It's Hard to Say
I find this question quite intriguing. Since Apple’s MacBook Pro has roughly double the average selling price (ASP) of an iPad, most people would assume that Apple must make a higher gross margin on the MacBook Pro. But that’s not necessarily the case.
I would argue that it’s more likely that Apple makes more money on the iPad even at half the ASP. I would expect that iPad gross margins are fairly close to or perhaps higher than an iPhone. At a high level, you can see that Apple’s gross margins rise when iOS devices are a greater percent of total sales and they fall when they are down. But my suspicions go deeper than that.
I used to analyze laptop profitability for the Gateway Corporation in their heyday, so I know a thing or two about what it costs to manufacture laptops. Because of that, I can see a myriad of advantages that Apple has with manufacturing an iPad instead of a MacBook Pro.
Material Advantages
The iPad outsells the Mac by a factor of 2:1, so components that are specific to MacBook Pros are going to be more expensive just because of that. Not only that, the MacBook Pro has way, way more unique components than an iPad. The hinges, trackpad, keyboard, GPU, etc. are all items that the iPad doesn’t need to worry about.
Labor and OH Advantages
A rule of thumb in manufacturing is that labor and overhead rise and fall with the number of unique components that an item has. That means a bunch of parts that need to be ordered, delivered, stored in a warehouse, and finally assembled. A MacBook Pro is going to be exponentially more expensive for Apple to produce from a labor and overhead perspective.
Also, depreciation is captured in the overhead line of an income statement. Remember when I mentioned that the iPad outsells the Mac by 2:1? That also means that all capital costs are spread over half the volume. That means a smaller gross margin.
Selling Costs
All warranty costs end up below gross margin in selling costs. Warranty costs for laptops are amongst the highest of any kind of device. By their nature, laptops are prone to suffering from damage because they aren’t always sitting on a desk. People walk around the office with them; they precariously balance them on a sofa arm; they trip on the power cord. A lot of this damage shouldn’t be covered by the manufacturer, but when a customer plays dumb what are you going to do? They have no idea why their hard drive isn’t working or why their power jack came loose.
Then there are ports. The more ports there are, the higher the eventual warranty costs. No matter what you do, people find a way to jam things in there that shouldn’t be there or they throw their laptop in a bag with some accessory hooked into the port and break something. And the customer always claims that it just broke in the middle of the night while sitting unmolested on his desk.
At Gateway, one of our largest warranty costs was broken power jacks or internal damage due to the power cord yanking the device off of a table. The iPad, due to its all-day battery is rarely ever used while plugged in. So no one is going to yank on the power cord. This means less damage to internal components. This used to be a non-issue for the MacBook Pro due to MagSafe, but Apple has backtracked here by dropping MagSafe. I assume either they are prepared to the pay the price or maybe the new components are more resistant to damage.
When it comes to ports, the iPad has a huge advantage over the MacBook Pro. There is only one port and it’s hardly ever used for anything. The iPad also seems much more resistant to damage upon a drop. Plus, it’s harder to drop since it doesn’t have that awkward balance of holding a laptop by the corner with the screen open.
I could go on and on about why the iPad probably has lower warranty claims than a MacBook Pro but suffice it to say that it all adds up to a more profitable income statement for the iPad than the MacBook Pro.
Conclusion
It’s not controversial to say that it costs Apple a great deal more to manufacture and service the MacBook Pro than it does the iPad. The question is whether the MacBook Pro’s higher ASP makes up for the difference. That is difficult to say, but I doubt it does. I think that Apple is reaping more profit from every iPad sold than the MacBook Pro.
Apple has made it a point recently to spell out their commitment to the MacBook Pro. I don’t doubt that they fully intend to satisfy demand for it in the foreseeable future. How long people will be clamoring for $2,000+ devices is another question.
But if Apple commits a great amount of its resources to developing the MacBook Pro, I doubt it is because of the financial case to be made. It’s more of a romantic commitment to a device that used to define Apple.
Microsoft has made a big splash with what journalists define as “going after the MacBook Pro.” My first thought has always been “Why?” That’s a small market destined to shrink. I’m sure there are financial analysts at Apple who tell Tim Cook that if Microsoft wants it, let them have it.
I’m amazed that anyone would question why Tim Cook or Apple seem to never give up on the iPad in the face of falling sales for the past three years. It’s because the profit margins are probably huge. When you combine double the unit sales volume with perhaps double the profit margin you can be forgiven for wanting the future to tip one way over the other. And the customer isn’t getting screwed. If you can get by with an $800 device over one that costs $1,800 what’s to complain about?
I used to analyze laptop profitability for the Gateway Corporation in their heyday, so I know a thing or two about what it costs to manufacture laptops. Because of that, I can see a myriad of advantages that Apple has with manufacturing an iPad instead of a MacBook Pro.
Material Advantages
The iPad outsells the Mac by a factor of 2:1, so components that are specific to MacBook Pros are going to be more expensive just because of that. Not only that, the MacBook Pro has way, way more unique components than an iPad. The hinges, trackpad, keyboard, GPU, etc. are all items that the iPad doesn’t need to worry about.
Labor and OH Advantages
A rule of thumb in manufacturing is that labor and overhead rise and fall with the number of unique components that an item has. That means a bunch of parts that need to be ordered, delivered, stored in a warehouse, and finally assembled. A MacBook Pro is going to be exponentially more expensive for Apple to produce from a labor and overhead perspective.
Also, depreciation is captured in the overhead line of an income statement. Remember when I mentioned that the iPad outsells the Mac by 2:1? That also means that all capital costs are spread over half the volume. That means a smaller gross margin.
Selling Costs
All warranty costs end up below gross margin in selling costs. Warranty costs for laptops are amongst the highest of any kind of device. By their nature, laptops are prone to suffering from damage because they aren’t always sitting on a desk. People walk around the office with them; they precariously balance them on a sofa arm; they trip on the power cord. A lot of this damage shouldn’t be covered by the manufacturer, but when a customer plays dumb what are you going to do? They have no idea why their hard drive isn’t working or why their power jack came loose.
Then there are ports. The more ports there are, the higher the eventual warranty costs. No matter what you do, people find a way to jam things in there that shouldn’t be there or they throw their laptop in a bag with some accessory hooked into the port and break something. And the customer always claims that it just broke in the middle of the night while sitting unmolested on his desk.
At Gateway, one of our largest warranty costs was broken power jacks or internal damage due to the power cord yanking the device off of a table. The iPad, due to its all-day battery is rarely ever used while plugged in. So no one is going to yank on the power cord. This means less damage to internal components. This used to be a non-issue for the MacBook Pro due to MagSafe, but Apple has backtracked here by dropping MagSafe. I assume either they are prepared to the pay the price or maybe the new components are more resistant to damage.
When it comes to ports, the iPad has a huge advantage over the MacBook Pro. There is only one port and it’s hardly ever used for anything. The iPad also seems much more resistant to damage upon a drop. Plus, it’s harder to drop since it doesn’t have that awkward balance of holding a laptop by the corner with the screen open.
I could go on and on about why the iPad probably has lower warranty claims than a MacBook Pro but suffice it to say that it all adds up to a more profitable income statement for the iPad than the MacBook Pro.
Conclusion
It’s not controversial to say that it costs Apple a great deal more to manufacture and service the MacBook Pro than it does the iPad. The question is whether the MacBook Pro’s higher ASP makes up for the difference. That is difficult to say, but I doubt it does. I think that Apple is reaping more profit from every iPad sold than the MacBook Pro.
Apple has made it a point recently to spell out their commitment to the MacBook Pro. I don’t doubt that they fully intend to satisfy demand for it in the foreseeable future. How long people will be clamoring for $2,000+ devices is another question.
But if Apple commits a great amount of its resources to developing the MacBook Pro, I doubt it is because of the financial case to be made. It’s more of a romantic commitment to a device that used to define Apple.
Microsoft has made a big splash with what journalists define as “going after the MacBook Pro.” My first thought has always been “Why?” That’s a small market destined to shrink. I’m sure there are financial analysts at Apple who tell Tim Cook that if Microsoft wants it, let them have it.
I’m amazed that anyone would question why Tim Cook or Apple seem to never give up on the iPad in the face of falling sales for the past three years. It’s because the profit margins are probably huge. When you combine double the unit sales volume with perhaps double the profit margin you can be forgiven for wanting the future to tip one way over the other. And the customer isn’t getting screwed. If you can get by with an $800 device over one that costs $1,800 what’s to complain about?
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