September 18, 2012

The iPhone 5: COGS are the Apple Profit Core


I leave it to my colleagues here at TechZone360 to explain virtually everything you need to know about the global phenomenon known as the launch of the Apple iPhone 5. It is certainly something to marvel at. This is true based on the iPhone 5’s versatility as well as Apple’s continue marketing virtuosity in the post-Jobs era. Let’s face it, as big as everyone thought the iPhone 5 was going to be it looks like it might be even bigger.

Factoids abound. A few are almost incomprehensible. For example, analysts say the iPhone 5 will add more than a government stimulus package to the U.S. GDP, between one and one and a half percent. Apple says it set sales records over the weekend with a staggering two million plus pre-orders last Friday alone, a fact backed up by AT&T who said sales shattered their records as well.

Sales in retail stores will not begin until 8:00AM EDT on September 21 and shipments are likely to now take two instead of three weeks to arrive. The latter is actually good news since the new Apple iOS 6 will be available for download on September 19. People are already camped out at stores waiting to place their orders. Part of this is because a sizable segment of the population has a desperate need to have the latest and greatest. Part is because that same crowd fears not getting one to dazzle their friends with and stoke their sense of well-being if Apple ends up being unable to keep up with demand.    

While the scope of early demand is impressive, in many ways it could have been foreseen. Forget about the rush of current iPhone users dumping older models prior to the launch as a leading indicator. With a large display, new design, faster processor and improved camera this was going to be a hit. I may be showing my telecom prejudice here, but the thing that seals the deal is LTE connectivity. Why own an old slow iPhone when you can have one with an improved online user experience that is demonstrable? Why own an Android 4G LTE device now when you can have an iPhone with LTE? This is all the more compelling for those with current contracts who can get a subsidized phone in the U.S. ($199 for the down and dirty 16G version) by simply agreeing to a two-year extension. Whether it is worth the base price for those wishing to not have a contract remains to be seen, but I suspect the market will respond with a rousing yes.

The numbers you have likely not seen       

The iPhone 5 is coming out in three flavors. In keeping with pricing tradition of previous iPhones, prices are as follows: The 16GB will go for $649, the 32GB version for $749 and the 64GB one for $849. This kind of pricing, along with the aggressive price premiums the iPod and iPad have over competitors in respective markets led me to wonder why the company can command the stock valuation it has. Obviously, the brand status continues to enable the company to charge premium prices versus competitors, but how much of a good thing is this? The simple answer is “very good.” Margins are terrific. The other answer lies in one word, ARITHEMATIC.

Research firm TechInsights is always a great source of cost of goods (COGS) for understanding such things. With the caveat that it has not analyzed the new iPhone5 yet, the analysis even as a rough estimate is revealing:

Even taking into account manufacturing costs, packaging and shipping that is a whole lot of margin. Toss in a few accessories, and the Apple Store and iTunes wrap around, is there any wonder the Androidians are eating their collective hearts out? Given competitive ecosystem business models no wonder why it is so hard to take a good bite out of this Apple. As with human health, it is important to have a strong core.  

In the name of full disclosure my wife’s contact for her Blackberry with our provider is about to be up. I have a suspicion you will be seeing me in line.  






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