Apple to See Dip in Product Profitability

With the recent rise in memory and display process, Apple risks seeing a dip in its profit margins, but new products as well as strategic reserves are likely to lessen the impact.

There has been talk of memory shortages for some time now, and Apple is one of the major consumers of NAND flash, with an estimated 25 percent of global production. Given the circumstances, it is not surprising that prices are going up significantly. In July along prices for 2GB, 4GB, and 8GB on-the-spot orders went up by $2.92, $3.29, and $1.71 respectively. While this might not seem like much at first glance, it is enough to have an impact on Apple's iPod margins by approximately 3% by the end of the quarter. Considering that prices are likely to continue going up, Apple could see even more of the iPod profitability eroded.

Similarly, display prices have gone up by $5 and $11 for every LCD. This is expected to erode margins on both iMacs and MacBooks by as much as 5 percent is the current trends continue, and it will have the biggest impact on the premium screens used in portables.

Considering that Apple has already factored higher prices for components into its guidance for the summer quarter, it is likely that the company is prepared for the added expense and lower margins. Also, Apple is known for buying memory from multiple sources and at time hoarding it in preparation of new product launches, so it is quite possible that they will not be overly affected.

Last but not least, new products that are expected to ship in the near future could do much to mitigate the damage. Leopard, new iPods, as well as the European iPhone are all expected sooner than later, and then there is the mysterious product transition that the company hinted at.

Despite the threat of reduced profits, Apple does have a great amount of resistance to such fluctuations in component costs and has always set prices on its own terms, always staying clear of products that don't have decent margins.