Horace Dediu on Apple’s iPhone Profit Margins

Horace Dediu:

The question should be: How is this possible? What does this product have that gives it such a pricing advantage? Note the the ratio was preserved through the three years shown and has persisted for nearly five years.

And in a separate piece:

However, a casual observer would be stumped by a comparison with competitors which cannot come near the profitability Apple enjoys. How can the same bundle of components (admittedly mostly off-the-shelf) be sold at triple the margins?

It comes down to software. Apple has a monopoly on iOS and OS X and charges for it through its hardware. That’s a very valuable monopoly. It’s worth at least $1 billion per quarter.

A serious mistake Apple bears (such as the aforelinked Karl Denninger) make is to assume that any hardware product has a natural or fair profit margin of no more than around 10 percent. That might be a good rule of thumb for a commodity market, but Apple doesn’t make commodity products. Compare Dell vs. HP Windows PCs, or Samsung vs. HTC Android phones, and one might reasonably argue, “Eh, what’s the difference?”, and thus profit margins are squeezed because they have to compete with each other on price. Apple’s products have unique differences that people are willing to pay for.

The fair price for a product isn’t cost-of-goods plus (say) 10 percent. The fair price for a product is what people are willing to pay for it.

Thursday, 19 April 2012