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Cybernaut

The technology margins

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There’s no question that the successful high-tech companies of the world can make a lot of money. Last quarter Apple posted a billion dollar profit, while the big telecommunications companies are reporting profits in the hundreds of millions. Even Sony managed to make a small profit of $14 million U.S. this year in the same quarter they lost an estimated $429 million U.S. due to the recall of 9.6 million laptop batteries.

Microsoft has the largest cash reserves of any company on the planet at $49 billion, which often earns more in interest than the company’s mainstay operations. Still, would you believe Microsoft has spent over $9 billion developing Vista up to this point? Kind of takes the sting out of the $250 price tag for the home version available this week.

Every business model is slightly different. Some companies operate with small margins and make huge profits due to their volume of sales, while others are more inclined to make a guaranteed profit with every sale. Other companies are willing to take a loss on new technology in order to attract a built-in customer or subscriber base — standard practice for most printer and cell phone companies these days. Still other companies start out with small or negative margins for some products, knowing they will make money down the road when economies of scale kick in and their products become cheaper to produce.

To that end, customers usually have no idea what a product is actually worth — how much an items costs to manufacture, how much of the price tag is dedicated to research and development and the support of said item, and how much the company stands to profit. However, a handful of consumer technology websites have made a point of stripping down new technologies and pricing their components separately to give people an idea of what the actual costs might be.

For example, a market research company called iSuppli recently broke down the cost of materials going into Apple’s new iPhone, and found that the parts for the four gigabyte version will cost about $229.85 (all figures in American dollars), with another $15 for manufacturing costs. Given the reported $499 price tag, that gives Apple a profit margin in the range of 50 per cent.

The iSuppli figure doesn’t include expenses like research and development, the ongoing costs of supporting and marketing the product, the warranty losses, and the various percentages charged at each level of distribution, but it’s helpful when deciding whether to buy early or later when the price comes down.

Similarily, Merill Lynch of Japan estimated that the manufacturing cost of a Playstation 3 was over $800 U.S. per console at launch, resulting in a $300 loss to Sony for each unit sold. When economies of scale kick in, and manufacturing of specialty items like the Core Processor is optimized, the manufacturing costs are expected to go down to about $320 after three years.

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