Intel Chips Are Far More Expensive For Apple (AAPL)

| About: Apple Inc. (AAPL)

A lot of people have been expecting that with its conversion to Intel processors, Apple's Macintosh computers would rapidly become cheaper because of their use of "commodity" Intel parts. Business Week and supply chain analyst firm iSupply rebut that myth by noting that where the G5 chips were costing Apple about $100 or so, the new Intel Core Duos are costing it more like $265. That means that Apple is absorbing $165 more in processor cost on the new iMacs, since it didn't change their pricing.

I think there are two important takeaways here:

1. Standard does not necessarily mean cheaper. Apple's move to an industry standard part has actually raised its parts cost, not lowered it. We shouldn't be surprised at that. A manufacturer like Intel who has the majority of the market for PC processors has immense pricing power, whereas a smaller manufacturer trying to break into the market might be willing to make less profit to do so. Further, some standards include intellectual property (in this case, the processor design is definitely proprietary Intel property) that raises their costs.

2. Pricing is a marketing decision to address a specific market, not a function of cost.
Apple didn't raise its price to accommodate its higher parts cost because it judged that a higher price wouldn't have met the needs of its target market and might have reduced its sales. Pricing is only one of the four Ps of marketing -- Product, Place, Price, and Promotion -- and the lowest price is rarely the best business decision without thinking about the other three Ps.

The bottom line: Apple switched to Intel parts for more benefits than cost, since the Intel parts are costing it more. Expect to see a lot of marketing about those benefits in Apple's upcoming products and promotions.

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