Why there's no Mac tablet this quarter

The Mac blogosphere wants a tablet Mac for this quarter's "product transition." Here's why they won't get it.

Good news: the Internet isn't making us stupid Apple's CFO mentioned a product transition driving gross margins down. Most commentators don't seem know what gross margin means, and the analysis goes down hill from there.

Bad news: we were stupid to begin with This will only hurt for a minute. Gross margin is defined as the difference between the cost of sales and the net sales.

The cost of sales is the direct cost of making the product, like CPUs and labor. It doesn't include R&D, selling, advertising, marketing, administrative or other overhead.

Finance for techies So a statement such as

In order for a product change to influence earnings, it would either need to have thinner margins than existing products, or reduce sales in some way.

is just Wrong. We aren't talking earnings, we're talking GM. Earnings come after you've paid for R&D and Steve's jet. Nor are "reduced sales" going to reduce GM unless Apple stops managing inventory. You can bet they aren't planning that.

The $150 million question Earlier, I estimated the product transition cost at about $150 million. It could be +/- $50 million.

There are two main ways a product transition could affect the gross margin.

First, the gross margins on existing products could be reduced by building them with more expensive components. Replacing a $25 DVD burner with a $100 Blu-ray burner would increase cost of sales by $75.

Second, Apple could be building up inventories. In accounting terms, cost of sales is equal to the beginning inventory plus the cost of goods purchased minus the ending inventory.

This second option is what partisans of the Mac tablet or other mythical products are pinning their hopes on.

But the numbers don't lie: $150 million would mean an increase of 30% above normal growth in Apple inventories. Assuming Apple has an $8 billion quarter they'd have to sell over $2 billion worth of this magical new product. In one quarter?

No. Way.

This isn't inventory build-up. It is margin pressure from new components.

But what about the software? Another goofy suggestion: the software in the product will reduce margins. Uh, guys? Take a look at Microsoft's margins. Bits are free - they don't increase product cost. Just R&D.

The Storage Bits take Apple traditionally maintains certain price points, relying on component cost declines to increase gross margins.

MacBooks are Apple's single largest product line. They've gone the longest without a design refresh. Thus the obvious conclusion: portable Macs are getting costly new components.

Expect to see Blu-ray burners, quad core processors, LED backlights, more solid-state drives, energy-efficient motherboards and improved battery life and/or slimmer and lighter notebooks. Not all on everything, but as appropriate. Some long shots: high-def webcam; Wi-Max; Mac OS in flash; and full 64-bit hardware across all 'Books and iMacs.

These are all leading edge, currently low-volume, products. And expensive. Ever notice how the new toys show up on the high-end? Well, Apple owns the high-end notebook market and they plan to keep it.

One more prediction. The design language of the new MacBook Pros will look like the MacBook Air. The slab is so last year.

Comments welcome, of course. Blu-ray drives will likely go on everything except Mac Mini's and entry level MacBooks and iMacs. And I hope Compressor gets an update to deliver Blu-ray output.