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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 note-books, 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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