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What the Muses Deign: Economies of snail

Porruka,, March 29, 2002

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Apple has come under fire recently for the price hike on the LCD iMac line of machines – a $100 increase across the board for US buyers and variable changes for the rest of the world. The reason? According to Apple, LCD and memory prices have skyrocketed. (Of course, the Wintel crowd has to copy Apple on this, too.) Apple has wisely decided to keep existing pricing on orders placed before the announcement, while saying at the same time that production is ramping up further to satisfy demand. One wonders, though, will the demand be the same now that the price has risen?

Of margins and men

In recent years, Apple has protected its margin on hardware above almost all else. Even amid cries of “Lower prices for more market share,” and “There’s still a gap between Wintel and Macintosh at the low end,” the company has steadfastly clung to some of the highest margins in the industry and even raised them at times. This, one would assume, would be at least partially to appease Wall Street, given the rocky financial history of Apple pre-Jobs and the dramatic haircut Apple stock took in September 2000.

Short-term investors should cheer such moves, as they protect the cash that Apple uses to promote and produce new products. Longer-term investors might be happy that the company is stable but look forward to the time that unit sales start growing again, allowing the company to actually make more money using those industry-leading margins.

Of men and their margins

Something else that helps Apple keep the margins up (in addition to price increases – this isn’t the first time) is a subtle but important shift by Apple: moving sales from the channel to in-house, to the Apple Store (online) or Apple retail stores. For every machine Apple is able to sell without having to use a middleman, the effective margin per machine goes up. This is simple Business 101, right? Well, you might think so, but this strategy isn’t playing well with the independent sales force who makes sure Apple products are available to the rest of the world. As Apple’s margins go up, the resellers’ margins seem to shrink, and that’s when they can even get product to sell. There are multiple reports from various news sources that claim that, even in the tight availability market of the new iMac, outside vendors have been relegated to the shadows when it comes to hardware shipments. What is the price increase going to do to these vendors and all the orders they have that are already impossible to fill?

Of conspiracies and capitulation

Of course, whenever something happens that’s unpopular, the worst motives get attributed. With Apple’s latest move, it’s possible to hear the story that the delays were planned, that the hype was generated just to jack up the price later. Unlikely, given Apple’s announced stand of honoring the existing pricing for existing orders. (Side note: However, everyone thinking about ordering gear from the Apple Store should read the Sales and Returns Policy – Apple does indeed claim that the sale price will be the price on the day of shipping. This would be great in the case of price reductions, but also does give the company the right to increase as well.)

No, this is more likely yet another case of Apple’s forecasting being highly inaccurate. The kudos Apple earned for offering the high-end iMac first evaporated along with the supply. And the resellers? The supply issue might be just another nail in the coffin. It’s not likely any of the price increase will go into the resellers’ pockets; it will just reduce the margins even further. That is, when they can finally get machines to sell. Apple, however, will still probably sell as many of the machines as it can make. Let’s hope it’s enough to keep everyone (Apple, resellers, users) happy.

Editor-in-Chief, MacEdition

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