Apple getting ready for 'product transition'

Is it time for a price cut on the iPod Touch?

(Credit: Ina Fried/CNET News)

Let the guessing begin.

Apple Chief Financial Officer Peter Oppenheimer's decision to warn financial analysts Monday that Apple's fourth-quarter gross margins will be negatively impacted by a "product transition" should be enough to get the rumor wheels turning: of course, it doesn't take all that much. The remark came within yet another Apple's earnings report that produced stellar numbers for the previous quarter but an outlook below what Wall Street had been expecting.

Oppenheimer deftly avoided several questions from analysts who tried to get a little more information on just what that "product transition" might involve. He used the exact same phrase last year in July during an earnings call to warn analysts of pretty much the exact same situation: that the transition would cause lower profits for the upcoming quarter. The result? New iMacs in August, and the iPod Touch in September.

There are two obvious scenarios that would cause a CFO to warn shareholders that his profit margins might be a little light heading into the upcoming quarter: lower prices, or more expensive production costs.

We already have a pretty strong suspicion that Apple is planning to introduce new notebooks during the quarter. It's been quite some time since the design of the MacBook has received an update, and with Apple's other notebooks sporting an aluminum enclosure these days, it's not hard to envision a similar design in the works for the MacBook based on Intel's new Centrino 2 technology.

But how would that change the margins on the MacBook? The MacBook seems to be the most popular segment of Apple's notebook lineup (the company doesn't break out the details), and perhaps switching to the aluminum enclosure for such a high-volume product would increase Apple's production costs for the MacBook.

Could Apple be considering overall pricing changes in the Mac lineup? One financial analyst seemed to suggest that with a line of questioning that Oppenheimer parried. Apple offers a smaller degree of customized options for Macs on its Web site than other PC vendors do on theirs, and the markup on some of the extra components (like $200 for an extra 2GB of memory) is pretty steep.

New MacBooks are also expected to arrive this quarter, which could affect Apple's product margins.

(Credit: Apple)

The trouble with that theory is that there doesn't seem to be any real reason for Apple to change the pricing of the Mac at this point: the company just sold the highest number of Macs in a quarter in its history. Price doesn't seem to be an object to sales, so why take the margin hit?

Likewise, the iPhone pricing isn't likely to go anywhere in the quarter with the iPhone 3G just making its way out to the public. The subsidized pricing courtesy of AT&T isn't going to change that quickly: Apple COO Tim Cook admitted that the company's internal surveys revealed that a lot of people who liked the iPhone weren't going to pay $399 for it. Apple and AT&T are likely to give the $199/$299 pricing scheme at least the remainder of the year before revisiting things.

The most likely bet for a price cut is the iPod Touch, which sticks out like a sore thumb at $499 for the high-end model compared to the new pricing for the iPhone. Apple wants the iPod Touch to be the future of its iPod lineup, but it's a pretty pricey option compared with the rest of the iPod lineup right now.

Consumers responded very well last quarter to the February price cut for the iPod Shuffle, Oppenheimer said. Obviously, those people buying the Shuffle and those buying the Touch are looking for two very different things in a portable music player. But still, in a economically tepid (at best) year, every dollar matters more than usual.

An iPod Touch price cut makes perfect sense: drop the low-end 8GB model, move the 16GB down to $299, and the 32GB down to $399. And if the company is feeling a little more daring, it could double the capacity of the iPod Touch at those price points.

One scenario that was not addressed by any of the initial questions from the financial community was that involving a brand-new product. There has been lots of speculation over the past year or so that Apple has a minitablet/UMPC/MID type device in the works that would take the Cocoa Touch interface found in the iPhone to a larger screen. But that has always seemed like a more far-fetched notion, given all that Apple has had on its plate this year.

If I had to bet, I'd pick new Centrino 2-based MacBooks and a significant price cut for the iPod Touch as the most likely causes for a gross margin decline next quarter and into next year.

Both of those products could take some time to ramp up to volumes that could make the margins more palatable, although it's important to remember that Apple's margins will still be 30 percent after the decline. That's still pretty healthy for a company in its category.