Colossus: The Apple Project

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?

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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, iPhone, iPad, Mobility, Smartphones, Storage

About

Robin Harris has been a computer buff for over 35 years and selling and marketing data storage for over 30 years in companies large and small.

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216 comments
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    • Overpriced = vulnerable during a depression

      Watch those earnings quickly disappear as the depression deepens.
      LBiege
      • Lets see how many fly or stay on the shelves

        Considering all the reviews, and having used
        it,.... blah is all I have to say.

        Great for Apple but nothing else.

        Apple.. has an issue.. and thats its out to get
        your money... if you are fool enough to have
        some one dazzle you with pretty pics and
        movements.. yep.. you will fall into their web,
        once in.. you have no choice but to keep on
        paying them.

        Or else be free and have free apps. 26000 as
        of today. not 1000000+ but thats 1/4.. when
        you consider that back a year ago.. it was
        80000 to 2000 over 1/40 relationship.. Android
        is creeping up on Apple.. Jobs is not thrilled
        about it.

        Resistance is futile!
        Uralbas
        • Yawn.....

          Oh no another competitor in the "Free" market who resents a
          company making a profit!?! Yeah if only every company were not after
          my money just like Apple but guess what they are... go figure. Sort of
          the very reason to start a business when you think about it. Every
          company by he way includes Google. The only difference is that they
          are choosing a different angle but an angle none the less. Go ahead
          and try and get Google to reduce their revenue by giving to you
          something for free that they want to generate themselves money and
          see what happens after they stop laughing. As for flying off the shelf?
          Well I don't know myself. Still it did take the public some time to
          warm up to the iPod and look what happened with that product:P

          Pagan jim
          James Quinn
          • Price point consumer knowledge and competition...

            I think they have something here and while I know anything said against Apple really wads your panties. I think the expection for this product was over the top. I could be a hit, but I think laptops and iPhones it will be luke warm to cold for a long time. I could care less, but to ignore the above just because it's "Apple" is just a foolish.
            ItsTheBottomLine
            • Not beczause it's Apple.. hardly.

              If you notice as a rule I only counter what I see as unreasonable of not
              well thought out attacks. This is a foolish attack. I have witnessed
              countless brand name computer makers come and go in Apple's
              lifetime. What did they have in common basically? That they all went
              down fighting the razor thin margins battle. There have been so many
              I'd challenge anyone to make a list of all of them. Also why is Apple
              being dragged into this as if it's the only company that makes a
              profit? BMW or Rolex ring a bell? That list of companies also is rather
              large... Yet I don't see people pointing out to them constantly that
              Timex and or Kia are out there and by comparison Rolex and or BMW
              are EVIL in some fashion and or their clients are fools. Heck there are
              the better chocolate makers who sell their confections at a higher
              price than Hersey's for crying out loud. Where is the rage?

              Pagan jim
              James Quinn
            • Because this article was about computers...

              It is sorta silly to try and compare computer and car manufacturers. Plus, all the hipocrites claim they hate microsoft for the very thing they seem to love apple for.

              Just "attacking what I see as unreasonable."
              eargasm
            • Never cared about MS making money....

              I do think their Office product is to much for what you get.. Or to put it
              better I would get too much and pay to much for I have not use for many
              of it's features and like many a MS product they would only get in my
              way. Which is why I like to use iWorks. Oh and computers are just
              another product as a cars and watches etc.. etc. Computers are not
              unique in that way. Yet Apple seems to be considered almost evil by not
              jumping into the razor thin margin game and yet people seem to fail to
              understand how well Apple is doing. Give credit (excuse the pun) where
              credit is due.

              Pagan jim
              James Quinn
          • High Profit Margins = Stupid Customers

            Well, you can explain "gross margins of almost 40% that dwarf the competition" only on two ways: you have stupid customers or you have, in some way, a monopoly.
            I would add that IMHO the mobile phone and laptop computer markets are very competitive.
            ramon.sole@...
            • re:High Profit Margins = Stupid Customers

              Not really. Delivering a better product is what matters and if it costs more, so be it. There are reasons why there are MBs, BMWs, Ferraris and Porsches. Guess what the "general public" meaning people unlike YOU and ME (why are you reading ZDnet?) need devices that are easy to operate bottom line. The iPhone has solved so many of my own family's tech issues it is unbelievable...yes, I can actually put an hourly tech rate to it!
              geeman44
            • Exactly!

              Why would intelligent people buy superior devices? Who bought all of
              those iPods and iPhones? I guess it was the 'stupid people'. Why should
              an innovative company, creating cutting edge products, be rewarded with
              profits?
              I guess the 'non-stupid' people will continue using their Zune until HP
              actually produces a tablet like that empty mock-up that Ballmer held up
              at CES ... if ever.
              john_gillespie@...
            • Or Apple is buying parts in huge quantities...

              and look at what you actually get when buying an Apple gadget.
              If you're much above the average consumer then it should be easy to see the value in them.
              Mikael_z
            • Or smart ones....

              THe often heard argument is that "It's been done before" when it comes
              to Apple. Take moving heavy stones from one place to another. Now I
              could point out to the wheelbarrow salesman that my work force has
              been carrying by hand stones for decades now so why would I wish to
              purchase a bunch of these wheelbarrows to do what amounts to the
              same thing? If you don't understand don't worry.. You are not alone in
              this:P

              Pagan jim
              James Quinn
            • High Profit Margins != Stupid Customers

              Profit is not evil. Innovation comes at a price. You have to hire the best people, you have to stick your neck out really far so that people of the internet can mock you for your unusual thinking. The computer hardware market's razor thin margins are unrealistic and not sustainable on a business level.

              Any new start-up that launches into a market where they will earn less than 10% gross margin should have their heads examined - unless of course they REALLY love what they do. That is not a way to make money and enjoy life. You might as well pump gas and save yourself the stress.

              I find it amazing that so many people do not understand the difference between an Apple product and a generic computer or even say a Dell. To say that Apple is overpriced is like saying that a Cadillac Escalade is overpriced compared to a bare bones Chevy Tahoe. They are just different. You will pay more for the prestige of the name, the features, the finishes, the options, the mystique, etc. A specs list is not the only point of consideration.

              I have used generic PCs for most of my career and have one at home. I also bought a MacBook Pro last year to pursue iPhone development. Both computers do the job... send email browse the web, play games, create documents and spreaddsheets, yadda yadda. Everytime I pick up my MacBook Pro, though I marvel at what a beautiful example of industrial design it is - it is truly a work of art and a well thought out design that is beautiful and functional. To say that an equivalent spec'd Dell was a "better deal" based on price and performance is still not accurate. The fit, finish and materials of the case are NOT the same. So I say, buy your cheap computer and leave those that want the Apple fit, finish and experience to enjoy it. Don't be surprised when your favorite OEM goes belly up for giving it's stuff away at a low margin. No need to keep blasting. We get your perspective.
              griffariff
            • So, its not the superiority its the glitter???

              nt
              eargasm
            • Maybe it's not a strictly equivalent comparison

              This presumes there aren't other reasons to buy the Apple hardware beyond just getting an Apple name.

              In laptops, for instance, I find the Apple hardware to have remarkable lifetimes -- six and seven years for the first two Apple laptops I ever bought, and all of the others are still in use today. The Dells and HPs had useful lives of only about 2 years each, and never as long as 3. The cheaper construction just doesn't hold up well. (Having said that, the Macbook I use now is not quite 4 years old and is showing the fact that it doesn't have a durable metal body. Still, it has already pulled a long time.) I get similar life out of Thinkpads, but the pricing is very similar.

              But the hardware isn't the whole story. Macs are vastly less trouble to keep running than Windows PCs. How much does the typical consumer spend on antivirus? How often do they replace the PC because it is malware infected to the point of uselessness? How often do they pay for someone to remove malware? How much software do you have to buy for Windows where you get useful "in the box" stuff on the Mac? Once you start adding up these negative factors for the PC you start seeing that it's not an apples-to-apples comparison (pun not really intended). There is value in MacOS, particularly if you want to use the PC to get something done rather than trying to de-louse it every few months. (I don't care *why* that is the case, but it *is* the case.)

              How about those iPods? At this point there are many MP3 players out there competing with it. Apple still dominates. Why? I suggest that it could be because Apple provides a whole ecosystem that is so easy to use that just about anyone can do it. Stick a CD in and click "import" or go to "iTunes Store" and buy something. Plug in the iPod and your stuff just appears. No drag and drop, no software that is so close to utterly useless that it's obvious it was an afterthought.

              It's hard to say if this magic will rub off on the iPad, but I tell you: I don't give Apple my money so often because I am a fan of Jobs. I do it because the equipment works, and keeps working.

              jim frost
              jimf@frostbytes.com
              jimfrost
            • Re: Maybe it's not a strictly equivalent comparison

              >How much does the typical consumer spend on antivirus? Answer: Nothing. It's provided free by our broadband carrier. It's to their benefit to keep customers malware free.
              >How often do they replace the PC because it is malware infected to the point of uselessness? Answer: Never. None of our desktops or laptop computers have any problems.
              How often do they pay for someone to remove malware? Answer: Never.
              >How much software do you have to buy for Windows where you get useful "in the box" stuff on the Mac? Answer: I've got Gimp for free for photo processing, Open Office for word processing, etc., and SciLab for heavy duty number crunching.
              At work they got us a bunch of iMacs to use at the lab. Other than being pretty, and having very nice graphics, they don't do what I need. Not Apple's fault necessarily; it's just that most of what we have was written for Windows.
              barrywms
            • @berrywms

              "How much does the typical consumer spend on antivirus? Answer: Nothing. It's provided free by our broadband carrier. It's to their benefit to keep customers malware free."

              Wrong! If nobody spend money on antivirus then Nortons, McAfee, etc.. would be out of business. And all providers do not provided it. Practically ever PC ships with a 1 year subscription of AV of some sort. After one year most let it expire, that's when I start making my money. Because people <b>do</b> pay to have it removed.

              "How often do they replace the PC because it is malware infected to the point of uselessness? Answer: Never. None of our desktops or laptop computers have any problems."

              Not very often, but it <b>does</b> happen. Usually it's an older computer that's not worth the time to pay someone to fix it.

              ?How often do they pay for someone to remove malware? Answer: Never.?

              Yes they do, I just did it yesterday.

              ?How much software do you have to buy for Windows where you get useful "in the box" stuff on the Mac? Answer: I've got Gimp for free for photo processing, Open Office for word processing, etc., and SciLab for heavy duty number crunching.?

              The average computer user, don?t even know what Gimp is. But they?ve heard of Photoshop or Photoshop Elements. As for software, most people use what?s on their computer from the factory. So if it don?t have a program that is equivalent to, say, iMovie, they don?t do movies. So in their untrained eyes, their computer (Windows) can?t edit movies. I?m not saying Windows can?t be used to edit movies, I know it can, however, you have to remember, most users don?t know squat about computers and that?s what they think. I know, I see it everyday. The problem with most computer geeks, is they don?t understand that they are the minority.

              ?At work they got us a bunch of iMacs to use at the lab. Other than being pretty, and having very nice graphics, they don't do what I need. Not Apple's fault necessarily; it's just that most of what we have was written for Windows.?

              Really? Give me an example. I bet that when it comes to Macs, your just like the average computer user, if it's not installed, it can't do it.
              Axsimulate
            • @ramon.sole

              Really!? So all the people in the world that buy cars such as Mercedes, BMWs, Porsches, Ferraris, etc. or Rolex watches or high priced big screen TVs or huge computer monitors, or dump a ton of money in a computer just to get 1 fps out of the latest game, because, you know, high end graphics cards are high profit items, are stupid customers? Huh, I didn't know that.
              Axsimulate
            • Then MS customers = stupidest of all?

              With 75, 80 even 85% profit margins on Windows and Office products.
              Wow.
              Bruizer
      • um

        Well, the depression started over a year ago and the worst of it seems to
        have passed. Apple was one of the few tech companies that performed
        exceptionally through it. This old canard has been done to death.
        macgroover