IDC: The iPod shuffle has decent margins

Macworld has published an article detailing IDC's comments about the costs of the iPod shuffle. It states:

The iPod shuffle's flash memory, which was supplied by South Korea's Samsung Electronics in the model examined by IDC, is estimated to be the most expensive component used in the player by far, said IdaRose Sylvester, a senior semiconductor research analyst at IDC.

She estimated the 512MB of flash in the cheaper of Apple's two iPod shuffle models costs the company around $37.50 for each player. That's about two thirds of the estimated total $59 that Apple spends on materials needed to make each 512MB iPod shuffle. The product retails for $99 giving the company a profit of about $40, or roughly 40 per cent.

Although the above numbers do not include assembly and other costs, the iPod shuffle does seem like a fairly simple device overall and thus such costs are likely low. Consequently, margins on the iPod shuffles are likely reasonably high. Specifically, despite the very low prices of the shuffle, this screenless iPod is not a loss leader. Apple is making decent profit off of each and every iPod shuffle sold, while still undercutting prices of competitors' flash-based players.

[Update 2005-01-27]

Apple's CFO Peter Oppenheimer contradicts the IDC claims. He states that the average 2004 margin on the iPods was 20 percent, and that the shuffle's margin is lower. While this does not mean the shuffle is a loss leader, perhaps the margins on the shuffle would be better described as mediocre by Apple's standards. However, it will still be a significant profit generator for Apple, given the shuffle's high volumes.

6 GB iPod mini released

As expected, a new 6 GB iPod mini was released yesterday, in 4 colours (with gold no longer available). Colour screens, although widely rumoured, are not a feature of the new iPod minis. More importantly, however, is the massive increase in the battery life. The mini is now rated for 18 hours. The 6 GB unit is priced at $249, which is the same price as the old 4 GB, although it no longer includes a power adapter or a Firewire cable. The 4 GB is also offered now in the same four colours, but has dropped to $199 (sans accessories).

Many people never use the power adapter, so it makes sense to offer it only as an add-on accessory. What was a little bit surprising however was the choice to stop including the Firewire cable. From a business perspective it does make sense, since at this price point, even with the $20 Firewire cable the 4 GB iPod unit is cheaper than it used to be, and most people with newer computers can simply use USB 2.0.

However, many older Macs do not have USB 2.0 support, and those with older laptops or all-in-one machines like the iMac, cannot add USB 2.0 at all, so Firewire becomes a necessity. Furthermore Firewire is a technology invented by Apple. Yet despite all of this, Apple has made the financial decision to make Firewire an added cost option only. It is wise from the business perspective, but it signals the end of an era for Firewire. Firewire has truly become niche only, and Apple is capitulating to the dominance of USB 2.0. Fortunately, Apple continues to sell the Firewire cable, and a plethora of cheaper third party cables are available, including retractable ones.

Not surprisingly, Hitachi and Seagate both have announced 6 GB 1" hard drives. It is not entirely clear who provides the drives in the 6 GB mini however. Ironically, the bare 6 GB drive costs $299, which is $50 more than the 6 GB iPod mini, and the 4 GB drive costs $199, the same as the 4 GB iPod mini.

In addition to the new iPod minis, the iPod photo line has been revamped. The 40 GB iPod photo no longer exists, but there is now the much cheaper and thinner new 30 GB iPod photo, dropping $150 from the previous $499 price to $349. The 60 GB iPod photo stays the same, but also drops $150, from $599 to $449. Again, much of the price drop is due to the removal of accessories, but overall, the price drops are still substantial.

Because it is so new, the iPod shuffle line remains unchanged. One point of note however is the new iPod shuffle ads no longer specify that the units are PC and Mac compatible. Only an Apple logo is displayed. It seems that in the short lifetime of the iPod on Windows, Apple has already established enough mind share so that just the Apple logo suffices.

Toshiba struggling with iPod shuffle demand

Toshiba, a supplier of flash memory to Apple for the iPod shuffle, is increasing production capacity of flash memory chips to meet demand. Demand for the iPod shuffle is so high that Corporate Vice President Masashi Muromachi has this to say about the iPod shuffle: "Demand created by this new machine is so vast that our current capacity can in no way meet their needs."

Currently, wait times at the Apple Store are several weeks for shipment of the iPod shuffle.