Another week, and another set of filings in the Apple vs. Psystar case. And yes, the case continues to get grittier and grittier. Last week Apple accused Psystar of destroying evidence, and this week Psystar is kicking it up a notch. The depositions of key Apple employees are currently under way, and August 14, it was Phil Schiller’s turn. According to Psystar, Schiller was “wholly unprepared and unwilling to testify”. At the same time, Apple has suddenly told the courts it will no longer seek recovery of lost profits from Psystar, because that would require Apple to give out its profit margins – and Apple doesn’t want to do that.
Schiller on the spot
Let’s start with Phil Schiller’s deposition first. It took place on August 14, but Psystar was far from impressed with Schiller’s performance. In a filing to the court, Psystar claims that Schiller was “wholly unprepared and unwilling to testify” about the damages Apple claims to have suffered because of Psystar’s Mac clones. The filing further states that Schiller did not answer questions asked during the depositions.
Psystar now seeks a do-over asking the courts to order Schiller to answer the questions:
Apple’s furnishing a witness on injury who was wholly unprepared to testify about that subject is a discovery violation that relates to a core issue in this case, the harm, if any, that Apple suffered as a result of Psystar’s conduct. Psystar respectfully requests that this Court (1) order Apple to properly prepare Mr. Schiller for his deposition as a corporate representative on injury, (2) require that Mr. Schiller appear for a continuation of his deposition in Houston, at the offices of Psystar’s lead counsel, within the next fourteen days, and (3) pay Psystar’s attorneys’ fees associated with Mr. Schiller’s deposition, this brief, and any subsequent proceedings.
In what is sure to be a very surprising move, Apple disagrees with Psystar’s filing. In a counter-filing (is that a word?), Apple states that Psystar’s deposition of Schiller was “nothing more than an effort to harass one of Apple’s senior executives and prematurely seek expert testimony”. According to Apple, Psystar’s filing leaves out several key facts, and Apple therefore asks the court to reject Psystar’s request for a do-over.
Apple states in their counter-filing:
Despite Apple’s objections, Psystar’s counsel sought testimony on the quantification of damages — the subject of expert testimony — rather than the injury suffered by Apple… Mr. Schiller was fully prepared to discuss the non-quantifiable injury to Apple but Psystar’s counsel chose to not ask those questions and terminated the deposition instead.
Those who have followed the case in more detail will remember that the exact same thing happened when Apple was ‘depositioning’ Psystar; Apple also claimed Psystar was not answering questions properly about the company’s financial information. In that case, the judge sided with Apple.
Sudden Apple turn-around
In what will also raise a few eyebrows, Apple has suddenly told the courts it will no longer seek recovery of lost profits from Psystar. Apple states that its margin information is a closely guarded secret, and that the benefits of keeping that information a secret outweigh the possible damages done by Psystar. The decision comes after Apple reviewed Psystar’s financial information (which it got during the discovery phase).
Apple further wants the judge to issue a protective order which would make it impossible for Psystar to retrieve the margin information through the discovery phase:
In light of Apple’s decision not to seek lost profits and Psystar’s stated intent to disclose Apple’s confidential information, Apple now seeks a protective order specifically precluding the discovery by Psystar of Apple’s non-public profit margins on the sale of individual products or product lines. Indeed, Apple believes that discovery of its non-public financial information should be limited to revenues, R&D and advertising costs related to Mac computers and Mac OS X.
Since I’m certainly no laywer, please take my assumptions that follow with a mountain of salt. I find it rather odd that after reviewing Psystar’s financial information, Apple suddenly no longer wants its damages recovered. It seems as if Apple realised it could not, with a straight face, argue that Psystar had any significant impact on Apple’s revenue stream.
Still, it seems as if the margin information is very important, especially to Psystar. If Psystar can prove that its Mac clone business had zero impact on Apple’s bottom line, it would seem they would have a stronger case.
It seems like Groklaw’s PJ has not yet looked at the documents, but her insights will probably be a lot more useful. I’m sure an article on her end is upcoming, and I will update this one with her findings as soon that article is here.
Apple make changes to it EULA again!
It is discovered that Pystar has a tablet on the way!
In the next episode As The Silicon Valley Turn…. stay tune!
Apple is VERY afraid people would find out how high their margins are. So…keep bending over, folks.
To be fair, though … if anyone doesn’t already realize (it’s quite apparent, to anyone with half a brain) that Apple’s margins are ridiculous, then they’re just throwing away their mon …
er, nevermind.
Edited 2009-08-21 20:28 UTC
So when Microsoft has 85% profit margins (for Office and Windows), that is apparently ok when compared to Apple’s 15% average profit margin. Also, what constitutes a profit margin when most of it is then pushed back into the business? Sun had far higher profit margins than Apple, and yet they lose money because they not only invested the whole lot back into R&D but more. fretinator, you sound like you’re on a fishing expedition to prove some deep seated hatred of a company.
Edited 2009-08-22 00:04 UTC
I would imagine that thier profit margin was in fact much lower (no actual figures btw, more intuition). R&D needs to be taken into account when calculating profit margin. The “cost” to produce a piece of software encompases not just developing the software it’s self but also all of the R&D $$ invested up front by a company to create the technology the product uses.
Hypothetically, lets say that Sun creates Solaris and spends $1M on developers to code, test, etc., and then they sell it for a while calculating thier profit margins as a percentage of their $1M investment vs the $ they sell it for and the # of copies they sell. Then let’s say they take all thier profits from Solaris and re-invest it into researching and developing security and auditing features. If the next release of Solaris, let’s call it Trusted Solaris, includes all of this, then that previous profit spent on R&D is now factored in to calculating the profit margin on Trusted Solaris.
R&D definitly isn’t free and is a key factor in calculating profit margins.
For the record, no company is in business today to peddle their wares at only a 14% markup. Anyone who thinks that needs to either a) lay off the kool-aid, or b) take a beginners class in business math.
Since any, and all, of Apple’s financials need to be filed at the end of every quarter, how is an admission like this not flying in the face of public disclosure regulations?
And for the record you need to take a reading class when I said, “average profit margin” – learn what average means before you start deriding another person on this forum because otherwise you’ll come off as the grade A jackass you’ve just done now in your response to my post.
Wow, that’s some attitude problem you have there, Kawai. You really should get that looked at, you know. Maybe then you wouldn’t come off as such a jackass.
With the Microsoft ‘Laptop Hunters’ ads airing to moderate success, and this recession still haunting everyone, the last thing Apple wants to do is to remind the public of the fabled ‘Apple Tax’.
Profit margins are closely guarded in every niche market – which Apple happens to occupy for the ‘premium computing’ market right now.
Um, how does using a Mac equate to “premium computing?” I’ve done some kick-ass stuff with computers for 20 years, and I’ve never owned a Mac …
Edited 2009-08-21 20:30 UTC
“Premium” is a term a lot of people misuse.
Premium does not mean expensive. Premium does not mean slightly higher quality.
Premium comes from the combination of high quality and unconditional customer support. Premium means the customer IS the centre.
By no stretch of the imagination does Apple fall within the premium category – nor does any other major manufacturer, by the way. If there is one industry where the customer as far removed from the centre as possible, it’s the computing business.
Thom, not trying to be annoying … (remember, I’ve never owned a Mac) … but I thought the whole point of owning a Mac was the “incredible customer experience, awesome support, control of the computer returned to the user” etc. etc. that Mac fans are always raving about.
Is this not the case? I’ve actually been considering a Mac for my next computer purchase (I generally build my own boxes) … but if what you say is true, it gives me pause …
Edited 2009-08-21 20:58 UTC
Thom, not trying to be annoying … (remember, I’ve never owned a Mac) “… but I thought the whole point of owning a Mac was the “incredible customer experience, awesome support, control of the computer returned to the user” etc. etc. that Mac fans are always raving about.”
In my experience owning a Mac is benefited also by incredible customer experience, awesome support, control of the computer returned to the user… Keep in mind that Thom has a very public display of distaste for Apple and the Mac and it is his goal to bring the company down a few pegs.
“Is this not the case?”
No. Thom is incorrect…. especially considering Apple’s satisfactory ratings amongst ins competition.
“I’ve actually been considering a Mac for my next computer purchase (I generally build my own boxes) … but if what you say is true, it gives me pause”
I’d say give it a shot. I’m very satisfied with my Macs
Edited 2009-08-21 23:11 UTC
I recently bought my first Mac (a Mac Mini, actually). I was looking for new machine for music-production and decided to give Apple a try. I bought it directly from the Apple online-store, and I was very happy with their customer-support. They even called me to notify me that my Mac Mini was picked up by the courier service and would be delivered the next day. In my humble opinion, that’s good customer-support.
Apple is a bit more expensive, but when I look at the software you get with your mac (iPhoto, iMovies, GarageBand, etc…), I’m not surprised.
It seems dictionary.com pretty much disagrees with you:
http://dictionary.reference.com/browse/premium
Used as an adjective, it can mean either of the first two you state are “misused”.
I have never heard anyone claim that “Premium means the customer is the center”… but that’s a neat marketing idea.
Thom,
Be careful, your hate is showing. Customer focus is Apple’s forte. Look at the “refund” for Gen 1 iPhone owners after the price drop, look at the genius bars, look at the customer satisfaction surveys, look at the customer support rankings. They are doing something very right and counter to your “every thing for cheap” philosophy, it costs money to operate that environment, create products that work, and then support them when the time occurs.
Edited 2009-08-23 06:41 UTC
Holy shit! Just imagine what you could do with a Premium Mac!
J/K of course…
Apple’s net margin is public info. It was 14.7% last quarter. They just don’t break it down by product. It may be a little higher for Macs & iPhones than it is for iPods, music and software (or maybe not), but it gives you a general idea.
Other noteworthy net margins in the computer industry last quarter (all info is from Google Finance):
Intel: -5.0% (oddly, their previous quarter was 8.8%)
Dell: 2.3%
HP: 6.3%
IBM: 13.3%
Adobe: 17.9%
Microsoft: 23.2%
Google: 26.9%
Oracle: 27.6%
We do know Apple’s sales (not profit) broken down per product, see the 2nd table on this page:
http://www.osnews.com/story/21871/Apple_Reports_Best_Non-Holiday_Qu…
Additionally, Thom has recited on comment pages several times that about 50% of those sales are in the United States alone (leaving the other 50% for the rest of the world). I, in turn, wonder if certain areas of the States (NYC, SF, LA) make up the majority of those U.S. sales.
Interesting to look at these comparatively to see where you are truly paying a premium. When Apple’s “performance” (quality, reliability, customer satisfaction etc) in the industry is discussed maybe we should also be looking comparatively at those who are making even higher margins than them?
The difference here is a companies financial position is a statement of fact which is (well, should be) readily available, a quantification of damages is something that is developed through a combination of historical figures and expert opinion about probable future impact, and is often fluid throughout the process as points are won or conceded. At the deposition stage he would be required to outline the areas of business he believes have been affected by Pystar’s operation but quantification of the actual damages to those areas of business would come later.
How I see Apple not wanting to divulge specific information regarding OS X profit margins is rather simple:
1):
Apple makes money on OS X retail sales – or at least loses VERY little.
Meaning Psystar would be helping Apple’s bottom line, which would go completely against Apple’s case, or simply isn’t causing enough provable harm to be profitable.
2):
Apple’s money/public relations managers decided the lawyers needed to get the case over with more quickly than would be possible if Apple attempted to prove and collect on damages.
3):
Both of the above are true. I think this is the most likely case – it seems it always takes multiple reasons for any corporation to do anything.
If Apple was REALLY being hurt by Psystar’s actions, they would launch a PR campaign to protect their image in the community, and the would not worry so much about how long or how much it would cost to recover their losses – or at least put a halt to the drain.
Apple makes money on each OS X sale at retail, the more that sale the better! If Psystar has built 1000 machines with OS X, Apple may have made nearly $10000 in profit thanks entirely to Psystar – which makes it hard to claim damages!
Indeed, selling OS X at retail may have been a money ‘loser’ ( as in not showing a segregated profit when factoring R&D ), but enough unit sales could turn this unprofitable venture into profitability.
The LAST thing Apple would want to say is that Psystar’s action made Apple money – even though it has, regardless of how you look at it.
Now, Apple has decided they would be best with a court-ordered injunction, forget trying to claim damages – even though that could make Apple money to pay the bills.
Then again, maybe Apple simply can’t figure out how to recover losses for less than the expenditure required to recover those losses – which would make sense even given some loss on even a few thousand unit sales.
Oh well, I hope Psystar wins this one. If Apple wins, copyright owners will have just legally invaded your enumerated rights – where you == u.s. citizen || u.s. business || u.s. legal entity.
–The loon
I thought it was going to be about the EULA, whether or not it is enforceable. This seems to have nothing to do with that at all.
… and come up with a ballpark figure of just exactly what Apple’s markup over cost is. While we cannot actually figure out their profit margin from this since we don’t know what their advertising, personnel and shipping expenses are, but we can estimate based on how what the entire rest of the industry pays.
For our example, let’s use the mac mini. It’s the only standalone (in the sense of no keyboard/mouse/display) system apple offers without spending a few grand, and is filled with fairly normal components. The current bottom model Mini comes out as:
2ghz Core 2 – LORD KNOWS which one since they don’t like to reveal those types of details… I cannot even match it on my current wholesale sheets, so we’ll price something BETTER, a 2.8 ghz E6200 wolfdale, which at 100+ order comes to $53 apiece.
1 gb RAM – They use PC 1066 DDR3, interesting to waste so much effort on RAM and then give it a crap cpu. Given a current street of $20 it’s no suprise that wholesale order of 100 pieces is $10 bucks a pop.
Comes with a Ge9400m integrated video (aka GTS100) on board – so we’re talking a similarly equipped main board. A similarly equipped micro-atx board runs $140 retail, $96 on my sheet for a wholesale order of 100.
Crappy little plastic case and a external DC to PC power adapter shouldn’t run more than $40 manufactured en-masse. (hell I can buy a microATX desktop RETAIL for under $40)
120 gig notebook form factor SATA drive – We’ll use a WD Scorpio Blue for our ‘similar’ build, which again our wholesale order comes out to a miniscule $34 apiece.
Finally a slimline optical drive. A pioneer slot loader (closest I can find to what apple uses) runs me $38 a pop on a order of 100.
Figure $20 in labor for assembly in some third world shithole, another $20 per unit in shipping costs for the slow boat from china and to retail/warehouse locations… another $20 per unit to cover ‘free’ warranty expenses… round up to the nearest whole ten dollars for ‘incidentals’…
We come to a ballpark internal cost of $330 per unit – and that’s with a better CPU. Apple sells pretty much the same unit for $600, so that’s a markup of almost 82%.
Of course, we play with it a bit, let’s say you build the same mini with a 2.26ghz processor (the fastest mini), a 320 gig hard drive and 4 gigs of RAM.
Since we’re still at a better processor there’s no price change there.
320 gig hard drive SATA notebook is on the wholesale sheet, again a WD scorpio Blue, is $47 per 100 units.
4 gigs of DDR3/1066 in a 2×2 configuration – $52 for a tray of 100 pieces. (crucial)
That brings us to a ballpark figure of $380 bucks – for more computer than what Apple charges $1049 for… making the markup on that configuration be a whopping 170%.
Nope, no price gouging going on there… That in terms of parts the price difference between the top fully loaded model of the mini and it’s bottom end counterpart CANNOT be more than $50, the $450 price difference at retail is probably a good indication of why they don’t want anyone sticking their noses into their profits – or markup.
But, for fun – let’s build the rough equivalent of the loaded Mac mini via newegg, then mark it up the 33.33% I used when I was running a mom and pop whitebox builder when my wholesale channel couldn’t provide (which I only marked up 40%). We’ll throw away the art *** form factor in favor of a quick build and expandability (like that x16 slot we’ll give it)
We’ll use a E5200 wolfdale as the processor. The lower DDR2/800 FSB will mean a cheaper mainboard, cheaper RAM, and the 2.5ghz processor will deliver much more of a performance increase over the 2.2ghz core 2 they are using than the 1066 DDR3 RAM will.
http://www.newegg.com/Product/Product.aspx?Item=N82E16819116072 – $64
For motherboard how about a DFI GF9000-T2. MicroATX, supports our desired CPU, even has an X16 slot if we want and has the same on-board video chip. It’s a little expensive, but that’s retail matching for you.
http://www.newegg.com/Product/Product.aspx?Item=N82E16813136064 – $140
For memory, 4 gigs of DDR2/800 should be sufficient AND dirt cheap. A-Data Vitesta is good stuff and quite reasonably priced…
http://www.newegg.com/Product/Product.aspx?Item=N82E16820211282 – $47
On the Case, we’ll go with something cheap to keep the price under control… Cheap little logisys case should be MORE than adequate to the task.
http://www.newegg.com/Product/Product.aspx?Item=N82E16811148046 – $32
Since we’re using a desktop form factor case that means we can use a full form factor hard drive and optical, lowering the prices of those components and increasing the capabilities greatly.
Hard drive – how about a 1TB Seagate Barracuda?
http://www.newegg.com/Product/Product.aspx?Item=N82E16822148411 – $80
… and for optical, we’ll go with an OEM LG
http://www.newegg.com/Product/Product.aspx?Item=N82E16827136144 – $28
That’s $391 prior to shipping, $412 to be shipped anywhere in the US. Add our markup and we’re looking at $549.99 for more computer than apple is willing to sell you for less than a grand. Even if we doubled the budget of the components I cheaped out on (case/optical) and went to 50% markup at point of sale, we’d still be well under their prices.
Nope, nothing wrong with their pricings – only thing wrong are the idiots willing to spend that much.
Edited 2009-08-24 08:30 UTC
You only mention hardware, while the Mac Mini comes with a bunch of software too.
You need to include at least the price of aWindows license in your setup. Then include the price of a audio multitrack solution (including soft-synths) to compensate for Apple’s GarageBand.
Oh and the price for a backup solution (like acronis trueimage), since the Mac Mini comes with Time Machine backup software.
Now calculate the price again.
Actually I was thinking tack on the cost of a retail box of OSX… to compare apples to apples. (which is their current problem since they can no longer claim the PowerPC ‘unique’ bullcookies)
Or since the Mac isn’t compatible with ****, tack on a *nix distro since we aren’t even worrying about windows compatibility.
The question would become are they using their completely over the top absurd pricing of buying a mac to make the retail box a loss leader?
Interesting software to mention there, since in my experience Garage Band is a tinkertoy and I’d still go out and buy Sonar or CuBase… Probably with Proteus VX as the softsynth if I were to go windows. (Proteus VX is free).
Edited 2009-08-24 12:55 UTC
Well, I use Logic Express these days. But in my experience, Garageband was more powerful than I anticipated. The built-in synths sound quite good and allow a certain amount of tweaking (adsr-envelopes, cutoff-filter, resonance), and the effects are not that bad either.
I’m not a guitar player, so I can’t judge the built-in guitar-amps and effects.
Edited 2009-08-24 17:22 UTC
Which is kinda funny, since Microsoft can’t legally include software like that because of it’s “monopoly status.” If Psystar looses, Microsoft should include this on Windows 7 EULA “You may install this on any non-Apple branded computer.”
Well I quickly put together a 2x 2.26 GHZ MacPro on New Egg to compare what I paid for my MacPro.
NewEgg $2860.00 (pre shipping)
Apple $3299.00 (free shipping, pre tax)
So yea I paid about $450 more to Apple but I saved in time to get OSX86 to work. I also have an upgrade path when the Xenon’s drop in price down the line. The Mac I had before this one was a G4 2x1Ghz computer that lasted 7 years. (And is still working but has developed some hardware issues.)
Now if your argument is that Apple doesn’t offer a mid-range (i7) tower I can understand that. But its not all that much cheaper to build your own comparing similar components.