As we all know, Apple just announced that fabulous new iPhone destined to suck wads of cash out of our wallets. Yet despite this being the leading electronics company on the planet, we can’t even order the phone for another month and they won’t start shipping until the calendar month after that. So, what’s happening here? Why aren’t they piling the phones up high to capitalize on the publicity they’ve got?
Depreciation.
This is a slightly out-there explanation, but bear with me. Christopher Mims of the Wall Street Journal has the more standard explanations for us here.
Everyone likes to have a great pre-order book they can wave around as if they were some jock showing off for the cheerleaders. And it is indeed true that if you have a selection of new models, then you don’t really know how the ordering is going to go between the models. Perhaps better to see what the order mix is before nailing down the proportions that need to be manufactured.
Yes, it’s true that Apple has a history of changing specs at the last moment, and it’s even true that they’re operating right at the limits of what can be done in volume with the current technology. Even a month helps here, getting all the suppliers up to speed with what they’re supposed to be supplying.
However, I still say depreciation is part of it. For one of the little secrets of the electronics world — not a secret secret, just something not a lot of people know — is the rate of depreciation of electronic componentry. The rough rule of thumb is 1 percent per week. That’s compound, not straight line, so we expect a year-old component to be worth much less than half what it was 12 months ago. This is not something that happens to every single piece, of course, it is only a rule of thumb.
But consider, for example, those OLED screens. Currently there’s only one manufacturer who can make these in the quality and volume desired – Samsung, a major Apple competitor. They’ve thus got something of an opportunity to insist on a reasonably fat price here. Apple is known to be urging other potential manufacturers to step up, and as soon as one or more do, quite obviously the price to Apple of the component will fall.
More generally, such is the speed of advance in electronic tech that, say, memory of the same size and speed, or a processor of a certain GHz and transistor number and so on, falls at that 1 percent per week price. That could well happen in steps rather than a smooth curve, but this is the other side of Moore’s Law, that we can double the speed or transistor count of a chip every 18 to 24 months. Certainly something after 6 months is going to be considerably cheaper.
That is, all of it, the same thing as depreciation. If Apple can delay shipping iPhones for a month or 6 weeks after having set the specification, then all of the components will be that little bit cheaper. If they can push volume shipments out for several months, then it’s all cheaper again.
We’re actually in a world where it is logical for an electronics manufacturer to spec a product with no hardware profit at all on issue. No, I don’t say that Apple does do this, only that it’s a reasonable strategy. Just the general decline in componentry costs will, over the 12 to 36 month life of the product on the market, lead to increasing hardware profits over time. As we know, Apple generally cuts hardware prices after a year of a particular model, but it still enjoys that fall in costs over the first 12 months.
So, it’s logical to design and build something right at the limits of current mass manufacturing technology. It’s also similarly logical to make people wait a couple of months to get one given depreciation, even more logical to try to get real volume shipment a little further out. The world’s most successful electronics company has just announced a product we cannot get for a couple of months, and true volume shipping is a little further out than that.
And people wonder why Apple is the world’s most successful electronics company.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
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