What’s Behind Apple’s Epic Memory Markup; Apple’s iPhone customers haven’t benefited from the plunge in memory prices over the past four years

September 27, 2013 Leave a comment

What’s Behind Apple’s Epic Memory Markup

By Adam Satariano and Ian King September 26, 2013

While all those new iPhone sales send Apple’s (AAPL) profit forecasts sailing past previous estimates, one big reason isn’t getting much attention: The company charges four times the going rate for extra file-storage space. As with previous models, Apple is asking for an additional $100 to double the storage memory on the iPhone 5s and 5c, and $200 to quadruple it to 64 gigabytes on the 5s. A similar 64GB memory chip for phones running Google’s(GOOG) Android operating system sells for about $50 on Amazon.com (AMZN). While the cost of smartphone memory has fallen 71 percent in the last four years—to about 60¢ per gigabyte, according to researcher IHS iSuppli—“Apple has never followed the trend in passing along the savings,” says IHS analyst Michael Yang. Apple spokeswoman Natalie Kerris declined to comment.Unlike other phonemakers, including Samsung Electronics (005930:KS) and LG Electronics (066570:KS), Apple doesn’t let customers swap out old memory cards in favor of roomier ones. The only way to enhance storage on an iPhone is to buy a new device. “They can’t put in upgradeable storage, because they make so much money on the markup to 64GB,” says Kyle Wiens, founder and chief executive officer of component seller IFixit. That’s a big inconvenience for customers who can’t afford to shell out for a brand-new device. Jessica Boudevin, a writer in Los Angeles with an 8GB iPhone 4, says she’s “constantly deleting” photos, videos, and other files to make room for new ones.

Apple enjoys a profit margin of about 50 percent on the iPhone, according to Brian Marshall, a senior managing director at researcher ISI Group. Its memory premium extends to the iPad—a 128GB version of the tablet costs $799, $300 more than a 16GB model.

The company has significant markups on other components, too. Through Apple’s website, upgrading its Mac Pro desktop with a Radeon Pro 5870 graphics card, typically priced around $200, costs $449. At an Apple store, a charger that IHS estimates costs $1.40 to make sells for $40. The company’s gross margin stood at 37 percent last quarter, compared with archrival Samsung’s 30 percent, Hewlett-Packard’s (HPQ) 23 percent, and Dell’s (DELL)18.5 percent, data compiled by Bloomberg show. Marshall estimates that the mobile memory markup accounted for about one-fourth of Apple’s profit last quarter; Gene Munster of Piper Jaffray puts it at around two-fifths.

The company’s sales growth is slowing, and its share of the $280 billion smartphone market is falling against a wave of cheaper alternatives, especially abroad. The iPhone accounted for 13.2 percent of global smartphone shipments last quarter, down from 17 percent the year before, according to researcher IDC, and iPhone sales growth has trailed the overall smartphone market for the past two quarters. From the new models’ Sept. 10 unveiling to their launch, Apple’s stock dipped as analysts fretted that the phones weren’t priced low enough to compete with Android in fast-growing developing markets. It rose again on record launch-weekend sales of more than 9 million iPhones.

For now, at least, Apple can afford to play to the high end. In a Piper Jaffray survey of 416 customers waiting in line for new iPhones over the 5s and 5c opening weekend, average respondents said they wanted a $299 32GB model. (Its storage costs Apple $18.80, according to IHS.) Among consumers who want iPhones that badly, extra memory is an easy upsell, says Michael Gikas, a senior editor at Consumer Reports. “As long as Apple can make people pay,” IHS’s Yang says, “it will stay on this track.”

The bottom line: Apple’s iPhone customers haven’t benefited from the plunge in memory prices over the past four years.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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