In the words of a former executive, Jean-Louis Gassée, Apple Computer has been using its supply chain strength as a “strategic weapon” to maintain its market dominance. Gassée was quoted in a New York Times article (10/24/11) that describes how Apple has become both an innovator and a price-leader in the smartphone and tablet markets. The Times describes how Apple has used its successes and cash to make bold supply chain moves — such as a five-year, $1.25 billion deal for flash memory for iPods and other devices — that have been giving it a cost advantage against its competitors. It made that deal in 2005 and it has been paying off ever since, along with many others.
According to the research firm iSuppli (as quoted on epicmobiles.com), Apple’s cost to produce the basic 16GB iPhone 4S is $196. Those models sell for $199 online with a two-year carrier service contract. That means the fees Apple collects from AT&T, Verizon and Sprint are not subsidizing any of Apple’s costs. They are pure gross profit.
As The Times points out, for years Apple was considered a brand that offered cool, but pricey products. However, it has managed its supply chain so well that it now delivers it both ways — cool products and competitive prices.