Colossus: The Apple Project

Summary:Apple not only unveiled a new product - the iPad - but also a new financial metric: gross margins of almost 40% that dwarf the competition. Likewise, Apple's market share and/or mindshare dominate it it's chosen markets. Will the iPad help or hinder Apple's margins and growth?

Apple not only unveiled a new product - the iPad - but also a new financial metric: gross margins of almost 40% that dwarf the competition. Likewise, Apple's market share and/or mindshare dominate its chosen markets. Will the iPad help or hinder Apple's plan for world domination?

First, the storage Other than the 3G radios the major model differentiator is flash storage capacity. Since we know how much flash storage costs we get a clear view into the relative profitability of the iPad models.

In addition to the amount of storage we also have some new information from Apple about their gross margins -- the difference between what it costs Apple to build a product and what they sell it for -- due to new accounting for iPhone revenues.

Apple was reporting margins in the low to mid 30s range. Instead of recognizing iPhone revenue over a two-year period they recognize all revenue at the time of sale.

This has raised their gross margin to almost 40% in the latest quarter -- way higher than other PC vendors and consumer electronics companies.

iPad storage pricing MLC flash goes for about $2/GB. The difference between a 16 GB iPod and a 64 GB iPod had is 48 GB or less than $100. Possibly much less considering that Apple is far and away the largest flash buyer.

The manufacturing difference is how many chips get wave soldered on the board. With a better than 50% gross margin on the added flash the 64 GB iPod is a very profitable product for Apple.

And the 32GB is even better for Apple: the additional 16 GB costs ~$30 and sells for $100 for a 70% gross margin. Note: I'm assuming the iPad uses multi-level cell (MLC) flash - but they might have the more expensive and longer life single-level cell flash - which costs ~50% more than MLC.

Will the iPad be successful? Most observers are comparing the iPad to the iPhone -- and that is wrong. The iPhone moved into a well-defined niche -- the smart phone market -- with easily identified advantages: a big bright screen; the touch interface: the app store; and iTunes integration.

The iPad is more similar to the iPod when it was first introduced: consumer uncertainty about its use; limited functionality; price compared to other players; and, most importantly, skepticism that people really want what the product offers. Despite an innovative ad campaign it took two years for iPod sales to take off.

People will need to discover for themselves if the iPad provides a worthwhile service. And Apple will find out what people want in such a device. That will take time and a lot of revamped applications - if it ever happens.

The Storage Bits take With the recent accounting change Apple is revealed to be a financial powerhouse compared to other PC and consumer electronics vendors. They dominate the $1k retail PC market with over 90% market share. The iPhone has redefined the smart phone market. Despite falling sales the iPod still dominates the music player market.

With the iPad Apple fills the gap between the high-end iPod Touch at $399 and the low-end MacBook at $999. With a lightweight Bluetooth keyboard and the iWorks applications the iPad will meet the needs of many mobile consumers.

The iPad will not be an overnight success the way the iPhone was. But it does open up a new kind of computing: casual, mobile and always on. The kind that tablet computers were supposed to provide - but never did.

And we can be sure it will be very profitable for Apple.

Courteous comments welcome, of course. The first to be hurt by the iPad will be the MacBook Air: why spend an additional $1,000 for a heavier netbook with less battery life? Update: I added the 32 GB version info.

Topics: Apple, Hardware, iPad, iPhone, Mobility, Smartphones, Storage

About

Harris has been working with computers for over 35 years and selling and marketing data storage for over 30 in companies large and small. He introduced a couple of multi-billion dollar storage products (DLT, the first Fibre Channel array) to market, as well as a many smaller ones. Earlier he spent 10 years marketing servers and networks.... Full Bio

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