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  • So Where’s the Major Product Transition, Apple?

    October 15th, 2008

    All right, as we reach mid-October, I continue to wonder just what is Apple planning that will result in lower profit margins as a result of a major product transition?

    Or has it already arrived?

    That development was signaled during the last quarterly conference with financial analysts to discuss Apple’s earnings. It sure ignited the speculative flames, as both rumor sites and regular media outlets wondered just what Apple had under its corporate sleeves.

    Well, in September, the iPod line was refreshed in the typical fashion. More goodies for the same price, and a new/old form factor for the iPod nano. Certainly this will put Apple in good stead for the holiday season to sell tens of millions of iPods once again, even though sales increases are not quite what they used to be. But none of the changes can truly be characterized as major, nor would it seem that the prices are aggressive enough to hurt profits.

    That takes us to this week’s note-book refresh. Now in the scheme of things, I suppose Apple didn’t really have to do much. After all, MacBooks and MacBook Pros continue to deliver great sales figures, and, aside from some flashy colors on ugly old boxes from the PC box assemblers, there’s not much competition.

    So what did Apple do? Well, it was a mixed revision.

    At the low end, they simply continued building a variation of the older older model with either white or black plastics for $100 less, making them the first note-books from Apple to dip below the magic $1,000 barrier in several years. But it’s not as if the price changes are aggressive enough to substantially hurt profit margins, as the older parts used in these products are cheaper than they were when the MacBook line was last revised earlier this year.

    Now I suppose those precision aluminum unibody enclosures weren’t cheap to design, and it could be that the initial production ramp might prove to be extremely costly. Indeed, Apple has a penchant for expensive fabrication schemes, witness the complex plastic casings for the late, lamented Cube. So even though pricing for the new MacBook and MacBook Pro lines aren’t significantly different from their predecessors, I suppose that could hurt margins. The new NVIDIA graphics chips and the glass trackpad with embedded click button might also raise the price tag somewhat.

    So perhaps that’s it, folks! I suppose we’ll know when the inevitable tear-down occurs and an estimated bill of materials is published.

    Of course, some of the analysts don’t quite see it that way. I’m already hearing rumblings that Apple disappointed them because there was no $899 MacBook to compete with the cheap PC note-books. Perhaps they are still succumbing to the belief in the alleged “Apple tax,” the extra money you reportedly pay to own a computer with the Apple label on it.

    Perhaps they are just following the talking points of a certain misinformed Microsoft executive who ranted on about that subject in a recent interview published over at CNET, a site that’s always had difficulty giving Macs a fair shake. They really don’t deserve the extra hits, either, but I’m presenting the link anyway in case you want a point of reference.

    It’s worth noting in passing how the subject of that interview claimed that the Mac version of Office lacked an equivalent to Outlook, as if Entourage didn’t qualify. He needs to read the company’s spec sheets a little more carefully.

    He also referred to the Mac Pro, which lists for $2,799 in its standard configuration, as an example of an extremely overpriced computer. Now I suppose it is, when you look at those PC boxes listing for $399, complete with display. However, the Mac Pro isn’t strictly a personal computer; it’s a workstation. When you match it up with the equivalent product in Dell’s lineup, a Precision Workstation, identically equipped of course, the Mac comes out considerably and surprisingly cheaper.

    Indeed, when I did that before writing this article, the Dell, even with a $150 rebate, was still over $4,000. In Dell’s favor, they do offer a free 19-inch display, which is worth maybe $400. But that still leaves one huge price gap.

    In fact, Dell actually admitted to those differences at one time, although they never explained why, nor did they attempt to reduce the price of their product to match Apple’s.

    In any case, it’s a sure thing that the arguments about Apple’s prices won’t end here. There are many ways to spin that debate, and I’ve already weighed in on it far too often already.

    I just believe that, when it comes to the value equation, the Mac, or most any Apple product for that matter, generally comes out way ahead of the competition.



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    9 Responses to “So Where’s the Major Product Transition, Apple?”

    1. Andrew says:

      Its actually quite funny that Microsoft specifically mentioned the Mac Pro in saying that Apples are more expensive. Its quite hilarious, as you correctly point out, that the Mac Pro is far cheaper than the Dell equivalent, and here is the rub, unlike comparisons involving the Mac Mini or the MacBooks, two products which are radically different than their competition and cannot be fairly price-compared, the Mac Pro is the one Apple model that does directly compete and can be configured EXACTLY the same as Dell’s version.

      I also think you are right in the machining process for the new MacBooks and MacBook Pros is the radical change that will lower Apple’s margins. I went and played with one today, and that thing just has to be expensive to make.

      Cheers,

      Andrew

    2. javaholic says:

      Great headline. I was thinking the same thing yesterday after the announcements – so the “big transition that our competitors won’t be able to match” was…?” Yes, has to be that new swanky fabrication process. I don’t doubt a lot of R&D has gone into it. Unfortunately it’s just not as quite as exciting as speculating on what hot new price points we might see (the $800 MB, especially when things are getting tight financially for many) or a game changing new product in the line up (perhaps the elusive minitower is being moulded right as we speak!) 🙂

    3. Richard says:

      You have to wonder about the wisdom of the new aluminum chassis manufacturing process. Apart from all the expensive machinery used to manufacture it, there is a great deal of waste material (to recycle).

      The camera industry has used investment cast magnesium alloy frames for camera bodies for many years. (Take a look at Nikon’s D3 or D700 product descriptions for an example…and Nikon is a pretty conservative company.) Investment (“lost wax”) casting is commonly used to manufacture everything from titanium golf clubs to jet engine turbine blades which require great precision and consistency. There is a state-of-the-art centrifugal casting facility in Arizona which produces many such things that has been in business for some years (and would not have required building a new plant).

      It makes one wonder why Apple have chosen the clearly more expensive technology which, to my thinking, offers no benefit over a more reasoned manufacturing process. There is simply no benefit to a “billet” chassis that I can see.

      It also makes one wonder what other mistakes Apple have up their sleeve that will reduce margins.

      As a number of analysts have observed, Apple have yet to make an entry into the laptop price segment which contains the majority of laptop sales. The beauty of increasing sales volume which Apple have consistently ignored is that the actual cost of the OS per unit is essentially nothing and the revenues gained from each sale work to reduce the per unit development cost of the OS and various supplied applications, quite apart from getting more product with the company name into the market where it can, potentially, influence other purchase decisions.

    4. David says:

      I’m still waiting for something to resemble a major product transition. The new MacBooks arrived at slightly higher prices than the models they replaced and will end up costing Apple less in the long run because the cases won’t discolor or crack and need replacing under warranty. It must be costing Apple a small fortune in parts and labor to deal with plastic MacBooks.

      While I agree the $2799 Mac Pro is certainly a strange comparison given that Dell charges more, there is some legitimacy to comparisons made to the $2399 Mac Pro. If you swap Xeon for Q9xxx series processors and DDR2 FB-DIMMs for more common DDR3 PC3-10660 or PC3-12800 it’s possible to build a PC for around $1400 that’ll equal the quad core Mac in almost any test. Apple works hard to avoid such comparisons by pointing out that the machines aren’t “equivalent” and you, Gene, regularly support that position, but if the same amount of computational work can be accomplished in the same amount of time then it’s a fair comparison. Apple could build towers using mainstream parts but they won’t because 35% profit on $2400 is a lot more than 35% profit on $1600 and they aren’t capable of attracting enough new buyers to make up the difference.

      I don’t even need that much power myself, a $1200 mainstream quad core Mac tower (the kind Acer sells for $1099 with a 20″ LCD) would suit me. I demand the ability to swap my internal HD whenever I feel like it without having to dismantle the entire machine and refuse to contribute to global waste by buying a machine with an integrated display. An LCD display should last 3 computers not just one and LCD manufacture produces some of the most harmful greenhouse gases known to man.

    5. Gene, if you are worried about giving sites hits that you don’t want to then you could always add the “no follow” tag to the link.

      For more information on this go to http://skeptools.wordpress.com/2008/09/03/not-just-for-spam-anymore-nofollow-for-skepticism/

      -Derek

    6. I realize, but it’s not something I choose to dwell over. It’s a matter of being courteous despite the fact that they don’t deserve it.

      Peace,
      Gene

    7. Sean says:

      @ Richard:

      If your premise was correct, then Dell would have a net income to revenue ratio more similar to Apple’s. If the cost of the OS is reduced to 0 by high volume, low margin sales then why is Apple with $30.8 billion in revenue, on 9.5% U.S. market share making $4.6 billion in net income (14.93%), while Dell with $64.15 billion in revenue, and 29.5% U.S. market share makes only $2.85 billion in net income (4.45%). The only real beneficiary of the high volume, low margin approach taken by Dell et al. is Microsoft, $60.42 billion in revenue, $17.68 billion net income (29.26%). Microsoft pushes its ‘partners’ into the low end of the price spectrum precisely because the Dell, HP etc. brand names mean nothing to Microsoft, but each unit shipped by these manufacturers is a license fee in Microsoft’s pocket. The damage done to HP and Dell by selling substandard, low cost, poor quality merchandise at little or no profit is of no lasting concern to Microsoft. After Compaq is Packard Bell, after Packard Bell is Gateway, after Gateway is E-Machines, after E-Machines is Acer, after Acer is the next company seeking effortless orders, underselling PC ‘brand names’ until they price even themselves out of the market.

    8. Richard says:

      Sean:

      No, you misstate the premise.

      The marginal cost of the OS for an additional sale is essentially zero. There is revenue attributed to the sale which can be used to amortize the actual cost of developing the OS. Therefore actual margins are different because the cost of goods sold is different.

      The analysts have discussed the additional market segment which Apple would likely attract if there were an $800 laptop to offer to people who have $800 to spend.

      The new “billet” aluminum chassis is an example of unnecessary cost without corresponding benefit, in my view.

    9. Jim says:

      There is just one product that I believe could truly shake up the current product line. A redesigned Mac Mini that is able to accept a full sized graphics card. With an integrated NVIDIA graphics chip but an included expansion slot capable of accepting a full sized graphics card or expansion card of choice. This product would surely fill a missing gap in the Mac lineup and provide what many in the Windows world are looking for.
      What could such a machine be used for?
      Perhaps a business computer replacement that is simple inexpensive small and clean with an expansion card slot if needed capable of running any operating system of choice.
      A home entertainment extension for itunes music, video, web browsing, pictures, and if you want hardcore gaming by just purchasing and installing your own graphics card of choice. Perhaps video card creators might now consider it lucrative to port some of there products to a high volume and upgradeable devise and will in turn lead the way for game companies as well.
      Now if you visualize such a Mac it may look very much like an elongated Mac Mini or a brick.
      If such a Mac existed I think it may help sell some of those new 24″ monitors with the integrated power usb and graphics cables and camera.
      Such a product would surly cut into iMac sales and may even shave a hair from the Mac Pro numbers.
      But in turn it would also most definitely cut into Dell and HP business machines along with some gaming pc’s
      and maybe even a gaming console or two.

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