 2
While you have a perfectly valid point, one thing you should realize is that suppliers usually go under contract, to provide that part for a specified time. Yes, they do re-bid, but that also cost money for the alternate product to be engineering approved, then cut it into the design cycle, manage, etc. That cost is not insignifigant, so I'd be surprised if the price dropped signifigantly as 2years have gone by, on an already mature product.
With that said, some prices are quite volatile, like memory, so that would be something that was purchased at market rates.