Massucci's Take: Apple making more while charging less
Filed under: Company News, Technology, Columns, Investing, Earnings, Apple
Recently I bought an Apple (AAPL) iMac, and after upgrading the hard drive and opting for a bigger display, I wound up spending more than I had planned. Listening to Apple's earnings call this week, I discovered that many of its customers have had similar experiences buying Apple products.Apple CFO Peter Oppenheimer said that Apple recently finished its "most profitable quarter ever," selling more iPhones and Macs than in any previous quarter. Interestingly, while retail prices have been cut on many products, the average selling price for those products has risen. How is Apple doing it?
"Apple is one of the few companies that continues to see consumers buy up the food chain, as opposed to buy down," says Brian Marshall, technology analyst at Broadpoint AmTech in San Francisco. "It happened in every single one of their product categories. Despite the fact that they're bringing down prices for their computers, iPods and iPhones, their average selling price continues to go up."
The company sold 3.05 million Macs in the third quarter, up 17 percent over last year, and 7.4 million iPhones, up seven percent, Oppenheimer said on a company conference call this week. Apple sold just 10.2 million iPods, down from 11 million a year ago -- but half of those sales were first-time iPod buyers, he said.
Analysts say that customers may visit an Apple Store or Best Buy (BBY) intending to buy an iPod shuffle and walk out with a more expensive iPod Nano, or plan to buy a Nano and then spring for the pricier iPod Touch. Mac buyers may think they want a $999 MacBook but then decide to spend $200 more for the sleeker aluminum model. "When Apple cut prices on the 3G to $99, I thought that was going to be huge," Marshall says. "In fact, what we saw in the average selling price for the quarter is that many customers wound up buying the high-end $299 iPhone."
I liken it to car shopping. Shoppers often splurge for upgrades, such as a better stereo, after deciding on a particular make and model. The extras come after the initial sticker-shock and the eventual decision to buy.
As the U.S. recovers from this recession, Nomura economist Paul Sheard says, consumers will tend to withhold spending until they see more positive signals that the economy is recovering, or see other consumers spending more. Apple may be the only exception to this rule.
Marshall had forecast an average iPhone selling price of $530, less than Apple's report of more than $600; he has a buy rating on Apple's shares and a 12-month price target of $235.
The higher average selling price, Apple says, is due in part to a boost in iPhone 3G S sales. "Average selling prices were also up for the Mac portable [laptops] as more customers bought the MacBook Pros," which are more expensive, Apple's statement said. Both the iPhone 3G S and MacBook Pros are among the more expensive products in their categories. Sales of the iPod Touch, the most expensive iPod in the line, are up 100 percent versus the same quarter a year ago, CFO Oppenheimer said on this week's call.
So be careful when you walk into an Apple store. If you're like the rest of us, you may find that you're powerless to resist the charms of its more expensive products -- and that you spend more than you meant to.
Anthony Massucci is a senior writer and columnist for DailyFinance. You may follow him on Twitter at hianthony.
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Reader Comments (Page 1 of 1)
10-23-2009 @ 4:52PM
Iridium said...
Simple.
The bottom tier of Apple products are terrible. The shuffle is garbage but the low price point draws interest. It makes people believe that anyone can afford Apple.
You then move into the Apple marketing campaign. Apple is cool and you must have an iPod or iPhone to be cool. You only want to spend $99 but you don't want to buy a terrible product. IN order to be part of the Apple crowd you spend more than you wanted to. However you justify the purchase because you wanted to buy an Apple product in the first place.
Same thing with the Macbook. The $999 Macbook is a terrible computer. You can buy a Dell notebook with better specs for $399. $999 gets you in the door, buying into the hype has you walking out with a $1399 computer.
The reality is that Apple could sell an iPod touch for $100 direct and still turn a hefty profit, just not the outlandish profit they currently command.
That is because people are dumb enough to overpay handsomely just so people will think they are cool. Just like paying $350 for a Coach purse made in China for less than $10.
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10-25-2009 @ 10:29PM
Knute5 said...
The bottom tier Apple products are hardly garbage. Many folks buy and are more than happy with them for not only the hardware and software but the integration with other Apple products (e.g., iPhone/iTunes/App Store and MacOS). But the higher end products are slick, award-winning products impeccably designed by (Sir) John Ive, and people want them once they see them. Can you fault Apple for doing such a good job making tech look sexy? Yes, a Chevy Malibu will get you from point A to B, but if you see a Lexus, something tugs at you to make the leap...
10-23-2009 @ 6:59PM
Alessandro Machi said...
Canon and Apple need to get their act together so my canon digital still camera works on snow leopard.
This is exactly why we need a consumer financial protection agency. I paid, upgraded, and now can't finish my two books. It's been one month for me now that I, and anyone else who upgrades to snow leopard has been held hostage by these two companies.
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10-25-2009 @ 11:44PM
Max said...
You said it, glad to hear I'm not the only one. Since installing Snow Leopard, I have to use the standard Mac image capture software to upload my G10 images. The Canon software fails. I actually got an email reply from a tech guy at Canon, but all he could suggest was to reinstall something.
10-26-2009 @ 6:38AM
John C. Randolph said...
Cannon's software isn't Apple's responsibility. Thousands of other vendors had their products ready to go the day that Snow Leopard was released. I'm a registered Apple developer, and I've had pre-release versions of Snow Leopard available to me for well over a year.
-jcr
10-23-2009 @ 10:42PM
jan said...
I buy Apple because they work. I buy Apple because I don't want to know anymore about how my computer works than I do about how my door bell works. Just work, everytime.
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10-25-2009 @ 11:54AM
steve said...
Iridium your comments are way too extreme.
$399 Dell better than a macbook? Dell is so far gone, that not only are they generally not capable of providing a good laptop experience, $399 gets you a flimsy plastic 6 pound brick.
If Apple can actually get better margin, shouldn't they? it's all about customer willingness to pay. In fact lowering their prices would definitively change the brand and lower Apple's cachet among world consumers.
I don't argue that people spend on Apple to be "in", but all the more power if they can do so. The shuffle is probably one of the worst products Apple has, so agree with your take there, but extending this logic to the rest of the line fails.
e.g. iPhone 3G - don't people remember this was the most advanced phone in the world 3 months ago?? This is hardly Apple pawning off second hand junk at high margins. The bill of materials for the 3G is still around $200. This is truly a case of broad market enablement of a world class product.
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10-25-2009 @ 11:04PM
alec said...
yea iridiums an idiot lol
when you buy an apple computer you arent just buying it because of the hardware... its the compatability between hardware and software.. your $400 dell laptop wasnt voted number 1 in customer satisfaction by PC mag lol
in all seriousness apple have a total of 6 different computers on sale because they spend the time and the effort researching what people want, what works best with their computers etc.. so that their customers are satisfied with the things they are buying where as dell just pump out hundreds of computers and hope they suit what people want.
the apple coolness may be what draws people in but the great products are what makes people willing to buy more
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10-25-2009 @ 9:58PM
Dianne Heath said...
People probably have in mind that they are going to spend around $300-$500, so when Apple drops the prices they just buy a higher quality item at the same price.
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10-25-2009 @ 10:04PM
Chad said...
Apple hasn't lowered prices, they're playing a shell game with component pricing. $100 for 2gb of RAM, $200 for a hard drive upgrade to 500GB turns a baseline Macbook Pro right back to the $1500 mark. The actual price difference between buying a 250GB laptop HD and a 500GB HD is about $20-30. Apple's reaping huge profits from people that apparently don't know any better, of have simply been baffled by the BS.
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10-25-2009 @ 10:33PM
Knute5 said...
Seasoned Mac users know you make the upgrades yourself, especially RAM which is a no brainer. But for those who want total convenience, they'll pop for the upgrades which, admittedly, are more than Dell.
10-26-2009 @ 6:39PM
pedro pimenta said...
how?
what do you mean, how?
doesn't it make sense?
sell cheaper = sell more.
more money.
ca-ching.
i don't know why humanity doesn't realize this.
Reply
10-27-2009 @ 12:23AM
john said...
I still have and use the original shuffle for my kids, and I personally use the 2nd gen shuffle for bike riding. The things just keep on playing.
Here's the simple truth, you treat your stuff well, they last. You treat them like crap and they don't.
Still going strong, an iMac G3, iBook 3G, iBook G4, Powerbook G4, Original Shuffle, 2nd Gen Shuffle, Video iPod, and two classics. Now one problem. Plus they all still look like new.
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