Revealing How Apple Makes Its Money: Sell iPod, iPad and iPhone at 200 Percent Markup

Face it; Apple Inc., maker of the infamous iPod, iPhone, and iPad devices, is great at making money, even though the company does not manufacturer their devices. It is no secret that every product that comes to market takes off like none other and other manufacturers are constantly trying to catch up to Apple's market share. How is Steve Jobs and their company doing it? It is simple, really. They pay Foxconn, the manufacturer of the devices located in China, next to nothing while charging the consumer an arm and a leg-and it works.

iPod Manufacturing Cost

While watching an interview given by CNN's Fareed Zakaria with China's Premier Wen Jiabao on October 3 2010, the Premier made a reference to the cost of making the iPod when speaking (through a translator) about the Chinese and American economies. He stated that he remembered when (in their last interview in 2008) that Fareed Zakaria made an example of the "iPod player in the United States. An iPod player is sold at $299 in the States (in 2008). But the Chinese producer only gets $4 in processing fee." Wow, that is what I call a mark-up.

To verify what the Chinese Premier was talking about, since it caught me off guard at that moment, I checked CNN's transcripts of that interview in 2008 and could not find the Premier's reference to it, so I dug some more. In fact, I found a study sponsored by the Sloan Foundation, which was conducted by the University of California in 2007, reported that indeed it cost only $4 to manufacture an iPod in China, plus a dollar or two more to add other parts from the Philippines and Japan. Apple at the time sold them for $299. If those costs were translated into US dollars, the cost in 2007 would have been about $78, according to the same report.

The Second Generation Apple TV Cost

Apple TV, the digital television receiver box much like the set top boxes used to view cable or satellite television, is in its second generation and is less than four inches in length and width and weighs less than a half a pound. The remote control that comes with the box is even smaller. The TV retails at $99, but a report issued October 6 2010, reported that the Apple TV, the newest device touting the best Apple experiences yet, only costs about $64 to manufacture-in the US.

It uses the same components that the company's other devices do, such as the same A4 processor, Bluetooth/Wi-Fi chip and memory chip as the iPad and iPhone and iPod Classic, Nano and Touch do. Nevertheless-and this is where it does not make any sense-the Apple TV only costs $99 retail as opposed to the iPod Classic 2010 retail price of $249 for the 160 GB version. According to the Huffington Post, the iPod Nano costs $45.10 to make but retails at about $179. This is opposed to the iPad, which starts at $499 retail, but costs only $269 to make.

The iPhone Costs How Much?

Additionally, the iPhone apparently costs $188 to make, but retails at $199. While this may not seem like much of a difference with the iPhone, it should be noted that if the device were purchased separately without a contract, it would in fact cost $499 to purchase outright. It only costs $199 because purchasers are required to buy it with a two year contract. Then, they are made to purchase a required data plan, which then offsets the subsidized amount over the two years. If the user defaults on the contract, they are charged the termination fee, which is to cover the cost of the subsidized phone.

Why Such a Difference in Price?

Why is it that Apple's technology costs so much less at retail? Well, one reason for the difference in manufacturing costs is the display used. The bigger the display size, the higher the cost. While the Apple TV does not use a display, all the other devices do to some extent. Even the smallest iPod uses at least a two inch display, which accounts for some of the manufacturing costs. The iPod Classic and iPad both use bigger displays than the other devices, as does the iPhone. Nevertheless, this still does not answer the question of why does it cost so little to manufacture and so much at retail? When are people going to stop paying these extraordinary costs and learn that the only people who benefit from the extraordinary prices are Apple's shareholders and Mr. Steve Jobs himself?

Sources:

"Transcript of Fareed Zakaria's interview with Premier Wen Jiabao," Infoseek China
Erica Ogg, "iPhone 4 Teardown Reveals it Costs About $180 to Build," CNet news
Stan Schroeder, "iSuppli: iPad's Actual Cost is $260," Mashable
Catharine Smith, "New iPod Nano Costs About $45 to Make: iSuppli," Huffington Post
Umair Haque, "What would a Fair-Labor iPod Cost?" Harvard Business Review
HAL R. VARIAN, "An iPod has Global Value-Just Ask the (Many) Countries that Make it," New York Times