Step One: Profit

Jeff Taylor | February 24, 2005

I enjoy kicking Apple around as much as the next Apple-kicking guy, but this takedown of the iPod Shuffle seems to fail on a couple levels. It is great that someone went to the trouble to price out the component parts of the $99 Shuffle and came up with about $59 in electronics. But can you jump from that to the conclusion that Apple therefore makes "a profit of about $40, or roughly 40 percent" as the PCWorld story does?

What about the cost of all the Shuffle ads Apple has up on TV and in magazines? That ain't cheap. And those neato white iPod displays in just about every retailer, underpants gnomes tending and setting up those things? Gotta be aware of these costs before we declare that Apple is making a killing on Shuffles.

Then there is the general tone of the piece, which seems to suggest that Apple is somehow pulling a fast one on Shuffle buyers. How Much Should an IPod Shuffle Cost? How about exactly what people are willing to pay for one? Plus $50 for a blue one. Kick!

Comments

Phil|2.24.05 @ 6:26PM|#

Oh, brother. It takes a complete misunderstanding of capitalism, markets, entrepreneurship, business models, and, well, pretty much everything ever to posit that a product should be sold for, and is worthy only, the value of the components that went into it. If the editors who allowed this piece to run don't understand why a finished product is worth more than a pile of its unassembled parts, they're idiots who deserve to be writing for their high school newspapers.

|2.24.05 @ 6:32PM|#

Yeah, I was gonna say "if it bothers you so much, just get the parts and build one yourself," but you beat me to it Phil (I still said it anyway, but you catch my drift ;) )

|2.24.05 @ 6:47PM|#

Hah. For Apple, a 40% markup is remarkably modest. (I agree that the figure is largely bogus)

Usually its around 400% more than the components are worth. If not more.

|2.24.05 @ 6:51PM|#

Complainer: "This item costs way too much."

Me: "Did you pay for it?"

Complainer: "Yes."

Me: "Then explain to me again how it costs to much."

Warren|2.24.05 @ 6:52PM|#

Oh right Marty. Hey! I figure that article take's up $0.000002 worth of memory and cost less than $0.00001 to deliver. If you got paid so much as a buck to write it, Well that's just highway robbery fella!

How about exactly what people are willing to pay for one?

AMEN brother, sing it loud.

Larry A|2.24.05 @ 6:54PM|#

Price out the "component parts" of a PCWorld magazine. Paper, ink, a dab of glue. Bet you aren't anywhere near the cover price.

|2.24.05 @ 7:01PM|#

So, since that $40 is excess profit, enabled by a complex and interdependent society, the forty bucks must dutifully be returned to the society that made the profit possible. If Apple shareholders resist a transfer of cash from their accounts to the state, the company might give away 2 iPods to the poor for every three it sells (40/99ths). That way they could be socially responsible and evangelize the brand.

|2.24.05 @ 7:10PM|#

Isn't Apple making something more like a 67 percent profit, not 40 percent, since they're selling $60 worth of goods for $40 more than what it costs to make them? Or do I need to go back to study the basics in economics?

Either way...good for them. Wish I though of it first.

|2.24.05 @ 7:23PM|#

Yeah, I was gonna say "if it bothers you so much, just get the parts and build one yourself,"

or meet the half-way compromise: buy a one gig flash card for $60, plug it into your PDA with MP3 playing software, and enjoy all the benefits of the iPod Shuffle except the brand inclusion and marking yourself as a target for mugging.

|2.24.05 @ 7:48PM|#

Isn't Apple making something more like a 67 percent profit, not 40 percent, since they're selling $60 worth of goods for $40 more than what it costs to make them? Or do I need to go back to study the basics in economics?

Shhhh!

I love math-deprived consumers...

Franklin Harris|2.24.05 @ 8:27PM|#

I don't get the iPod. For the price of a low-end iPod that will only play songs randomly, I can get a real, full-featured MP3 player.

The Lonewacko Blog|2.24.05 @ 8:29PM|#

There are so many other costs associated with the iPod as well: advertising, keeping the stores open, shipping and handling, prison guards for the factories... (The latter is satire and commentary.) Did they figure in the quantity discount on those parts too?

|2.24.05 @ 8:29PM|#

How Much Should an IPod Shuffle Cost? How about exactly what people are willing to pay for one?

The point of a good product takedown isn't "How much should X cost?" it's "X should cost what you're willing to pay for it after you realize how ripped off you're getting by reading my article."

That said, the article is less a takedown of the Shuffle than an unpaid advertisement for introductory economics textbooks.

|2.24.05 @ 8:55PM|#

OK, PCWorld, where's the sneering article about all the craaaaaaazy HUGE margins that Microsoft has been making on MS Office for the past 10 years? I'd bet that it's at least 50%. Is Microsoft Office really worth $400? I guess it is if you're willing to pay $400 for it, but I'm not.

|2.24.05 @ 9:43PM|#

I know people like this author. They are unable to ever enjoy a good dinner at a restaurant, let alone the wine, because restaurants charge more than the groceries necessary to make delicious food. After building his ipod for $60 in components, he can blow the savings on ingredients for his victory party.

|2.24.05 @ 10:00PM|#

My dad, who is quite intelligent, and an engineer and an M.B.A. to boot, as well as being an all-around great guy, still complains about how restaurants rip us off by charging over $1.00 for "just a few cents worth of soda" and genererally subscribes to something close to the Marxian theory of value.

This is how I learned that people can be both (A)highly intelligent, well-educated and likable, and (B) really wrong about some things. Knowing this is what enables me to debate politics without getting cheesed off or flying off the handle (hardly ever).

|2.24.05 @ 11:19PM|#

You know, if you break it down to its component molecules, its like...an even bigger rip off, man.

|2.24.05 @ 11:34PM|#

If you break it down past molecules, it doesn't even exist. It's just a pattern or idea. That's an infinite profit percentage! I should buy Apple stock...they make money from nothing.

|2.25.05 @ 2:11AM|#

The Ipod is a really strong product for Apple. As the article points out, the hardware sales will drive the sale of the music files even though Apple is making money on the hardware. And with the better deal that's coming their way for flash memory, the margins will improve. The Apple stock continues to get upgrades with price targets now in triple digits even though its gone from the low 40's in October to 88.93 at today's close.

Since there is an open market for Ipod competition, the term "rip off" has no place in this consideration. Longer term, the popularity of the Ipod could well engender more non-random player competition. Hey I just thought of a slogan for one of them:

"Don't shuffle your feet, direct the beat!"

Damn, that sounds good at 12:00 midnight. Any promotion depts: Just email me to discuss rights.

|2.25.05 @ 3:00AM|#

Personally, I'm rather tempted by a 1GB Shuffle for $150. A higher-end iPod with the keen scrolling wheel appeals, but I don't think I'll use it quite often enough to justify the larger price.

And yes, I'm one of those mysterious people who like random playlists. Judging by some of the more derisive comments on the iPod Shuffle, all 3 of us (4 if you count Steve Jobs) are pretty damned powerful consumers, considering that "Shuffle" buttons have been on CD players for over a decade. :)

Franklin Harris|2.25.05 @ 3:09AM|#

Wanting random playback sometimes is one thing. Having no choice but random playback is something else.

|2.25.05 @ 3:35AM|#

Franklin:
The Shuffle has two play modes - shuffled play and the order of the playlist you load into it. They hype up the shuffled play to a silly degree, sure, probably because "Be Honest, You Aren't Going to Decide To Construct a Playlist While Jogging" is not sexy enough for marketing.

But 90% of the time I use WinAmp on my computer* - mind you, with a nice, large screen to navigate all my music, and far fewer distractions than you encounter using a mobile player - I use shuffle, hitting a hotkey when the song that comes up doesn't suit my mood and I want to skip to the next track. This sounds like a natural fit with this gadget. I just don't much foresee walking around with the Shuffle and deciding I need to hear the Mission UK remix of Gene Loves Jezebel's "Heartache" right-this-moment.

(*Well, 90% of the time I'm not simply playing a music feed, but it'll be a couple of years before anything in the iPod Shuffle size range has nice wireless internet capability, I think.)

|2.25.05 @ 3:42AM|#

Thank you, Pavel, for making me laugh.

|2.25.05 @ 7:04AM|#

Operating Profit = Revenue - Cost to produce Revenue

Operating Profit % = Operating Profit / Revenue

In a capitalistic system there is no such thing as "gouging". Charge what the market will bear. If the consumer believes the value to cost ratio is bad they won't buy. If the supplier believes the profit level is bad they won't sell.

Sounds like a perfectly good and flexible system to me.

Viva Apple!

|2.25.05 @ 8:36AM|#

Eric the .5b: nizzews flizzash: last I checked, Amazon had the 4g mini's for $179 (apple just dropped the price because they're coming out with a 6g mini soon).

As for the actual content of this thread, well, I always hate these "consumer advocate" rants that chastise the producer for charging "too much". As everyone else has noted, the "fair" price is what people are willing to pay---this is the same flawed economics that play into "gouging" laws (when, for example, people are arrested for upping the price on generator rentals after a hurricane).

What really gets me here is that, with non-critical consumer items like the ipod shuffle, the ones who should be taking a flogging are the consumers who are willing to overpay. Hell, I'm guessing that the sales on the $250 4g mini weren't too spectacular, which is why it's going down so sharply. But, if anyone is to blame, it's the consumers. Companies will take whatever you offer them, and rightly so. If apple chose to sell the 40g ipod for $1200, and alot of people paid that much, then who is to blame?

|2.25.05 @ 8:39AM|#

Companies will take whatever you offer them, and rightly so

Er, let me rephrase that: "companies will take as much as they can get from you, and rightly so". Sorry, didn't realize how stupid that sounded until after I hit "post".

|2.25.05 @ 9:22AM|#

I don't use an iPod myself, but I understand they're tightly integrated with iTunes and the iTunes music store. The first is free so Apple isn't making a cent on it, while the second just breaks even. They're widely regarded as being well-designed and easy to use. So IMO Apple is selling a hardware/software combo and if you choose not to use their free software, that's your loss.

|2.25.05 @ 11:22AM|#

If the IPOD Shuffle is contains only $60 of components and so should only be worth roughly that, why didn't the guy find out how much the materials used to make the *components* cost.

I bet the raw materials used to make the components cost significantly less than $60.

|2.25.05 @ 12:45PM|#

Well, it's obvious that PC World has zero understanding of the process of making and selling a product.

The real question is, how many shuffles does Apple have to sell at $99 just to break even. As has already been mentioned, the cost of parts, development, production, advertising, salaries and taxes must be staggering. Even assuming that Apple does make $40 bucks (which is clearly not true) per shuffle, they'd have to sell 25,000 of them for every million spent just to break even. And if no one wants to buy a product of questionable utility, then Apples out some big bucks.

And as always happens, once some of the cost is recouped, the price will drop.

|2.25.05 @ 1:30PM|#

Evan Williams:

I'm not crazy about the iPod minis. Too little storage for the trouble of fragile, spinning platters.

|2.25.05 @ 3:26PM|#

While the 4 and 6gig versions sound great, here is what the ultraconsumers are doing to get the maximal iPod experience.

Mark Fox|2.25.05 @ 5:50PM|#

The headline is a bit odd but the article does not say that Apple is making too much profit. The analyst report is not for consumers but for competitors want to know what makes up an iPod and how to compete and for investors who want to get a idea if Apple is making a profit in this item. A more detailed report would estimate cost to assemble, ship, selling price to stores, etc.

What's most interesting is all the functions of the internal chips that Apple is not using - voice recording and a FM tuner.

|2.25.05 @ 6:39PM|#

But it's so tiny and cute! And convenient. And tiny and cute! And you couldn't have had something like it for 10,000 dollars just a few years ago.

|2.27.05 @ 11:39PM|#

Its called value added. The value of what you make is greater than the sum of its parts. Unless you are a car manufacturer in the old Soviet Union, you have to produce this to stay in business. I don't see why this is even a story. Of course the thing costs more than the sum of its parts, why the hell would Apple be producing them if it didn't? That being said. The i-Pod is way over rated. Yes, they do look nice and work great out of the box. After that they are basically cheap pieces of shit that will breakdown if you look crossways at them. They are extremely delicate and easy to break and only useful is you if you put no physical stress on them. Creative makes a much tougher product that you can use and abuse.