Apple price pressure as profit margin declines to levels after iPhone launch

Profit margin falls to 2007 level amid tougher competition and a lack of new products

PUBLISHED : Tuesday, 12 February, 2013, 12:00am
UPDATED : Tuesday, 12 February, 2013, 5:32am

Apple's profit margins are falling back to levels not seen since sales took off after the 2007 debut of the firm's iPhone, as competition and a lack of breakthrough products pressure the company to lower its prices.

Concern over falling margins helped prompt a 33 per cent decline in Apple's shares from a record high of US$705.07 on September 21, making it the worst-performing stock in the Standard & Poor's 500 Index over the same period.

Last week, Apple said the board and management were discussing the return of more money to shareholders, after a proposal by Greenlight Capital's David Einhorn to pay out more of its US$137.1 billion in cash and securities, possibly with higher-yielding preferred stock.

The latest quarter's drop in gross margin to 39 per cent from 45 per cent a year earlier was caused by the introduction of the iPad mini, as well as other products with higher costs and price reductions for existing products, the company said.

Unless chief executive Tim Cook unveils a revolutionary new gadget with premium pricing, Apple shares will remain under pressure, analysts said.

"It will be almost impossible for Apple to maintain the margins it's had in the last few years," said David Yoffie, a professor at Harvard Business School. "They've been able to charge pretty much whatever they wanted for their products, but competition is increasing."

It will be almost impossible for Apple to maintain the margins it's had in the last few years ... They've been able to charge pretty much whatever they wanted for their products, but competition is increasing

A central challenge is slowing sales of the iPhone, Apple's best-selling and most-profitable product that accounts for 56 per cent of revenue. Samsung Electronics, HTC and other rivals are introducing cheaper and feature-laden smartphones and tablets based on Google's Android software.

Apple spokesman Steve Dowling declined to comment.

One product with the potential to be profitable enough to slow the margin slide could be an Apple-branded watch that also makes phone calls, accesses the web and provides location-tracking services, Bloomberg Industries analyst Poonam Goyal said.

A watch with these features might retail for much less than US$200, keeping it within the price range that is the fastest-growing portion of the timepiece market, and also the most profitable, she said.

Apple could sell millions of the watches, and generate a margin of about 50 per cent, she said.

That is about twice the margin that Apple might earn by making a television or selling an inexpensive phone for less-affluent shoppers, said ABI Research analyst Michael Morgan.

The company is developing a wristwatch-like device using curved glass, The New York Times reported on Sunday, citing unidentified people familiar with the situation. Apple spokeswoman Natalie Kerris declined to comment on the plans.

Apple is also seeking new customers in China, where it will be harder to charge premium prices. New products such as the iPad mini are also being priced at relatively lower points, eating into margins.

Gross margin, or how much Apple earns after paying for raw materials, labour and production to build its products, is projected to decline this financial year, the company said last month.