Turning Hype Into Profit (or Business Math 101)

MoMoneyPoster As I mentioned earlier, I find all the breathlessness around the iPhone to be entertaining. It's a sexy-looking device, to be sure, but it's a phone. And a $500-600 phone at that! Multi-touch sounds interesting, but it's not as though there's much else here's that innovative -- email, messaging, web-browsing. With no developer platform -- but wait, "there's the web" (and the Apple fans fall all over themselves to declare it some sort of ground-breaking genius move -- "bold"? "forward-thinking"? Yeah, you're objective).

In any case, it's obviously been a very successful launch for Apple, even with the too-many-to-be-a-fluke activation problems. Wildly successful. Down the road, I may even stand in line (for 5 minutes) pick one up for myself. You know, once it has decent download speeds and there are some compelling applications (I kid, I kid!).  In the meantime, it is nice to see mobile devices getting a lot of attention like this and spurring on the competition for features is a good thing.

What had me chucking this morning was a TechCrunch post that declares $200 million in profit for Apple in their opening weekend. How did they get at this number? First, the quote:

"Based on the cost of manufacturing an iPhone..., Apple would have made a profit of between $200million and $266 million in 3 days (not including marketing costs), on sales somewhere between $350million and $420million, significantly more than earlier estimates of Apple having a $300million weekend."

The original quote referenced a BusinessWeek article from Monday that estimates the parts cost for an iPhone to be $200-$220US. This is from a non-Apple estimate by a firm that took apart a production iPhone and came up with an estimated cost for the individual components. The $20 difference is based on the 4GB versus 8GB unit.

So using the most basic possible math, TechCrunch clearly took this route:

 

Price    -

Parts Cost    =

Difference

*    Units Sold

TechCrunch Profit

499 200 299 700,000 $ 209,300,000
599 220 379 700,000 $ 265,300,000


Voila, between $200 and $266 million. The TechCrunch article does point out that Apple "would have" made this profit by "not including marketing costs".

I'm not sure why marketing would be the only cost called out separately here because the true figure for expenses on the iPhone are clearly much higher. So while Apple will never tell us what that number really is, the most basic analysis would also have to include:

  • R&D -- A team at Apple worked hard to decide what to build, which features to include, how it might be engineered, what the tradeoffs were for cost, features, battery life, and size. Multi-touch doesn't grow on trees, right? Nor do screens that don't scratch easily.
  • Design -- A team worked to come up with that cool look and all that sex appeal.
  • Development -- Somebody wrote that software, right? Sure, I know it's "based on" OSX, but it's certainly not a matter of OSX developers choosing "File -> Save As iPhone" in their development environment.
  • Production -- The BusinessWeek article referenced above states that the $200/220 cost for the iPhone is just the parts. Those parts have to be assembled. By people. And big machines. In factories.
  • Testing -- Use the phone internally. Find a problem. Fix it. Use the new phone internally. Request a feature. Add it. Repeat.
  • Fulfillment -- Those phones have to be packaged (something Apple clearly spends a lot of time and money on -- they single-handedly created "gadget porn") and shipped out to stores.
  • Marketing -- This is the one that TechCrunch opted to include and it's obviously a huge cost. There were iPhone commercials all over prime time in the weeks leading up to its launch. Posters, brochures, billboards, t-shirts, television spots, magazine ads, and so on.

Finally, there are other costs not specific to the iPhone that must be carried. All those jobs above people to sell it (sales and retail labor). Those jobs also include people who need places to work (facilities), recruitment and benefits (HR), paychecks and expenses (finance), and tools with which to communicate (IT). Overhead.

We'll never know exactly what those other costs do to the iPhone's bottom line. But we can safely say that they add up to some fairly non-trivial numbers.

Do I think Apple LOST money on the iPhone's opening weekend? I doubt it. But it's certainly not accurate to say they made anywhere near $200 million in profit. iPhone #1 was very expensive for Apple to put into a customer's hands... it's iPhone #5,000,000 and beyond that will let us know what sort of long-term value has been created for Apple's business.

And I don't mean to pick on TechCrunch here... lots of sites were calling the iPhone a massive hit before the first device had been sold over the counter. There's no shortage of this sort of speculation.

In fact, TechCrunch themselves poked fun at all the hype a few weeks ago by calling it the second coming. Hilarious.