Apple's Total Cost Calculation on the iPhone 3G S — Margin and Beyond

As a loyal iPhone user -- albeit one that despises the AT&T network -- and an Apple enthusiast who made the change to a Mac as a primary work machine last year, I've watched with interest the launch and fanfare surrounding the new iPhone 3G S, due out this Friday. You can find all the basic facts and figures on the launch in an excellent article today by Walter Mossberg (subscription required) if you're curious. But what I'm most interested in from a Spend Management perspective is how the new iPhone -- and indeed, Apple's new lower-cost strategy for many of its products -- represents a shift in market direction and philosophy.

In my view, the lower prices represent a complete bellweather shift in Apple's overall go-to-market strategy from one of product differentiation to one that combines price (and total cost) efficiency with innovation. Even though Apple's margins may take a hit in the near term from these price reductions, long-term I suspect it will be a smart move for a number of reasons. And it will also put even more emphasis on cost reduction and cost management efforts at Apple and throughout Apple's supply chain. A recent story from MarketWatch confirms that the new move is a "bet on volume" and the "company has estimated that third-quarter margins will come in at 33%, compared to the 34.8% reported in the year-ago period."

If history in other sectors is any indication, over the longer-term, these recent price cuts will not necessarily impact margins if Apple gains the volume leverage that I suspect it is betting on in the downturn as it attempts to push additional volume and gain marketshare over competitors. Indeed, as suppliers -- even specialty suppliers such as Corning, that has provided part of the environmentally friendly LCD casing in the past (and most likely with the new iPhone as well) -- suffer volume declines in other areas of their business, it's likely they will begin to partner more closely with customers such as Apple who represent a larger and larger percentage of their business. Not only will this result in volume-driven price breaks, it will most likely result in greater collaboration in product design to reduce total costs further, driving more environmentally friendly designs and helping to bring new solutions to market more quickly.

Apple's new pricing is a bet on its supply chain to deliver current and future cost reduction and overall total cost improvement. But it's also a bet that by partnering with suppliers more closely in the downturn as the rest of their business declines, that Apple can solidify relationships that will drive future product innovation while meeting overall corporate charters (e.g., support for its corporate focus on more environmentally friendly products going forward).

Jason Busch

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