Does Another Nail in Apple Margins Mean the Eventual End of Macs?

According to iSuppli, the new Mac Mini is a heck of a lot more expensive to make than is usual for Apple. A $599 machine yields just over $200 in margin. For many companies, that would be slick. For Apple, with its legacy of high margin business, this is the financial equivalent of an earthquake. And it's yet the latest piece of evidence suggesting that on the computer front, and probably elsewhere as well, the days of enviable levels of profitability, and the ability to sell expensive hardware, are likely coming to an eventual end.

First a caveat. I'm not suggesting that management out in Cupertino is doing something foolish. It's likely necessary that the company have an entry-level computer for the price sensitive. Sticking to the old faithful audience can't offer the type of growth desired by investors and stock-holding managers. But the result will continue to be pressure on profitability.

Back in February, Apple's own numbers showed that its net sales were slipping. The reason net sales are critical is that they set the upper limit on how much margin can possibly exist for a given product. Let's revisit some of the movement of Mac unit sales and per-unit net sales:

Total Macs
Quarter Unit Sales Per Unit Net Sales
Q2 09 2,216,000 $1,329
Q1 09 2,524,000 $1,408
Q4 08 2,611,000 $1,386
Q3 08 2,496,000 $1,446
Q2 08 2,289,000 $1,526
Q1 08 2,319,000 $1,532
The downward trend in per-unit net sales is obvious. Now, it may be that greater efficiency has allowed higher margins, making the room for the move. But you can safely bet that Apple's management isn't dropping prices because it wants to. This is a market pressure, maybe due entirely to the economy, possibly due in part to the demonstrated effect that Microsoft's ad campaign has had. Last fall, the company managed to drop prices and maintain price position in some clever strategic moves.

However, the difference between then and now is enormous. Everyone in the industry is feeling pressure from netbooks, and given Apple's business model, it is particularly vulnerable to tumbling prices. So what happens when hardware becomes a low-cost premium? Apple eventually does what it must, dropping the computer line (or spinning it out as a separate specialized venture) and focuses on product lines that cost significantly less and that offer ongoing revenue streams â€" iTunes purchases or a percentage of telephone subscriptions. The comapny simply won't be able to afford the business line.