Sunday, August 31, 2008

Squishy Margins: Apple Lower Margins Explained

Apple announced a their last earnings conference call  that they expect Gross Margins to be lower at the company for this quarter and into next year.  Here is a list of Margin squeezing forces that may be squeezing Apples margins.  

No one release, product, or strategy is the culprit here.  Do the MATH  a 2% narrowing of Apples gross margin will translate into almost a billion dollars a year in lower earnings (thats why we care)  That is more money than many new products will do in sales.

iPhone Accounting.  
Apple is accruing the income from iPhones over 24 months.  The expense created to enable the development, manufacture and sale of that phone is written off in the quarter it occurred in.  Apples manufacturing partner is currently rumored to be manufacturing 800,000 phones a WEEK.  The expense for this will show up in the next 90 days.  The income will not be completely realized until September of 2010.

Retail Sales Mac/iPhone
Mac sales are growing like crazy, much faster than the industry.  In order to maintain that growth, Apple has partnered with additional retailers, most notably Best Buy to sell their products.  For recent history Apple products have been sold primarily directly by Apple. 

Broad market competition
The larger Apple gets, the more price sensitive their next marginal customer is... Apple will be lowering their prices on iPods, Macs, iPhones in order to get them into more peoples hands because as has been shown is that if you buy one Apple product you  are MUCH more likely to buy another.

Product X
Product exists as does product Y and Z .  These products will have narrow gross margins on release but I think it is a red herring hiding as the product BY IT SELF will not be large enough a force to lower the margins as Apple has indicated.  All of these forces together are conspiring to lower the margins.

More to come

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