• Explore the magic and the mystery!
  • The Tech Night Owl's Home Page
  • Namecheap.com





  • Is Apple Gouging iPhone Customers?

    July 4th, 2007

    You’ve read the reports. It costs an estimated $265.83 to buy the raw materials and build the $599 iPhone. So Apple is, therefore, making 55% profit on every unit sold.

    Does that mean that Apple is cheating you?

    I’ve seen estimates of that sort before on iPods and other Apple hardware, and I’ll accept, for the sake of argument, that the figures are correct. However, there is one critical element that the analysts who have jumped on Apple for making too much money have forgotten: The software.

    We all know that Apple worked for several years to create the iPhone user experience? Was it all done free of charge? Did the employees on the iPhone project receive nothing more than nightly pizzas and tofu burgers for their efforts? Obviously not. I don’t have the figures — and Apple will probably not break them out from other R&D expenses — but I wouldn’t be surprised to discover that several hundred million dollars were spent to design and perfect the iPhone’s software.

    While the quality of software may not mean much to the wireless industry, simply because it’s almost universally lousy, it lies at the very heart of the iPhone difference, and why it has become such an early, runaway success.

    So just how much is the iPhone’s software worth, when you spread it out over, say, 700,000 units sold so far, at least according to the most generous estimates?

    That’s a really good question, and I wouldn’t hazard a guess. But I do want to remind those ill-informed financial analysts that iPhone development didn’t stop dead in its tracks when the first units shipped. Apple has, in fact, decided to book its income from the iPhone over a 24-month period, and it’s no secret they plan on ongoing software updates. So there will be continued expenses enhancing the applications and operating system that powers the iPhone, and that has to be reflected in its selling price.

    Consider a corollary: How much are the raw materials of a $129 Tiger upgrade kit worth? Take a look at the box, the DVD and the ultra-thin instruction booklet. All told, the costs of manufacturing each unit barely comes to $5, probably a lot less. So is Apple somehow gouging you on each sale? What about the $2,499 you pay for the Adobe Creative Suite CS3 Master Collection, which includes virtually the entire product line, from InDesign to Premiere?

    How is Wall Street going to account for what Adobe spends to create products that ship in installation kits that cost only a few dollars, each, to produce?

    Of course that takes us all to the heart of the matter, which is that Apple’s software is an integral part of its product line and its main advantage over the competition.

    The iPhone may have basic components that it shares with other products, but the vertically-integrated design will pretty much always set it apart.

    In fact, I’d be very curious to see how other wireless carriers address their shortcomings? Will they — as they’re doing now — simply provide a laundry list of bullet points designed to demonstrate the iPhone’s missing features, and how they are better equipped to meet those needs?

    All that will do is put them in Microsoft’s position, which is to design products based on the number of features rather than consider how well they are integrated and the overall user experience.

    Indeed, it’s clear to me that Apple is not overcharging you for the iPhone if you account for that missing factor — R&D.

    The other question is, of course, why Apple choose AT&T when there are carriers in the U.S. that have superior customer service and, supposedly at least, more reliable networks. Well, it’s clear that Apple demanded virtually complete control over the iPhone’s user experience, a hard-to-quantify emotional sense of empowerment, which is something no other phone manufacturer has ever understood. Apple clearly didn’t want to be handicapped by the sometimes arbitrary restrictions placed upon the likes of Nokia, Motorola and all the rest.

    This doesn’t mean that AT&T has no control over the system. It may even be that some of the missing features, such as the inability to sync your iPhone or download iTunes content wirelessly was, in part, a compromise of some sort. Or it may be that the systems to handle that traffic aren’t in place yet.

    As you’ve seen already, AT&T’s network has not been able to fully cope with the initial iPhone demand, particularly for folks switching service from other carriers or changing one of their AT&T plans.

    Over time, I expect AT&T’s worst problems in handling the iPhone will lessen. I would also hope that Apple carefully considered the possible handicaps of a poorly-performing infrastructure when they inked that deal with AT&T. Even if the iPhone were otherwise perfect, that could seriously handicap Apple’s long-term success as it strives to gain a big foothold in the wireless phone industry.



    Share
    | Print This Article Print This Article

    11 Responses to “Is Apple Gouging iPhone Customers?”

    1. Robert Pritchett says:

      Shouldn't they be doing these parts comparison lists for cars? Is that vehicle really worth $60,000? $40,000? $20,000?

    2. Lee R says:

      Silly question… You are only being gouged if you are being *forced* to buy the iphone. Everyone who paid $5-600 did so eagerly and without a thought of how much Apple was making. It was worth it to them to trade their dollars for a product that they felt was more valuable than whatever else they could have purchased with those same dollars. If the margin were 95% instead of 55%, it would be the same.  BTW, "gouging" is a term which comes up in conversation whenever someone is on the verge of suggesting that centralized government control of pricing will make things better. Never has happened…

    3. Silly question… You are only being gouged if you are being *forced* to buy the iphone. Everyone who paid $5-600 did so eagerly and without a thought of how much Apple was making. It was worth it to them to trade their dollars for a product that they felt was more valuable than whatever else they could have purchased with those same dollars. If the margin were 95% instead of 55%, it would be the same. BTW, “gouging” is a term which comes up in conversation whenever someone is on the verge of suggesting that centralized government control of pricing will make things better. Never has happened…

      It's the age-old question of the willing buyer and the willing seller. If you feel you got good value from the product you bought at the price you paid, that's the beginning and end of it.

      But as you can imagine, that doesn't stop some Wall Street analysts from looking into things they really do not completely understand.

      Peace,
      Gene

    4. gopher says:

      Well maybe not gouging, but practically the same feature set is there in NeoOffice, as Microsoft Office, and yet NeoOffice, costs how much to the consumer?   And before you tell me Entourage is not in Neo Office, consider this, Entourage has basically remained unchanged since Office v. X, and probably Office 2000 too.  The same crazy one database file which can be corrupted covers addressbook/mail/calendar feature has been there all along, with no improvement in sight.   You basically are able to get the same feature set free as part of Mac OS X as my FAQ:
      http://www.macmaps.com/entouragemigration.html illustrates, and without the bug.  It has been so bad, I sent a bug report to Microsoft, even a CD copy of my database file over a year ago upon request, and they still haven't gotten back to me.   If they stop having a single database file, and all your eggs in one basket, maybe I'd move back to it.

    5. George Slusher says:

      "However, there is one critical element that the analysts who have jumped on Apple for making too much money have forgotten: The software."

      They also ignore other things, like assembly, manufacturing the case (not cheap), transportation and distribution, overhead costs at the Apple and ATT stores, support/warranty costs (easily $50 per phone), and more. These jerks apparently have never run–perhaps never worked at–a real business.

    6. “However, there is one critical element that the analysts who have jumped on Apple for making too much money have forgotten: The software.”

      They also ignore other things, like assembly, manufacturing the case (not cheap), transportation and distribution, overhead costs at the Apple and ATT stores, support/warranty costs (easily $50 per phone), and more. These jerks apparently have never run–perhaps never worked at–a real business.

      Or maybe they have, but they wouldn't be able to create a good headline if the profit margins were closer to, say, 30%, which is fairly normal for Apple.

      Peace,
      Gene

    7. Apple's model Sucks says:

      Apple is gouging consumers.  The ATT lock in is nothing but a rip off.  This has nothing to do with controlling the iphone experience.  They very easily could have opened it up to other providers by selling an unlocked phone, which at a $600 buy in cost would be the right thing to do.  The iphone is useless to me because I do not want ATT and also when taking the phone overseas I am stuck unable to use a local sim card.  I would be happy to pay for the hardware and even a software subscription for updates if I so choose to buy them.Apple could easily make a good profit on an open platform but chooses to get involved with this greediness.  The iPhone seems like a wonderful product but come on, the pricing of the hardware is not the issue it is the service lock in.  What next the only broadband service for Mac's is att DSL.

    8. Gilles says:

      Since June 3, I have read blog posts or forum discussions about the so-called "iPhone virus". Mainly in French, but on a few English-speaking sites also. In fact, it's all about people receiving an eMail bait telling them they've won an iPhone. What disturbs me (I didn't loose any sleep, but still…) is the use of "iPhone virus" to describe this phenomenon. I wrote a few of those blogs, and nobody seems concerned about the phrase "iPhone Virus". But I think it looks to much like FUD and is misleading. Am I overly reacting ?

    9. Albert says:

      What a tired and pathetic device: Sensationalist headlines to draw in the crowds… "Is Apple price gouging? Predictable answer: "No". Sadly, I remember the days when Gene Steinberg had something worthwhile to say on Mac advocacy. Not any more.Have you noticed that Microsoft's profit margin, year on year, is 75%? And that's overall net company profit, not gross profit on one product. Where's your shouting exposé on that?

    10. What a tired and pathetic device: Sensationalist headlines to draw in the crowds… “Is Apple price gouging? Predictable answer: “No”. Sadly, I remember the days when Gene Steinberg had something worthwhile to say on Mac advocacy. Not any more.Have you noticed that Microsoft’s profit margin, year on year, is 75%? And that’s overall net company profit, not gross profit on one product. Where’s your shouting exposé on that?

      Microsoft? Well, I’ve given them their lumps about lots of other stuff. Profit margins are only part of it, and probably a small part compared to the other abuses.

      Peace,
      Gene

    11. Apple is gouging consumers. The ATT lock in is nothing but a rip off. This has nothing to do with controlling the iphone experience. They very easily could have opened it up to other providers by selling an unlocked phone, which at a $600 buy in cost would be the right thing to do. The iphone is useless to me because I do not want ATT and also when taking the phone overseas I am stuck unable to use a local sim card. I would be happy to pay for the hardware and even a software subscription for updates if I so choose to buy them.Apple could easily make a good profit on an open platform but chooses to get involved with this greediness. The iPhone seems like a wonderful product but come on, the pricing of the hardware is not the issue it is the service lock in. What next the only broadband service for Mac’s is att DSL.

      One of the reasons to partner with a wireless service is that the iPhone clearly needs back-end support for some of its features. Otherwise, they wouldn’t work. Consider the way voicemail is configured compared to other phones, and the fact that you can activate the device in iTunes; the latter clearly involves a connection to AT&T’s network. That’s not something that could be done otherwise.

      On the other hand, the iPhone is only one of many, many phones that are locked in to specific services. Even Congress is talking about it — though you’ll notice that didn’t happen until the iPhone came along 🙂

      Peace,
      Gene

    Leave Your Comment