The tablet memory mark-up scandal

http://blogs.which.co.uk/technology/tablets-2/the-tablet-memory-mark-up-scandal/

by bane • 13 years ago

30 48 13 years ago

blogs.which.co.uk

computer• 13 years ago

It's called market segmentation, and that by itself isn't a "scandal".

mtgx• 13 years ago

The scandal here is that they're still releasing "flagships" with 16 GB of storage, for the same price as it was 3 years ago, even though next year they should be able to offer even 64 GB of storage for the same price.

Component prices drop by about 30 percent per year, or in half every 2 years, and flash storage prices have followed that trend exactly (you can Google the iPad or iPhone build of materials from over the years, and see I'm right).

thoughtsimple4• 13 years ago

But they've also added 128 GB at the high end (also for the iPad 4 but after launch.)

This isn't about component pricing. It is about profit margins for the whole product line not each individual tier. Apple is using the drop in cost for one component to offset the increased cost of others to maintain their profit margin.

Joeri• 13 years ago

It's odd though that there is no market effect here to drive prices down at the high end. You could imagine a vendor selling a device with 64 gb storage where competitors ship just 16 gb at the same price level. Why isn't anyone doing that?

xradionut• 13 years ago

No competition is forcing them to... Plus consumers are consumers.

beat2• 13 years ago

It will probably happen, as Android and Windows tablets become commodities and are forced to compete on the same rotting-vegetables pricing basis as PC hardware. Once they go, Apple will quickly follow suit. But make hay while the sun shines, and enjoy the prisoner's dilemma while it's still profitable for everyone.

"Scandal" my butt. This is just market forces waiting to happen. There's a lot of money to be made in the relative slowness of the invisible hand.

thoughtsimple4• 13 years ago

A couple of points on Apple (which I’m most familiar with). First, you are only looking at the 16-32GB upgrade. They charge the same fixed increment on 32-64 and 64-128.This should give a clue for what is going on here.

Apple has a couple of goals. For the consumer they want it to be easy to make purchase decisions. By not varying the price for upgrading to each category, the decision becomes easier for most customers. What can you afford for the convenience of more storage space.

The second thing is probably more important to a successful business–profit margins. Apple is looking at profit margins across the whole product line not for each tier. Clearly anyone buying a 16GB or 128GB iPad is getting the best deal and those buying a 32GB are getting the worst of it. I’m betting that the 32GB iPad is the most popular and so it has the most influence on the profit margin for the platform. In essence, buyers of the 32GB iPad are subsidizing the 16GB version.

As long as customers find the 32GB iPad desirable at the list price, this will continue.

TrainedMonkey2• 13 years ago

I agree, another point that article is missing, is that buying extra 16GB of memory will give you more mileage compared to base 16GB. That is because significant portion of base 16GB is occupied by OS and required apps.

So adding 16GB does not double effective storage, more like increases it by 2.5-2.75 times.

tedunangst• 13 years ago

My 16GB model has 12.8GB free. A 32GB would have 28.8GB free. So more like increases it 28.8 / 12.8 = 2.25 times.

xumption• 13 years ago

Apple seems to be doing pretty well on the profit front given it's $147bn in cash reserves, all hail their profiteering but a large part of that has been acquired through blatantly milking a naive user base.

http://bgr.com/2013/10/02/apple-cash-reserves-147-billion-do...

wonderzombie• 13 years ago

Just because other people have different priorities does not mean they are naive.

smackfu3• 13 years ago

I think it's just a bit too transparent of a strategy, and I end up getting the 32 GB but feeling like I got ripped off, which isn't exactly a win/win for Apple.

twistedpair• 13 years ago

That is how Apple would probably spin it. We're not charging you $300 for a $16 part (16GB -> 128GB, 1800% markup) [0], we're simply making it easier for you to chose a model. IBM doesn't offer that feature!

[0] http://www.insye.com/DP/NANDFlashSpotPrice.aspx

radicalbyte• 13 years ago

I don't find the segmentation a problem - having high-end models just makes the mid-range look like better value. Old and very common trick.

The problem is that in the age of Retina displays, apps that were a 50mb three years ago are 150mb nowadays. So those 16gb are filled in no time at all.

Compare the iPad to the Xbox 360: the 360 launched with a 20gb hard drive. A couple of years later, that was replaced with a 60gb drive - because system changes made that 20gb very small.

I expect that the real reason is that Apple's margins are under pressure from cheap Androids, and a Retina display + uber CPU/GPU are better competition points than touching the Golden Goose..

fumar2• 13 years ago

I understand market segmentation, Starbucks does a great job with this (marketing background).

But, one of the reasons why I have lately avoided Apple's iOS devices is the feeling of getting robbed. Why should I pay 100 dollars more for 16 GB, its not worth it in 2013.

giarc2• 13 years ago

Imagine they charged only $20 extra for each storage increase. Who, when buying a $400 device wouldn't just opt for the small price increase? Therefore they would be sitting on a stockpile of 16GB tablets. Segmentation needs to exist to allow various classes of buyers. For example, someone using a tablet for email, web browsing only would be fine with a 16GB, but someone downloading many large apps would benefit from the 128GB.

CJefferson2• 13 years ago

Why would they sit on a stockpile of 16GB tablets? Are Apple too stupid to only make as many tablets of each type as required?

al2o3cr• 13 years ago

"scandal": you keep using that word; I do not think it means what you think it means.

Selling a device as having 16GB of flash when it only actually had 8GB would be a scandal; pricing something higher than an author believes is "fair" (while still selling so many that supplies are STILL constrained) is not.

georgemcbay• 13 years ago

I wouldn't mind this segmentation if you could easily upgrade the available flash via your own microSD card, but this option is quickly disappearing, even on the Android side (especially among the "flagship" Google nexus devices). So that sucks.

Guvante• 13 years ago

Tablets are moving away from the "storage device as a directly accessible object" model, which is a good thing. The only downside is how do you handle heterogenous storage without making the user deal with it?

SeanDav• 13 years ago

No scandal, just don't buy their products, and tell all your friends to not buy their products.

bananacurve• 13 years ago

And when they follow your advice who do you think they will call when there is a problem?

crystaln• 13 years ago

It is not scandalous to have your pricing correlate to value and markets, rather than cost basis.

If it were, almost every software and saas company would be a scandal.

Someone• 13 years ago

As others have said: it's just capitalism at work aka market segmentation.

However, it looks like there is some informal cartel, where nobody dares to decrease his margins in a ploy for market share. If you can prove that that is more than informal, you have a point.

For those who feel robbed when they see what $100 extra or so buys them, look at it this way: the 16GB version has only about $10 less worth of parts, but is sold for about $100 less. That's a bargain.

beat2• 13 years ago

It's more prisoner's dilemma than cartel. And like the prisoner's dilemma, it won't last.

benjaminwootton• 13 years ago

It isn't necessarily that the 32gb for instance is scandalously marked up over the 16gb. It's that the entry level is sold closer to cost in order to compete in that segment.

Entry level tablets have seemed really cheap since the iPad was first unveiled, and thats partly because the higher end models are subsidising the low end ones.

MichaelGG2• 13 years ago

This teardown seems to disagree:

http://www.isuppli.com/Teardowns/News/Pages/New-iPad-Air-Cos...

The 16GB models have 45-50% "implied margin". The highest end has 60%. That hardly sounds like subsidizing for any useful definition of subsidizing.

smackfu3• 13 years ago

The real scandal is not upping the base model to 32 GB.

paul_f• 13 years ago

After 3 years, it seems the base iPad should have moved from 16GB to 32GB to 64GB. Why didn't this happen?

SimonPStevens• 13 years ago

This is why I lament the fading of the 'PC era'. For me the PC embodies standards, compatibility and interoperability. Buy your PC from one company, and if their memory upgrade price was too high, buy your memory from another. (And your graphics card from another, and your hard drive from another...).

It's my hope that eventually similar standards will evolve for tablets (and laptops, and perhaps phones) that allow a consumer to easily modify or custom build a compatible device.

Unfortunately, I don't have high expectations that this will actually happen. The market just doesn't seem to be applying the right pressure to have any companies interested in doing such a thing.

(Out of interest, can anyone with more knowledge comment on how this standardization came about for PC's. I presume there was a time when computers from different companies weren't compatible. What brought about the "IBM compatible" machine, and why did IBM not sue the pants off every company releasing such a product?)

LukeShu• 13 years ago

The reason the "IBM compatible" machine took of is because for the most part, the IBM PC was made using off-the shelf, generic components; the only proprietary part was the BIOS. Compaq invested a TON of R&D into reverse engineering the BIOS, writing a spec for it, then having another team, who had no idea how it worked, re-implement it. Because it was a totally independent implementation based on described behavior, there was nothing IBM could do; there was no copyright infringement.

As for why everyone stayed compatible with each other... I have no idea.

sliverstorm2• 13 years ago

As for why everyone stayed compatible with each other

Because markets have momentum. When a hundred thousand people have IBM compatible PCs, making your part IBM compatible opens the door to an already-established customer base.

In simple terms, why does nearly every accessory interface via USB these days? Because just about everyone has a USB-compatible computer.

MichaelGG2• 13 years ago

Weren't OSes a factor in that? Especially in the Windows era - having one common platform where everything must work killed any chance of someone trying to do their own thing.

Or do you mean like OEMs creating complete computers that wouldn't take processors or expansion cards or peripherals from anyone but the OEM (via some sort of authorization system?)? From my memory of building back in those days, that'd have been a bad move. You'd get a rep for being incompatible and people would have less incentive to buy your system.

thoughtsimple4• 13 years ago

Early in the PC revolution there were several companies making "almost" compatible PCs. For example the DEC Rainbow was one of these. Even IBM tried to go it alone with their incompatible PS/2 and Microchannel bus. These companies tried to make sure that PC/DOS software would run but that they owned the hardware market exclusively. They all failed--they were all rejected by the customers.

Shortly thereafter the market was inundated with white box PCs. This change reduced the margins on PCs to such an extent that it remade the PC market again. The rise of Dell was part of this process. The only way to beat the local white box supplier was to have superior supply chain logistics which is what Dell brought to the market. By this time, the requirement for compatible hardware was so ingrained there wasn't even a discussion if it was possible to go off on your own--unless your name was Apple.

sliverstorm2• 13 years ago

Perhaps the most critical problem: user serviceability is pretty much directly at-odds with compactness, form factor, lightweight...

tpurves2• 13 years ago

Shocker, this just in, successful companies use:

- value-based pricing instead of cost-based pricing for products and upgrades

- set lower gross margin prices on a base model product in order to attract customers and upsell and cross sell to high margin add-ons and premium versions

btw. Apple has sometimes been described as a flash memory distribution company. All the other stuff, the devices, itunes, the media business, the app store, serve primarily to help sell more flash memory. The lion share of apple revenue is attributed to hardware sales. Mostly iphone and ipad. Within hardware sales the BOM and markup for flash memory chips is the largest driver of gross margin.

seandougall• 13 years ago

Indeed. Back in the now-lamented good ol' days of build-it-yourself PCs, I recall learning that Intel made all their Pentium processors exactly the same, artificially limited the clock speed on some, and sold them cheaper. So the difference in manufacturing cost between, say, a 400 MHz processor and a 433 MHz processor was exactly $0, but somehow nobody seemed to get quite so up in arms about paying more for the extra value.

CJefferson2• 13 years ago

I think you are mis-remembering history. People were extremely annoyed by this, and put quite a bit of work into figuring out how to clock the processors higher, and figuring out which processors could be safely overclocked.

tpurves2• 13 years ago

You are essentially correct. Even today, all chips fresh off the fab (of the same family) cost essentially the same to make for the same die area. However, do to natural variance in the process they don't all perform the same. So chip makers 'bin' the chips for different speeds and very different prices, essentially based on scarcity. But then with each lot and stepping the FAB starts to get better and better at making the top bin chips, and variance reduces. That's where the marketers take over, down-binning perfectly good fast chips to serve low-end customer segments, under-clocking, fusing off perfectly functional areas or features of the the chips to protect their segmentation strategy etc. Intel, AMD, Nvidia do this all the time. That's how they get dozens of SKUs out of only a couple of chip designs in production at one time.

That's why, at many points in history, you'll find bargain priced intel chips, that if you unlock them, turn out to work exactly as well as 'extreme' or luxury-priced chips, that had just been artificially down-binned and handicapped to meet demand for lower priced PCs, and to be able to sell a chip at every price point for maximum price discrimination.

TL/DR - Yes, all chip makers basically price their products like airplane seats.

programminggeek• 13 years ago

Is it a scandal to sell a cup of coffee for $3? It's water and coffee grounds. Is it a scandal that the large size is $1 more, but doesn't cost an extra $1 to provide the extra liquid?

Apple is a business that sells products to make money. Not every business is Wal-Mart and Dell with razor thin margins.

Apple nearly killed itself by destroying its margins and cash in the 90's and only survived by cutting all the unprofitable businesses and focusing on where they could operate profitably. Apple has since spent nearly two decades building up their cash reserves and only selling products that have something like a 30+% margin on them (which is similar to software margins FWIW).

I think it's smart and a lot of people could learn from Apple's obvious business acumen. Get good at selling your product with enough profit margin that you can sustain a business doing it. Sell to the people who are willing to buy at the price you are willing to sell, and ignore the unprofitable potential customers and ignore the pundits.

dreamfactory• 13 years ago

I'm a bit surprised that there isn't a diy upgrade market for ipads at least.

37prime• 13 years ago

Imagine if prices for tablets also change to reflect the ups-and-downs of memory and flash storage prices.

iPad today $499, might be $512 or $482 next week. Depends on the market prices on those components.

For sure companies like Apple locked in the prices for the components.

The tablet memory mark-up scandal

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