Apple’s margin squeeze has no easy fix amid 33% share drop

Product Mix

Apple may also be considering a payments system that would let it keep an extra cut of every device, song and software application sold that might otherwise go to credit-card firms, said Anand Srinivasan, a senior analyst at Bloomberg Industries.

Another approach that Apple may take is to introduce more fully loaded configurations of existing products. An iPad with 128 gigabytes of storage went on sale this month. Since the cost of doubling memory is less than the $100 extra charged for the device, the profit margin is higher, said Srinivasan.

Brisk sales of older models are also causing some investor concern. Last quarter, the new iPhone 5 made up only half the iPhones sold by Verizon Communications. The rest were the 16- month-old iPhone 4S and its predecessor, the iPhone 4. While older models contain cheaper parts and lift margins, they also hamper Apple’s ability to realize maximum economies of scale on newer ones.

After commanding a premium for most of the past decade, Apple is trading at a discount of 28% to the Standard & Poor’s 500 Index on a price-earnings basis, according to data compiled by Bloomberg.

Profit Trade-Off

“They need to do something eye-opening, but nothing is going to have as high a margin as the iPhone,” said Erick Maronak, chief investment officer at Victory Management Inc. Apple’s gross margin could easily shrink to 35%, he said.

Rather than milk its position for every last dollar, Apple should accept lower profits to keep growing revenue and market share, said Yoffie. Since its 2007 introduction, the average selling price of an iPhone has remained above $600, twice that of rival devices. A slimmer margin on a $300 iPhone sold to hundreds of millions of price-conscious shoppers would bring in more cash than a 50% margin on current models, he said.

“If they want to maintain or build market share, they can’t sustain prices that are in the neighborhood of 100% higher than rival products,” Yoffie said.

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