Three Guys and a Podcast

Three Guys and a Podcast: Apple News & Analysis

October 04, 2012 at 9:16am Pacific Time
by: Mark Reschke
Categories: iPad, iPhone, News, Products, Review

Apple Accessories: Lightning adapater cordFor the past four years Apple's profit margins have continued improve while mystifying the experts. In March 2008, Apple reported a 13.9% profit margin for the quarter. Now compare that to the March 2012 quarter where Apple reported a 29.6% profit margin. It seems nearly impossible with increasing competition that is specifically targeting Apple, and with pricing pressures at every turn, that Apple can continually grow its profit margin. 

To make matters worse China often boosts their minimum wage rate by 30% at a time. In fact, China has done this numerous times during the last decade. So how has Apple been able to continue to grow its margins? 

Apple has been able to counter these obstacles to profit by increasing their productivity, reducing costs (due to ever larger economies of scale), and continual improvements to their supply chain process.

While Apple works the underbelly of efficiencies to produce greater margin, they've caught onto a very simple and highly profitable way to help the equation — Apple accessories.

Looking at Apple's iPhone and iPad history, it's clear Apple has a laser-like focus on maintaining and/or growing their profit margin on each consecutive release: 

Original iPhone: Startup costs, lack of large scale volume sales, and an all-aluminum enclosure, coupled with massive R&D costs made it the least profitable iPhone ever.

iPhone 3G: Apple increased sales volumes from roughly 7 million original iPhones to over 20 million iPhone 3G products. The 3G cost increase was largely set on adding new GSM "3G" network speeds to the internals, but those costs were offset by cheapening the iPhone 3G to a plastic housing.

iPhone 3GS: Same chassis and design, with a bump in graphics speed, with sales doubling that of the 3G to over 40 million, easily made the iPhone 3GS Apple's most profitable iPhone ever. 

iPad 2: Apple launched a thinner and costlier to produce iPad 2. But Apple also delivered an integrateable accessory - the iPad smart cover. The brilliantly designed cover costs $29 for a synthetic version or $69 for leather. Apple had again learned how to boost it's margins during a costly new product introduction.

iPhone 4: The costliest iPhone ever made, Apple managed to offset costs with sheer scale, selling over 95 million units. But Apple also ensured the initial sales of iPhone 4's would be profitable by offering a $29 bumper. The bumper was a well crafted rubber ring, which protected the edges of the iPhone 4 and Apple had difficulty keeping the costly (yet cheap to produce) accessory in stock.

NOTE: It is with the iPhone 4, that Apple clearly locked into the new way to ensure margins during the launch of costlier products - Accessories.

iPhone 4S: Adding Siri, speed and better reception to the iPhone 4, the 4S was not a great deviation to the iPhone 4, and was clearly an extension of the iPhone 4. As a result profits soared during the December 2011 quarter, to an Apple record of 28.2%. Bumpers were still available for iPhone 4 or 4S.

iPhone 5: Launched in September 2012, the iPhone 5 represents a major redesign to the iPhone, including a faster custom processor, costlier display technology and LTE network integration. Apple has cost-reduced the backing of the iPhone, moving to aluminum vs glass, which was on the iPhone 4 and 4S. But clearly, the iPhone 5 is the costliest iPhone by component costs. Scale and automation will again be Apple's baseline silver bullet to aid in helping offset overall costs, but Apple has once again used two new accessories to boost it's margins. Apple's all-new earbuds headphones for $29 are sure to sell to many current iPod and iPhone users not planning on upgrading to iPhone 5. For those buying an iPhone 5, the new Lightning connector will sell millions of $29 Lightning adaptors, for users current legacy 30-pin connector devices. Of course, some will want an addtional Lightning cable for $19. 

It is currently rumored that Apple is stalling third parties from making Lightning adaptors and cables, so the Cupertino giant can reap high margins during the iPhone 5's initial launch. It makes perfect sense, and follows with other re-design launches of major products to ensure profit margins remain above 25%. 

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