Apple and Amazon are among the several companies that are outrageously overcharging flash storage
This entry was posted on Monday, September 10, 2012.
When you buy a product with multiple capacity options, how do you determine if the higher capacity is worth the higher cost? You’ve probably thought about how expensive it is to simply increase the physical storage of a given device. Take Apple’s iPad, for example: the 16GB model costs $499, the 32GB model costs $599, and the 64GB model costs $699 (all models are WiFi-only models in this case). Have you ever thought about what justifies a $100 increase in price for 16GB more storage, going from the 16GB model to 32GB model?
The fact is that Apple is overcharging you quite a bit of money. In fact, Apple isn’t the only company to overcharge for flash storage. Most smartphone and tablet manufacturers are following the trend of overcharging for flash storage. You might not even want to know what flash storage costs to Apple. So be warned…you may feel like you wasted your money after reading this article.
Just to prove that Apple isn’t the only company that is overcharging for storage (since I know some Apple haters will have a jolly time with this article otherwise), Amazon’s Kindle Fire HD is another good example. A 16GB WiFi model costs $300 and a 32GB WiFi model costs $370. There is no difference between the two models other than the capacity of the flash storage. So does 16GB of storage cost $70 to Amazon?
The answer is a big, fat “NO”! In fact, flash storage is ridiculously cheap. On top of that, the price of flash storage is going down! Over the past year, the cost dropped about 46%!
So let’s get down to the numbers: the average cost of 8GB of flash memory used in tablets is now $3.63 (and started at $6.82 in the beginning of the year, representing the 46% drop). Doug Freedman, an analyst at RBC, wrote a report about this subject. According to Freedman, Apple’s memory costs Apple about $0.40 per gigabyte. If you do the math, 16GB costs Apple about $6.40. According to Freedman’s report, the memory that Amazon uses costs Amazon about $0.70 per gigabyte. With this rate, 16GB of memory would cost Amazon $11.20. (Source: NYTimes)
If 16GB of memory only costs around $6.40-$11.20, why are consumers charged $70-$100 for a 16GB increase in storage? Keep in mind that many things are built into the cost of a product. Aside from the actual cost of the parts, accounted for in the total price are labor, manufacturing, research & development, advertising, and profit. But when it comes to the difference between a $499 16GB iPad and a $599 32GB iPad, the only thing you should be paying for is 16GB of storage. In a perfect world, a 32GB iPad would only cost about $505.
iSuppli reported that flash storage is the largest profit-generating aspect of the iPad and iPhone. “Apple makes far and away more money in selling consumers NAND flash than NAND flash manufacturers make selling it to Apple. And the more flash is in the iPad, the higher the profit margin there is for Apple”, stated the iSuppli report.
But we all know that no company could possibly charge for just parts in a simple storage upgrade. The $599 price of the 32GB iPad already has labor, manufacturing, and all previously mentioned costs built into the price from the $499 base cost of the 16GB model! If Apple were to sell the 32GB iPad for only $505, the 32GB model would lose value compared to the 16GB model. Soon, the 16GB model would be phased out. We can then continue to look at the 64GB model; with the proposed price module of $6.40 per 16GB, the 64GB model would cost only $524.60. At that price, the 32GB model would be phased out due to consumers leaning towards the 64GB model.
This same example can be applied to any manufacturer of goods that use flash storage. Apple, Amazon, Samsung, Google, Motorola, and many more companies all charge substantial amounts for flash storage when, in reality, the storage costs are pocket change to the manufacturer. The issue with selling storage at a lower price is that consumer options would be limited. As I mentioned before, lower capacity models would be phased out because consumers will prefer to buy a larger capacity model at a lower price. Manufacturers can make more money by increasing consumer options and charging not based on supply cost, but rather charging based on consumer wants. Consumers would prefer 64GB to 16GB; therefore, 64GB models are much higher priced. (64GB models are not much higher priced because of the higher capacity; as we learned, it only costs pocket change to bump 16GB up to 64GB. The simple reality is that if price were not a factor, consumers would choose the 64GB model. Therefore, the 64GB model is valued much more than its preceding models.) This way, 16GB models remain in the market but the high profit margin still exists in the 64GB model.