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  • Prices, Profits and the Bill of Materials

    June 29th, 2009

    Whenever Apple releases a new product, folks will sacrifice one of these gadgets in order to dissemble the component parts and attempt to determine their identity and cost. On the basis of this information, and a few educated guesses, we're supposed to know exactly how much Apple really spent on each unit.

    Recently, for example, it was claimed that the $599 Mac mini carries a component and manufacturing price tag of $376.20. This may not seem so large a figure, but when you factor in the price of shipping along with distributor and dealer markups, well maybe Apple isn't making such a huge profit on this particular model. Assuming the figures are accurate -- and I'll get to that in a moment -- the use of mobile parts for a tiny desktop is blamed for the high cost to make one.

    The theory goes that if Apple built them cheaper, from standard desktop parts for example, maybe they could charge less. Understand that such suggestions usually come from people who probably haven't a clue how to produce anything other than words in a word processing application. Certainly I make no pretense of understanding all the issues involved, but I think I can make a few observations that strike me as utterly logical.

    None of these cost estimates, you see, takes into account what Apple is really paying for raw materials and manufacturing. The reason is that those contracts are negotiated in secret and even Apple stockholders will not see that information in the company's financial statements.

    In short, it is quite possible Apple is benefiting to an unknown degree by special deals, quantity purchases and other arrangements that you and I know nothing about. Indeed, Apple is blamed for paying extra to use mobile parts, but by purchasing larger quantities for use in both desktops and notebooks, they actually save money. That's the sort of common sense information that analysts don't really comprehend.

    Indeed, this is all an exercise in futility. Do the dissemblers work as hard on taking apart a Dell or an HP? If not, why not? Shouldn't we know what it really costs the two largest PC makers on the planet to build their gear? Certainly they aren't making huge profits these days on personal computers. Is that the result of their inability to get good deals on components? Do we credit Steve Jobs, Tim Cook and the rest of Apple's executives with the ability to get better terms?

    Of course, one of the biggest advantages of all is that Apple limits the number of models it produces, and only offers simple upgrades for each, such as a faster processor, extra RAM, a large hard drive or, where possible, graphics processor. All told, it allows Apple to order larger quantities of each part. The PC box makers offer such a confusing choice that it's often difficult for you to know which model and which specific configuration of that model is right for you. It also increases a manufacturer's production costs, and hurts profits.

    All this demonstrates, of course, is that Apple has found a way to make good profits even in a down economy and still accumulate billions of dollars in reserve cash to use however they see fit. The response from far too many members of the media is that there is some sort of alleged Apple Tax, where the company charges extra for the same gear you can get from other companies.

    This has been shown time and time again to be just not so. As I've long maintained, a Mac and PC, when equipped with essentially the same hardware across the board and comparable software cost about the same. Sometimes the Mac is a bit more expensive, sometimes the PC. On the high end of the market, a Mac Pro, a workstation and not strictly a personal computer, will actually cost less than a similarly-configured Dell Precision Workstation.

    As I've said before, it's not an issue of whether you actually need a specific feature or not, or whether Apple should configure its products differently. The only fair way to do this sort of match-up is to use what's actually available, not what you want to be available.

    Yes, it's true that if you buy the spare parts and build one yourself, you will be able to get a PC for less. You can even make it a "Hackintosh" using some of the tips posted online to induce Mac OS X to run on regular PC hardware. However, you are not factoring in the value of your time in researching and selecting the components you need, assembling and testing them and, finally, installing Mac OS X.

    With a genuine Mac, Apple builds everything for you, and provides it with a standard warranty in case something goes wrong. If you make a mistake building your home-brewed PC, you will have to waste time repairing the unit or paying someone else to do it for you. That may be well and good from a hobbyist standpoint, but in the real world, most people would clearly prefer to buy something that just works out of the box.



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    15 Responses to “Prices, Profits and the Bill of Materials”

    1. Andrew says:

      Gene,

      You have stated many times that you need to make a Mac and a PC as close as possible in features to make a comparison, and as always, I strongly disagree. First off, many features of one or the other cannot be duplicated at all. How much should we add to the price of an iMac or Mac Mini to make up for the missing PCI-e slots then? How much should we add to the cost of a PC laptop to make up for the better quality LCD that Apple uses at the same size and resolution? How much is the aluminum case or lighter weight of a MacBook Pro worth compared to an HP or Lenovo? How much do we add to the price of the MacBook Pro to make up for the missing docking port and swappable drive bay on the ThinkPad?

      More important than features that cannot be duplicated at any cost are the features that a buyer actually doesn't want. Lets say I'm comparing the ultraportable MacBook Air to the similarly sized and similar weight Lenovo THinkPad X301. Well, the ThinkPad has an optical drive built into its equally thin and light chassis and the MacBook Air doesn't. Do I add the cost of the external drive to the Air? What if I have no want or need of that drive? As a buyer I would compare the X301 and the Air and pick the one that is right for me, but I sure wouldn't add $100 to the cost of the Air if the Remote Disk software was good enough for me just as I wouldn't add $50, $100 or whatever to the cost of the Lenovo for an iLife equivalent if I wasn't going to work with video and photos.

      What about Windows? Is OS X equivalent to Ultimate? Not really as it doesn't have the ability to control your external audio and video components (other than Apple TV) the way that WIndows Media Center does. Should I add the cost of Windows Ultimate to the PC? Should I add the cost of something like EyeTV to the cost of the Mac to make up for Windows Media Center? Should I care about either of those things if I will never hook up a TV or audio system to an ultraportable?

      I think the correct approach is to look at what you need or want in a computer, find the models that come closest and see which is more expensive. That doesn't in any way mean to buy the cheaper one, but it does say which is more expensive for a given use. My MacBook Air is more expensive than any netbook made, but if I only wanted to check the occasional email and have access to a full-feature web browser when on the road, a netbook would do just as well. Does that make the Air a bad value? No, but it doesn't change the fact that it is much more expensive for that very modest usage pattern. Likewise, if I wanted to edit video and need a gorgeous and full 24 bit 17" display on a laptop, there are very few PC laptops available that even offer such a screen, and those that do actually cost more than the 17" MacBook Pro.

      Put another way, if I am looking at looking at two competing models of car and one of them comes standard with a V6 and the other has the V6 as an extra cost option, and I have no want or need for the V6, then I will not add the cost of the V6 option in my comparison shopping. I might still like the V6-only model better and buy it despite its higher cost, but if I liked the other model better I certainly wouldn't upgrade to the V6 just because the competition has no 4 cylinder option.

    2. @ Andrew: If you can't duplicate the features in a reasonable way, or approximate them with an equivalent feature of similar value (an important distinction), then it is not an equivalent model.

      Apple's unibody case would fit into the category of "fancy case," and hence you might compare it to a Dell with a choice of colors. The quality of the LCD is not something you normally observe in a configuration page, so you'd try to at least match the resolution as closely as possible and what specs you can. Checking product reviews would also help to see how reviewers just a PC notebook's display.

      In the end, this will never be a perfect matchup, but you can certainly come close enough to get a sense of pricing.

      Peace,
      Gene

    3. Jim H. says:

      Gene,

      New subject. Have you heard anything about when 10.6 will be available for pre-order? I realllllly do not want to download the new OS to install at home.

      Regards,

      Jim

    4. @ Jim H.: Apple says it'll be available some time in September. I expect that they'll begin to take orders once the exact release date is known, but if it comes out early that month, you'll be able to order in August. You'll probably have two to four weeks advance warning regardless.

      Peace,
      Gene

    5. David says:

      Andrew and I are on the same page when it comes to computer comparisons. Gene will never agree with us, but that's fine. I hope he welcomes our point of view as much as I enjoy reading his.

      I should point out that there's never any need to assemble your own custom PC unless you enjoy doing it. Any PC shop will assemble your chosen bunch of parts for $50 or less and give you a warranty that's equal to or longer than the standard warranty from Apple.

      I do agree that having a Mac work out of the box and having Apple support at your disposal are very valuable things for the average consumer. That, of course, means that hackintoshes are not for the average consumer.

      Limiting choice has been financially great for Apple, as is their insistence on selling only all-in-one computers in the traditional consumer price range. Notebooks and glorified notebooks like the iMac are great for Apple because they offer lower performance than desktops and therefore need replacing sooner. Perhaps even more importantly all-in-ones don't offer any significant avenues for extending their lifetime and, because they include a display, lock you into not only buying from Apple but also buying a new display twice as often as you would otherwise need to do. Yes lots of people buy a new display with every new computer, but that's truly unnecessary and wasteful.

      Finally Gene's right when he says we need to take these bill-of-materials lists with a big lump of rock salt. iSuppi doesn't know what Apple is paying so they guess. I'm sure their guesses are better than mine, but that's not saying much.

    6. Andrew says:

      Gene Steinberg wrote:

      @ Andrew: If you can’t duplicate the features in a reasonable way, or approximate them with an equivalent feature of similar value (an important distinction), then it is not an equivalent model.

      But with Apple there ARE no equivalent models. Apple doesn't play by the same book as anyone else. The Air is a great ultraportable, but even the cheapest $300 netbook has more ports and better connectivity options. Likewise for the same price there are models that are smaller in footprint or weigh less. By your method, the Air is just not a player in the ultraportable market, but for users who don't want or need an optical drive or lots of ports, it competes well.

      Apple’s unibody case would fit into the category of “fancy case,” and hence you might compare it to a Dell with a choice of colors. The quality of the LCD is not something you normally observe in a configuration page, so you’d try to at least match the resolution as closely as possible and what specs you can. Checking product reviews would also help to see how reviewers just a PC notebook’s display.

      How does a choice of colors in any way match the strength of the unibody on a comparison shopper's mind? Likewise if you want outstanding color quality, resolution is the wrong specification to compare. Apple now uses premium LCDs on all models except the MacBook White, so when comparing the unibody machines to their competition (of which the White MacBook is a competitor) you cannot match them. By your spec-chart approach, the MacBook White beats the 13" MacBook Pro.

      In the end, this will never be a perfect matchup, but you can certainly come close enough to get a sense of pricing.

      But its a totally artificial sense, based on equivalency instead of the buyer. Nobody buys anything based on equivalency. It is preposterous to think that someone walks into a Chevy, Honda or Ford dealer and asks for "the closest model you have to the Camry" and then picks it because it is cheaper or ignores a model that lacks a feature they don't want anyway just because it doesn't match the Camry's feature list.

    7. The core issue is whether two equivalently-equipped Macs and PCs are priced comparably, and they are.

      The unibody case of the MacBook Pro doesn't materially impact its price, but having a higher capacity battery means you should pick a PC notebook with the latter. The issue of removability isn't important.

      The MacBook Air is not a netbook. It is a thin and light portable, and it is priced in the same range as those products.

      Peace,
      Gene

    8. Andrew says:

      The issue of removability isn't important TO YOU, it is very important to others.

      The unibody case has advantages and disadvantages beyond price.

      The Air is not a netbook, but sadly netbooks compete for the same buyer (3lb portables of limited function and minimum size). Compared to the premium ultralights the Air comes up seriously short in features, but vastly superior in processor. Lenovo's 12 and 13" ultralights do even better on display with a 1440X900 option. Sorry, you can only compare them in the context of the buyer's wants and needs, not unwanted features.

      Again, I respect your opinion on most things, but in this case I just don't think you get it.

    9. @ Andrew: Actually it only requires removing a bunch of screws at the bottom of the case to replace those batteries.

      To compare the Air to other thin and light notebooks, you'd certainly attach value to the features one has that the other doesn't. It most cases, it's just ports.

      Peace,
      Gene

    10. Andrew says:

      Replaceable and removable are two different things. I own an Air, and I wouldn't think of swapping out the battery mid-flight like I would on a MacBook Pro, ThinkPad or just about any other laptop. Obviously I can live with the sealed battery or I wouldn't have bought an Air, but clearly it is a concern and is in no way equivalent to a machine like the X301 with not only swappabe batteries, but three battery options.

      I also own a ThinkPad T400, which not counting OS X or Windows, is roughly comparable to a 15" mid-grade (switchable graphics) MacBook Pro. Processor, screen resolution and the option of switching between low power integrated and high power discreet graphics make this and its MacBook Pro competitor two machines clearly aimed at the same buyer.

      Those two machines can be price-compared, but only as they come, not optioned to be as identical as possible. For instance, a buyer who uses it on a desk and then carries it home won't care about battery life and will be happy with the lighter 4 cell battery on the T400. So-configured, it weighs 4.9 lbs to the MacBook Pro's 5.5, but the MacBook Pro gets 7 hours to the T400's 3.5. Easy, if you only need 2 or 3 hours of battery life, you will not add the price of the more expensive (and heavier) 6 cell or 9 cell batteries to the T400 when shopping against the MacBook Pro. Likewise, if you need longer runtimes, like 7 hours, you will head straight for the 6 or 9 cell option on the T400 and will factor in its price.

      The difference is almost $200 between the 4 cell and the 9 cell. A buyer looking for a mid-size laptop with powerful discreet graphics and a reasonably portable size and weight for carry to and from the office might not care a bit about runtime, and as such, will directly shop a 4 cell T400 against the 7 hour MacBook Pro without thinking twice about adding the cost of the bigger 9 cell battery. Likewise a buyer who works on the road a lot and values long battery life will immediately add that big and expensive 9 cell to the T400. Both configurations are direct comparisons a shopper might make, its just that Apple only competes directly with the long-life battery option. Last year Apple only competed with the mid-life battery option. Apple doesn't offer a shorter life (and lighter weight) option in a 15" MacBook Pro, so just as the MacBook Pro can double the life of the base T400, so too can the base T400 travel .6 lbs lighter than the MacBook Pro.

      The buyer decides what is more important, battery life, weight, price, or some combination of the three.

      Also, hardware as you and I agree is only part of the issue. If you must have OS X on your discreet graphics laptop then the 15" MacBook Pro mid-grade is the smallest, lightest and cheapest laptop you can buy today. I wanted discreet graphics on a mid-sized laptop used for general office productivity and, the need for discreet graphics, Windows games.

      The $2000 MacBook Pro is an excellent option for that role, but I got the ThinkPad for $1500 with both 4 and 9 cell batteries and a matte screen which I prefer. The MacBook Pro display has a better color gamut, but the ThinkPad has a docking port, swappable drive bay (I have an ultrabay battery) and the aforementioned battery options. The ATI HD 3470 discreet graphics is about equal to the GeForce 9600M GT while the Intel GMA 4500 is inferior to the nVidia 9400M, but uses less power. I always use it on discreet graphics plugged in and integrated on battery. The ThinkPad is also smarter (for now) about switching graphics as no logout is required and it can be configured to switch automatically by power source or profile.

      The 15" MacBook Pro gets amazing battery life at 7-8 hours, depending on settings. The T400 does far better at 13 hours with 9 cell and ultrabay battery. Do we add the price of an external battery with MagSafe adapter to the price of the MacBook Pro, or do we just say (correctly) that Apple doesn't compete for extreme battery life and leave it at that?

      What you just don't seem to get is that NOBODY pays for things they don't want just because they come standard on a competing model.

    11. @ Andrew: The short of it is that yesterday's $2,000 MacBook Pro is basically a $1,700 model nowadays.

      The left of it is this: If you can't compare two models because the equipment isn't comparable, then they are not appropriate models for such a comparison. End of story.

      The PC world has so many variations there will always be models that can't be compared to Macs. Period.

      Peace,
      Gene

    12. Andrew says:

      If you want discreet graphics you still pay $2000, the $1700 model is integrated only.

      And no, the end of the story is that you, the buyer, compare machines configured to do what you want, and ignore the presence of standard features you don't want. THAT is the end of the story. I don't need an DVD drive for my Air, so I didn't add the price of one when I compared it the ThinkPad X301, just like I don't need iLife or media center, so I didn't add Windows Ultimate to the ThinkPad (but did add Business, as I need domain membership). THAT is a price comparison, and the MacBook Air was the winner.

    13. @ Andrew: You forget that the integrated graphics is good enough for most people.

      As for the rest, that's not a price comparison, but simply a product comparison. You continue to overlook the distinction.

      Peace,
      Gene

    14. Andrew says:

      Good enough for everyone that doesn't want discreet. The ThinkPad T400 is also available with integrated only for less money, but the comparison was for discreet graphics.

      Tacking on unwanted features is not a price comparison, it is a way of cooking the books to make Macs look cheaper than PCs. They are cheaper if you want or need all of the features, but aren't if you don't.

    15. @ Andrew: Nonsense. You can't compare the price if you aren't selecting from two products that are as similar as possible in terms of configuration. What you actually need, however, may be totally different, but that isn't the issue raised here.

      Listen, you've presented your point of view 50 times already and then some. Time to let others participate, OK?

      Peace,
      Gene

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