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iPhone 5 and Wal-mart discounting

2012-12-18 16:17:27

Gruber writes about some genius analyst singing the usual "Apple is doomed" song.

He correctly points out that it's not a 33% discount, but really only a 10% discount.  It's $63 off of a $650 unsubsidized price.

I just would like to dig into this a little deeper. Here's how retail works: a manufacturer (Apple) makes a product, suggests a retail price ($650 in this case), and sells it to a retailer (Wal-mart) for somewhat less than that. How much less is a negotiation, and depends on the relative size and strength of the parties involved.

Wal-Mart and Apple are two of the biggest, strongest actors in this kind of play, so it's hard to guess how much margin Wal-mart was able to squeeze out of Apple. Probably more than Best Buy, but maybe less than AT&T. Apple and Wal-mart aren't going to tell us. 

Anyhoo, back to the way retail works: due to pesky things like anti-price-fixing laws, the manufacturer cannot order or pressure the retailer to set the final price. Suppose Apple sells the iPhones to Wal-mart for $586, Wal-mart can turn around and sell the things for $587 or $585 or whatever they want. You'd expect Wal-mart to want to make a profit, so if they are going through all the trouble to sell iPhones, you'd think the price they are selling at is safely above the wholesale price.  

But the subsidy, that's where things get interesting.  

You know those little wireless stores in kiosks around the town and the mall? They have signs that say "AT&T" in big letters and "Jimmy Joe Johnson's Wireless World" in tiny letters.  These are little businesses run by scrappy salesmen. Their job is to sell two-year wireless contracts. They have to pay 2 or 3 sales people to sit around the store all day long and wait for customers to walk in. Then they have to pay the sales folks a commission to sit down with a customer for twenty minutes and set up a wireless contract. And then have enough money left over to make the business worth running.  I really don't know how much they get paid for a contract.  But a two year contract is worth like $2000 or more to a carrier.  AT&T could easily pay $100 to acquire that customer.

So imagine you are Wal-mart, the biggest, baddest retailer in the universe. You go to Apple and say you will by a gazillion phones for whatever price; you go to the wireless carriers and say you will close contracts on a gazillion customers for $90 each. You can do this because you pay your employees terrible money, and $90 times a gazillion is 90 gazillion dollars. (if my math is correct.) They've undercut the mom-and-pop wireless store; they are delivering more customers to Apple and the carriers.

So Wal-mart cuts their customer $63 discount on a $2500 purchase: Wal-mart customers think it's an awesome deal; and analyst think Apple's margins are getting squeezed. Both are wrong.

Wal-mart wins; Apple wins; carriers win. Mom and pop corner wireless store loses.