In The Tom Peters Seminar, the business guru who goes by that name celebrated the fact that only some 10% of the price of his new Minolta camera resulted from materials and labor. The rest was “ephemera” and “intellect.” That means, translated from Peters-speak into English, that only a tenth of the hours we work to pay for a piece of consumer electronics go to pay the production cost; the rest go to embedded rents on artificial property rights.
Now Rob Carlson reports recent information that sheds new light on this contention. He cites Joel Johnson’s inadvertent admission that only 8-10 of the people at Aliph working on Bluetooth headsets are actually necessary to carry out or coordinate the production process. The rest are involved in administration and marketing. And the total cost of manufacturing (outsourced to China) amounts 5% or less of retail price. The proprietary software of the iPhone probably adds around $30 to the price.
On the other hand, the material components of a typical smart phone cost around $170-180. So total production cost is a little over $200, and the rest of the $500-600 price is retail markup and rents on proprietary design.
The remaining unanswered question, to make sense out of all this, is the cost breakdown of the components themselves. How much of the price of the components reflects the actual cost of producing them, as opposed to rents on proprietary design? How much of it is just administrative overhead from conventional corporate modes of organization (Weberian work rules, job descriptions, mission statements, and all the rest of it)? I suspect it’s a lot, if the efficiencies hardware hackers typically achieve in reverse-engineering proprietary designs are any indication (Factor Twenty cost reductions are not unusual).
Carlson himself, in the same post, goes on to describe how Biodesic‘s improvements in manufacturing processes and component designs are resulting in radical cost reductions, further blurring the boundaries between physical components and bits.
I’d be interested in any light the readers could shed on how much of the price of iPhone components results from proprietary design, administrative overhead, etc. I’m inclined to believe that conventional manufacturing is riddled with overhead costs in a manner comparable to a human body with congestive heart failure, bloated with edema from head to foot.
Kevin,
Here are some factoids for you….
According to CNET, the iPhone component price is around $174 http://news.cnet.com/8301-1035_3-10152771-94.html
You may or may not be aware of what Apple critics refer to as the “Apple Tax,” the extreme markup Apple plies to its products due to their sex appeal. Another example of the Apple Tax is the iPad, with margins estimated at 50% http://www.businessweek.com/technology/content/feb2010/tc2010029_588063.htm
Are you familiar with the OpenMoko smart phone project? http://wiki.openmoko.org/wiki/Main_Page
Apple recently decided to go after HTC for alleged patent infringements. Here’s some observations about the lawsuit: http://9to5mac.com/observations-apple-htc-3409733
Sadly, I am an Apple fan. I do like their industrial design. But in recent months it has become clear to me that Apple is antithetical to everything I stand for. Making that switch to open source software like Ubuntu may be tricky, but it is necessary to support the evolution of open source and drive down costs.
Hope these links are helpful. Best!
Keith
How many of the technological wonders that we now have, that bring added productivity and enjoyment to our lives, would we have WITHOUT the intellects of the people who designed them?
Can you design a smartphone from scratch, having never seen one before? Somebody, somewhere did. Some intellect stayed up nights figuring out how to assemble other pieces of technology into something that hadn’t been done before. Then it taught other intellects how to replicate the thing so lots and lots of people (who have no idea how it actually works) could have the benefits of using it.
If you do have those skills and imaginative capabilities, how much would you like to get paid for the efforts you put forth?
All production is a work of philosophy. Bread can’t be baked, corn can’t be farmed, computers can’t be built and programmed, without the thinking, reasoning minds of the people who A) discovered or invented the processes for doing such things, and B) didn’t/couldn’t discover or invent them, but learned how to *do* them.
Nothing that is necessary for the maintenance and betterment of human life can be achieved without the intellect of the human mind.
Just as a human is much more that the few dollars worth of chemical elements his or her body is made of, that loaf of bread and that smartphone are worth a lot more than the few dollars or pennies worth of chemical elements that they are composed of.
(Eek! The previous was submitted before I finished typing it … must have fat-fingered a focus-changing hotkey or somethimg)
Regarding administrative overhead:
Have you ever run your own business? Ask anyone who is self-employed, and they’ll tell you that they spend something like 10% to 20% of their time actually *doing* what it is they do. The other 80% to 90% is spent doing things like complying with government regulations and tax forms, keeping the books, marketing the product or service that they provide, meeting with prospective clients, et cetera.
Those businesses fortunate enough to be able to hire specialists to perform those functions for them save a great deal of time, effort and money for everyone involved, because each individual can focus more of their time doing what they do best, instead of having to wear a dozen different hats.
All of those people, while it may at first glance seem that they are unnecessary, contribute in some way to the smoother, more efficient running of an enterprise, which results in products and services being brought to market more quickly and less expensively than they could otherwise be. Were it not so, any employer worth their salt would get rid of those positions – and the companies that fail to do so, will quickly wither away the instant a competitor comes along and offers a product or service with similar benefits at a lower price.
Much of the bureaucratic waste that’s seen in the private sector is caused directly by the overhead imposed by the *government* bureaucracies – entities which do no productive work whatsoever. Their existence does nothing but impose expenses on productive enterprises, and offer opportunities for the unscrupulous to bribe and cheat their way to unearned riches.
Take a look at most doctor’s or dentist’s offices: How many people does a physician in private practice have to employ, just to keep up with the paperwork that the government mandates that they keep? (Paperwork, I might add, that no sane doctor or dentist would ever *choose* to do or keep!)
It’s similar in construction, or the provision of electrical power, or sewer services. Even hairdressers and massage therapists (and in some places even florists have to spend ridiculous amounts of time and effort complying with government regulations.
If that’s the kind of waste you’re talking about, yeah, I’m all for eliminating it. It does add unnecessarily to both the cost and the price of everything we buy.
The patents that Apple is suing HTC over are such ridiculus patents as multitasking operating system. HTC didn’t even know they were being sued before they read the article in the news about it.
Hear, hear, Rich!
BTW – Since when is price based on cost. Price is based on the value in the market place (one of the four P’s of marketing). Do you think a latte at Starbuck’s is based on cost or better yet a bottle of filtered water. Dasani is Coke without the CO2 and syrup, yet they charge the same as for a Coke.