I am not a management guru, but I did learn something about management and corporate responsibilities. Recently on Facebook I came across a post from Robert Scoble about how US market is the market that counts. He was talking about an article which reported that the iPhone 5 sales have helped Apple to take climb up the sales chart atleast in the US. I agree with him on the point that US market is one of the major market there is and being the leader there counts for something. But I would like to take a look at the bigger picture.
According to reports, the the individual parts of iPhone costs less than $200, yet it is sold at over $600 unlocked. Is that a 300% markup? Probably not. Though $200 is not the exact price and Apple would obviously get more discount based on the fact they are ordering the parts in bulk, let us round it off to $200. This is the fixed cost to produce an iPhone. Whether Apple makes just 1 unit or a billion units, there would not be any change in this amount. There are different variable costs associated with the product, R&D, salaries, marketing expenditure, shipping etc. But this cost is not associated to a single unit and when you allocate this amount to the number of units produced, the per unit cost decreases when quantity increases. If the total spent of Apple was 1 Billion dollar, and it produced 1 iPhone, Apple would have to charge one Billion and two hundred dollar for that single unit to break even, that is $1,000,000,200. But if Apple were to produce 1 Billion units of iPhone, then Apple could sell it for $202 and still make a profit of a billion dollars.
We could take a look at Apple’s account statement and see how much they have spend on Research, development, marketing and after looking at the profit they have made, we could come to certain conclusions as to how much profit Apple is making on one iPhone. Though the findings might be interesting, we would not be going into it. And it would take someone with much better knowledge about accounting to get to such a figure, if it hasn’t been done already.
The question here is, who benefits from this huge margin? Investors obviously. marketing firms, various relatively small business which are involved with the operations of Apple, fewÂ companies outside the US who manufacturer and assemble the product, various small industries over there providing supporting services. My friend Monica introduced me to Dependency Theory and how poor countries would always be providing resources to the rich countries whereby the bulk of the benefit is collected by the rich country. To me it sounds like an exploitation system, but it is how the world works. So, going by the dependency theory, only a fraction of the cost is given to companies outside the US for manufacturing iPhones. Again, who benefits? Most of the benefit is for the investors. Advertising, marketing, distribution channels gets their share of the profit, because they are part of the “core”. I would assume that the profit a a retail store or an online store gets from the sale of 1 iPhone is more than the profit that is earned by the company that assembled the iPhone in the first place. Do not forget that there are more people involved in making an iPhone where as to sell it, you just need one person. The wage that “manufacturer” gives to its employees, if you take per unit, would be a very small fraction of what the retail store receives in commission.
Now the question is, who pays for it. The 3rd world country which does most of the work doesn’t. They are making money, however little it might be, to buy food and live. These people have children who I hope are studying well. Since iPhone is sold mostly in US, it is the American public that pays for this. The American public is purchasing an over priced product that will make the rich even richer and they keep buying it year after year. Is that aesthetics of iPhone worth the premium pricing? I am sure that someone will argue that this money is being invested again and that is driving the American and World economy. But the cycle keeps repeating over and over with different products. I am sure Apple is doing its bit as part of a responsible corporation, but I am not sure whether it is charity or hospital or something else. But is that all that is expected from Apple, the company with the most market capitalization in the world?
Now let us look at Google. Android is developed by Google as an open source software. Any company in the world can use it for free and modify the code as they suit fit. If you are not happy with the way the Android development is happening, you can start another branch off it and develop it as you see fit. Where is the profit for Google in this? It will certainly have a impact on mobile search, some of the Google products would be used by consumers, but is it worth creating a new OS which is given away for free? They could have created a closed system and given it as a free license or at a lower rate than other companies do. Yet, the price is free. Is Google evil that they have an ulterior motive in doing this?
Let us try to figure out where Google is heading. Google is not a company with a Midas touch. There are numerous failed product and many of its Utopian ideas have been shot down. They might have learnt their lesson and might be making small moves so as not to scare other existing players. The first android phones were low powered and would have had very little impact on the mobile world, if it were not for loyal followers who hoped this was the start of something good. At some point Google realized they had to take matters into its own hands, and released the Nexus One. It tried to break away from carriers, but was not very successful. I purchased the Nexus One for $520, cheaper than Apple, but still expensive. Recent release from the Nexus stable Nexus 4, Nexus 7 are high end devices, but the price has come down drastically. Though the sales numbers are not available, the demand has been much higher than Google anticipated with stocks being sold out within a few hours, on its online store. The same store which failed when it tried to sell Nexus One.
What has happened during the period? Nexus One raised the bar, and mobile phone manufacturers responded. Powerful Android devices where designed by all the manufacturers. US consumers became aware of the alternative to iPhone at a lower cost. During some time Android over took iPhone as theÂ dominantÂ mobile OS. Google had peeled a layer to show what Android is capable of. It then removed another layer, showing how cheaper the hardware could be. Google is yet to reveal what it plans to do with its acquisition of Motorola. Google may just want to send a message to hardware developers that they are taking a stake along with others with the lawsuits flying all around, or they may want to raise the bar in hardware too.
On one hand, Google has given companies like Samsung and HTC an even playing field along with Apple in the US market. These companies are not from US, and the profit they make are for its investors. By reducing the price for its Nexus line, Google has indicated what kind of price the market should expect from other companies. Premium pricing is bad for the economy. Does anyone doubt that mobile phone price is going to drop when the demand for Nexus continues?
I said on one hand, here is the other part of it. Android has made iPhone like capabilities available worldwide. There are phones which cost around $40-50 which run on Android. They may not be the most powerful phone, but they do have the functions expected from a smart phone. Cheap tablets like Aakash are made which gives students from 3rd world countries an equal footing with their counterparts in US who carry an iPad to school.
15 years ago, I used to travel 15 Kms (almost 10 miles) by bus every week to nearest decent libraries (2 of them) to get 5-8 books. I used to spend 1 to 2 hours every morning going through the two newspapers that we used to get. This was the extend of my quest for information. The same information can now be made available to the poorest of children at the tip of their finger tip. As a kid, I once wondered how many intelligent minds are lost each year because they are not identified and nurtured. These are the kids should grow up to develop future technologies, economy, their nation and the world.
Would I be out of line if I said that Google has made the poor richer in education. Does this knowledge it not outweigh the billions donated by Bill Gates. If it were not for Google and Android, would it not have taken many more years before such technology was made available to what the world considers as poor? Economically they might be poor, but as human beings, they are equal to the richest person and their potential to contribute to the world is as good as anyone else.
Apple is exploiting the existing market, Google is not just developing new market, it is creating market creators. Let me ask you now, “what is corporate responsibility?”
- Google and Motorola rumored to be working on X Phone to once again take on the iPhone (imore.com)
- Google’s Next Target…the iPhone (atlantablackstar.com)
- 10 Reasons I Chose Android Over an iPhone (digitizd.com)
- Why Apple Needs a Really Expensive iPhone (cultofmac.com)
- The Magic of Google Now and Thinking Different (kbskobac.blogspot.com)
Amazing post Sunil! You have very intelligently and creatively utilized the insight 🙂 Looking forward to more!
Interesting subject … and why I’m not running out to buy an iPhone! 🙂
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Happy Holidays.. 🙂
Great post. congrats