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A historical explanation of Apple's recent margin erosion


Apple's share prices have been dipping in recent months as analysts have predicted the company's pace of remarkable growth is starting to slow. At their all time high Apple margins were at 50%, but in the most recent quarter they had shrunk to 37.5%. So why exactly is Apple's margin shrinking?

Asymco analyst Horace Dediu has posted an interesting examination of Apple's margins since 2005 to find the reason for their recent reduction. When his prediction that the company's margins would improve in quarter four of 2012 proved false, Dediu looked at the data to see what went wrong. His analysis takes into account the three major factors effecting margin changes for Apple: price changes, cost of components, and a mix of high and low margin products.

Dediu discovered it largely comes down to the iPhone, Apple's top selling product. While sales and the asking retail price of the iPhone have remained consistent over the years, the cost of components increased by 29% in 2012 over the previous year. This had the effect of cutting the iPhone's gross margin from 58% to 48%. The iPhone 5 is more expensive to make, and therefore currently has a lower margin.

iPad margins also decreased, though it Dediu notes that the asking retail price of the product also decreased in the time period. Ultimately he reasons that the increased cost of components is the main cause for the margin reductions.

As the mobile markets expand in developing nations like India and China Apple will face more pressure to keep their products affordable. The popularity of recent trade in programs in India for the iPhone 4 shows there is market desire for the products. Perhaps the reduction in margin due to the cost of making the iPhone 5 will help make the much speculated about "budget iPhone" a reality. Head over to Asymco for Dediu's complete analysis, including comparisons with Apple's competition at Microsoft and Google.

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