iPhone 6 and 6 Plus profit margins

Apple is well known to be the king of profits and this is primarily responsible for those billions of dollars in cash in its piggy bank. Apple has painstakingly achieved this crown though a  process that required gaining customer trust and partly trusting its own instinct on not sacrificing quality over margins and marketshare. In its own unique way, Apple has again proved the point that if money is the motivator instead just being a by product, then you will never make enough money, ironically. Tim Cook repeatedly has stressed this point, as recent as in the Charlie Rose interview on PBS, where he said having those billions of dollars profit is a good thing, a very good thing, but that is not what motivates him and Apple everyday.

iPhone 6 internals devolved - what does it cost for Apple to make an iPhone 6? (Source: iFixit)

iPhone 6 internals devolved - what does it cost for Apple to make an iPhone 6? (Source: iFixit)

When Apple released the new iPhone 6 models recently, I wrote about the missing 32GB memory in the base models in both the iPhone 6 and 6 Plus and how it made sense for Apple to do that in terms of bettering its profit margins (but not in terms of improving customer satisfaction). Today a report from Re/code, that it borrowed from the research firm IHS, confirms most of what was already known. The iPhone 6 roughly costs the same for Apple to make as it did for its iPhone 5, making the profit margin on the base iPhone 6 model, to fall around 31%. And for the higher capacity (memory) models the profit margin for Apple goes up like crazy, for example for the 128GB model, the cost is only $47 higher for Apple to make, but it charges $200 more to sell it. The same holds true for the 6 Plus compared to the 6, 6 Plus costs $16 more to make for the base model, but it costs $100 more to buy. So the profit margins for Apple only increase from the iPhone 6 base model to the iPhone 6 Plus 128GB model. This has always been the case, but what I think makes it really interesting this time around are three things;

  • More people are realizing that 16GB is not enough and will buy the 64GB model (of the respective iPhone 6 or 6 Plus) this year
  • There is clearly more than expected demand for the iPhone 6 Plus
  • The last year's iPhone 5S had similar margins as this year's iPhone 6, but the iPhone 5C had lower profit margins than the iPhone 5S

In summary putting all this together, Apple's profit margin for the year of iPhone 6 is going to increase significantly. While this is great for the company and its shareholders, Apple cannot ride on the good faith it has earned from its customers for long and has to sacrifice a little on the profit margins of the base iPhone models and up the memory to 32GB sooner or later

Apple charges $100 to $200 more for iPhone models with higher memory capacity. But Apple’s cost for the additional memory is about $47 more for the 128GB versions than for the 16GB versions... The result is profit margins that are slightly higher — by about one percent — on the 128GB models than on the 16GB models... They seem to be configured and priced to encourage you to buy the models with the higher memory
— Re/code