Reports Of Apple's iPhone 7 Profit Margins Are Greatly Exaggerated

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The internet is abuzz with discussions about the profit margin on Apple's iPhone 7 after UK-based analyst firm HIS Markit did a teardown on the cost of the materials used to make the handset. So the total cost of parts for the iPhone 7 comes in at under $300 and the retail price for the device starts at $1079 in Australia. People seem to think that Apple is pocketing over $800 in profit for the sale of every handset. Nope. Not even close.

Here in Australia, we're particularly sceptical of the way technology companies price their goods. We've been burnt in the past by unjustifiable markups on products just because of where we live. Apple hasn't exactly gained a reputation for being consumer-friendly and it has lost a lot of goodwill from customers after unceremoniously removing the 3.5mm headphone jack from the new iPhone 7.

So we all jump at the chance to crucify Apple when it was recently revealed that the cost of all the parts and a US$5 in basic manufacturing fee amounts to roughly US$224.80 (AU$297.93.) Meanwhile, the cheapest version of the iPhone 7 (32GB) in Australia costs $1079 to buy outright.

I've seen online comments from people who are outraged that Apple is charging customers three times the amount to buy the iPhone than it costs to make it. How dare this tax-dodging, arrogant company that is known to employ cheap labour from China rip customers off by charging such a high premium for a handset that was relatively inexpensive to make?

Speaking as a consumer, I'm not an Apple fan — I haven't used an Apple device since ditching my iPhone 4S (still the best iPhone, in my opinion) years ago — but we really need to step back and consider intangible costs that went into the creation of the iPhone 7.

Research and development (R&D) requires a lot of money. Apple employs a ton of talented individuals to improve its handsets, from a hardware and software perspective, year after year. According to Apple's financial results, the company is on track to spend US$10 billion on R&D this year, a 30% increase from 2015. Granted, that amount is an overall figure and not all of it goes into developing iPhones, but that’s still a big investment from Apple.

And, as much as I hate to admit it, distribution costs in Australia are higher compared to the rest of the world. Software vendors that deliver their products online have no excuse to slug us with an "Australia Tax" but when you're shipping physical goods, there are costs that add up when you distribute products in this country. Our population is concentrated along the coastline so it's difficult to set up a centralised distribution point for shipping goods across Australia, which incurs additional costs.

Then there are costs associated with marketing, training up staff at Apple Stores to support the new device, rent for retail stores and of course, the GST. And we haven't even mentioned resellers and third-party retailers, who also get a cut of every iPhone sold.

Make no mistake: Apple is still making a healthy profit from selling the iPhone 7 and the device definitely sports a big mark-up. But there are costs that are not immediately obvious (and hard to quantify) which do weigh into how the company charges for its handset. I still think the device is overpriced and I'm not remotely interested in buying it, but I sincerely doubt Apple is making an $800 profit for every iPhone 7 it sells.

So can we all put down our pitchforks now?


Comments

    Let's not mix up revenue with profit. Final profit is hard to calculate per category, but we do know Apple declares a gross margin of 39%. Applying this would see Apple make $420 per phone before admin and tax.

    I disagree with distribution costs, the Australia Tax far exceeds any freight and distribution costs, it's a 40% markup.
    Freight and the exchange rate don't blow out the cost by 40%
    There is no excuse for it except they can charge what they like.
    Probably it's a tax on our low customer base compared to the US.
    "the cost of doing business" is vague and hard to quantify.

      While I have no doubt we get screwed harder than we should, don't forget to take into account that GST is included in our price, rents for stores are higher and employee wages are MUCH higher.

      These discussions are more useful if people don't just make stuff up. The 'Australia tax' on the iPhone 7 is not 40%. Try 10-15%.

      http://www.smh.com.au/business/consumer-affairs/apple-iphone-7-heres-how-much-australia-tax-youll-pay-20160909-grckfl.html

    What does it even matter to anyone? If you don't like it, don't buy their phone. If so many people (including me) are happy to pay what they're charging, then they can keep charging it with no problem.

    Yeah... except that we know 3rd party retail margins are only like 5%, that Apple selling direct, from an online store still charges these prices, and that even 15bln AUD on RnD if spread evenly over *only* their iphone sales (which numbered 230mil in 2015) would amount to $65 per phone. (which, incidentally, what are we even getting for that money?? one less port?)

    So yeah, at least 40% pure profit makes sense. This is why they have 300bln in the bank...

    Imagine all the good that could be done with that money.. but no, it just sits there, because they are terrified of affecting their share price. Capitalism.

      all that profit and they pay bugger all tax in any country across the globe - great world citizens they are....

    @spandaslui good article, and you're right in suggesting everyone to put down their pitchforks. to improve on the article, compare say, Gucci handbags, Mercedes Benz and other luxury brands and see how others price their products. Economies of scale, limited stock run (further driving up price and consumer demand) are also successful 'tricks' companies use to maximise profit. Established golfing brands like Taylormade release new clubs every year, so all the peeps rush out and buy the latest gear (thinking that it will improve their game); another ploy in driving sales.

    Last edited 23/09/16 7:24 am

    Apple made US$28 billions selling 45 million smartphones at Q4 2016. That would suggest that average selling price(U$610=AU$800) is much lower than starting price of iPhone at AU$1079. Perhaps if Apple gross world-wide margin on iPhone being as quoted around 35-38%, from average selling price being roughly US$200=AU$260, average margin on Aussies iPhone could be around 500 bucks. Thats a lot of hours working at Boost Juice ;)

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