Misinformation Week, starring @phonescooper

Eric Zeman writes for Information Week:

The bill of materials for the 16-GB iPhone 5s comes to about $191. The device costs about $8 to manufacture, bringing the total to $199. The 64-GB model costs Apple only $19 more to make, for a total of $218. The full retail price of the 16-GB 5s is $649, while the 64-GB 5s goes for $849. It’s a shame Apple is only marking the price up by (a minimum of) 326%. (emphasis added)

It’s common to read about Bill Of Materials costs in the news, but you never see the caveat that these numbers are basically all BS. It is kind of fun to read about the raw price of an LCD panel or a few gigabytes of ram but it becomes absurd once you start trying to draw conclusions about Apple’s business model from them as the author does here. It is neither correct nor informative to use a third party component estimate to make wild claims about huge markup. These guys don’t know how much Apple pays for their custom silicon, and they don’t know how much Apple is paying to retool and ramp up massive factories on short notice. If you want to calculate how much it actually costs Apple to produce iPhones, you need to find out the Cost Of Goods Sold (COGS), not BOM.

Sale Price, COGS and Markup are all related to Gross Margin with a few simple equations:

(Sale Price - COGS) / Sale Price = Gross Margin
Markup = Gross Margin / (1 - Gross Margin)

The purpose of the Cost Of Goods Sold (COGS) accurately represents how much Apple is paying to produce the sum total of all iPhones. It won’t include research and development costs, marketing, or other indirect expenses but it will factor in all the costs directly related to manufacturing the phones. Parts, labor, inventories, factory overhead are all direct costs of mass-producing iPhones and you cannot ignore them. These costs are standardized, they must appear on all G.A.A.P. income statements and you have to include them if you want to talk about the “markup” of the product because markup has a real definition.

Due to court filings, we know that iPhone gross margins ranged from 49-58% over the past couple years (but before the iPhone 5 was released), which means that iPhone markups ranged from 96% to no more than 138% over the same period. To claim that Apple has suddenly pushed iPhone markups to “(at minimum) 326%” without a single accompanying price increase exceeds the bounds of credible argument.

Doing some further checks you might discover that in 2012, the 16 GB iPhone 5 had the same $199 BOM cost that the 16 GB iPhone 5S, that the 2011 iPhone 4S BOM was reported at $188, and the 2010 iPhone 4 BOM was $187. It stands to reason that the iPhone 5 and 5S Gross Margin are even lower than any of those reported in Apple’s filings since it has a higher BOM cost but the same price tag.

If you work at a company named ‘Information Week’, you might work on incorporating some information into your writings.

The markup on the 16-GB 5c is a more palatable 317%.

Argh. No it goddamn isn’t, Eric!

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