The hidden costs of Apple’s mobile transition

Going into the final two months of the year, the oldest product for sale in Apple’s mobile lineup will be the 15-inch MacBook Pro with Retina display, which has been on the market for a mere four months. Apple(s AAPL) is also selling an iPhone 5 and iPod Touch and nano that are just one month old, and November and December will bring a brand new iPad, iPad mini, iMac and Retina 13-inch MacBook Pro. It’s probably the biggest single product turnover Apple has ever done in such a short amount of time. But such a remarkable transition also has costs: Apple will, for what the company believes is a short while, make less profit on these new devices than it did on their older siblings.

Following the release of Apple’s fiscal fourth quarter earnings on Thursday, the company also forecast the results for the next quarter. While it predicted it would take in the most revenue ever in company history — $52 billion — for the months of October through December, it’s also projecting earnings per share of $11.52. That’s quite a bit below the $13.87 per share it brought in the same quarter a year ago: albeit ridiculous profit by that standards of the mobile industry.

CFO Peter Oppenheimer blamed slightly lower profits on a shorter fiscal quarter — 13 weeks this year instead of 14 weeks like last year — but also “changing gross margins.”


The refresh of the entire mobile lineup and most of the Mac lineup and Apple’s decision to ramp production on all of these products at almost the same time has costs, CFO Peter Oppenheimer explained in a call with investors.

“The margins on our new products are lower than their predecessors, including iPhone 5, and we’ve been very aggressive on iPad mini,” he said, indicating that Apple is keeping the iPad mini price low to be competitive.

“We’ve never introduced so many new form factors at once. All of these products have higher costs than their predecessors,” he said. Sure, that happens every time Apple refreshes a product, however, “the difference this time is the sheer number of products we’re introducing in a short period of time,” Oppenheimer added.

For years Apple’s reputation held that it built premium products, charged premium prices, and delivered premium profits. But with the introduction of the iPhone and later the iPad, the company has become known for something else: affordability. At $499, the original iPad was and remains cheaper than much of its competition, except for the more recent introduction of Amazon(s AMZN) and Google(s GOOG) tablets at very aggressive (and unprofitable) prices. Yet, Apple has managed to grow its profits while keeping its mobile products affordable. And investors have gotten comfortable with successively larger, more impressive earnings results. But it seems there is a limit: transitioning the majority of the product lineup at once does require some sacrifice.

Ramping its new product lineup all at once also seems to be having another effect: constrained supply. CEO Tim Cook talked repeatedly about demand for products outstripping the supply and Apple is trying to keep up. The iPhone 5 is backordered at most major carriers; Apple’s own website shows the wait is between three to four weeks. The iMac, he promised, would also be “significantly” constrained during the quarter.

“With each new product we see learning curves associated with ramping production,” said Cook. “The new products we have now are no exception to that — the difference is the number of new products we have moving at once.” The iPhone 5 in particular is presenting a challenge its manufacturer: Foxconn says it’s “the most difficult device” it’s ever built.

Apple is stressing that accepting lower margins and being behind on production is only temporary and that it plans to get its costs down as soon as possible.

While lower product margins are sometimes seen as a sign that trouble is around the corner, as was the case for Research in Motion(s RIMM) in 2010, in Apple’s case, it has its strongest lineup of products ever heading into a vital quarter. Not all history repeats itself.