The Bank of Apple: Using capital to ensure additional capacity and supply

When I wrote suggesting that the “best use of cash” was not acquisition but integration of manufacturing under the Apple control umbrella, the rumor that set off that discussion was that Apple was financing new facilities for its suppliers.

Those rumors were quashed, but we now know there is something to them.

During the September and December quarters, we executed long-term supply agreements with three vendors through which we expect to spend a total of approximately $3.9 billion in inventory component prepayments and capital expenditures over a two-year period. We made approximately $650 million in payments under these agreements in the December quarter, and anticipate making $1.05 billion in payments in the March quarter.

Apple Management Discusses F1Q11 Results – Earnings Call Transcript – Seeking Alpha [my emphasis]

So Peter Oppenheimer confirmed that Apple is using its cash as a loan facility for its manufacturing partners. It’s not for the first time either. Apple used the same leverage to ensure the supply of flash memory for the iPod line in 2005.

Philip Elmer-DeWitt reminds us Tim Cook confirmed:

The deal, he said, is similar to the one Apple cut five years ago:

“As you probably remember,” he began, “we signed a deal with several flash [memory chip] suppliers back at the end of 2005 that totaled over $1 billion because we anticipated that flash would become increasingly important across our entire product line and increasingly important to the industry. And so we wanted to secure supply for the company.

Partly as a result was a dominant position in the music player market that is still paying off today.

The use of capital to pre-pay for production is not therefore new. What we saw last quarter however is that it’s using capital to ensure there is additional capacity.

In other words, Apple Inc. pre-buys additional capacity by using Bank of Apple capital as a loan facility to bring more capacity online. How to judge this use of capital depends on your perspective:

  • From a fiscal perspective, Apple is acting like a trade lender (with moderate to low returns on capital.)
  • From the operational perspective Apple is acting as a limited manufacturing partner, just short of an equity holder.
  • From a strategic perspective, the Bank of Apple lends only to suppliers that commit to producing for Apple Inc. Thus locking out competitors.

This strategy is not without risk. Those loans are forward contracts on production. The risk is that production is unneeded and hence the loans won’t be “paid back”. But Apple knows demand and supply in this market better than anyone else, so it has an unfair advantage over the market. So the rewards are probably out of proportion to the risk.

By buying an option on production, not production itself Apple has a clever way to “own factories” without actually owning them: gain control over marginal increase in production without the impact from CapEX or depreciation.

The return on that option will never be seen on the OI&E line in the income statement and the cash once recycled back into the balance sheet will seem to be sitting unrewarded. But the return on that capital will show up in the bottom line by way of margin and top line expansion for years to come.

The committed capital is still tiny, but a proper analysis of Apple’s cash management would be to look at the return on cash as more than the return on treasury bills.

  • pphahnl

    great analysis! Reminds me about an article way back about Apple's manufacturing. They're genius in organizing this (not only in product design, software,..)

  • Narayanan

    I agree that this is a good strategy, but not without it’s risks. I feel the commitment risk is higher that what you have estimated, considering the emerging technologies in the mobile space such as display, battery and such apart from new market distruptuions. The flash memory situation is easier since that technology was fairly mature at the time and the market was looking for economics of scale.

    But as you say, the risked quantum is fairly small in relation to the

    • dchu220

      Hey Narayanan. I don't think Apple has a choice but to take these gambles. They are producing at a scale in the millions, even for products like the AppleTV. They don't have the luxury of easily swapping out components like Dell. The demand for their products continues to outstrip their supply. Without these investments, they would never be able to meet demand.

      • Narayanan

        I think we both agree on the strategy, as I mention at the outset, but differ on the risk assessment. If you re-read my comment, I was pointing out that there are other risks about the technology developments apart from Horace's "unneeded " or wasteful production.

        I also agree that at the moment we are fishing in the dark about the nature of Apple's investments and certainly the Apple team know where to put the dollars.

        PS. Sorry about my previous comment which got chopped accidentally. I don't know how to scroll inside a textbox in an iphone. Now That is something for Apple to sort 🙂

      • dchu220

        Gotcha. Bad reading comprehension on my part.

      • Hector

        You scroll with TWO fingers

      • Narayanan

        Thanks Hector! 🙂

    • Bob Shaw

      I agree with your assessment of risk. Technologies are advancing faster at the component level than customers ability to absorb them in their products.

      • arjun_

        Specifically to the components mentioned above, can you point out what is advancing faster? Also, if the component is ahead of the system, then there is no technology risk, correct?

    • arjun_

      I'm not sure what technology risks you are referring to. Can you elaborate a bit more on the nature of the risk?

    • Martin

      I'm not sure how those emerging techs would affect Apple. Apple stays true to their annual product revisions, so even if new techs hit the market, Apple appears happy to pass them by until the next cycle. Further, with their iPhone strategy, they keep the product on the market for 2 years, and in any case they need a supply of repair parts for years down the road.

  • dchu220

    A lot of their decisions to invest are probably based on products in the pipeline that nobody even knows about and forecasted 2 to 3 years out. That's the beauty of this strategy. Their competitors can't counter them and it negates the effectiveness of a fast follower strategy.

    I wouldn't be surprised if they picked this strategy up from Southwest Airlines.

    • FalKirk

      Ah! You beat me to it! I was going to suggest that Apple's risk on making these bets, while still huge, is mitigated by the fact that Apple is not just predicting the future, they are creating it. They know that they're coming out with the iPad, so they buy up all the 9.7 inch screens. They know they're coming out with the retina display for the iPhone so they buy up all the pertinent components. They know they're coming out with "X" on the upcoming iPad 2 so they buy up the appropriate parts before anyone else even knows they're going to be in demand.

      It's almost unfair. It's like Apple is both the dealer and a player in a high stakes poker game and Apple gets to see the cards being dealt before making their bets while everyone else has to make their bets first.

      • dchu220

        I may have you beat you to it, but you came up with the best analogy.

  • istavnit

    1bln , 3.9 bln – these are not significant numbers in relation to the cash pile

    • asymco

      A billion here, a few billion there, and pretty soon you're talking about real money.

      • ljp

        Haha. But people seem to think that Apple's cash hoard means that it doesn't matter. History is littered with companies that were flush and stopped respecting the importance of that money and collapsed.

        It was an interesting tidbit of the Google earnings where they were questioned about the $2 billion they spent for the New York office because they needed a space that could fit into the "Google" mindset. Their willingness to pay a premium for acquisitions of companies is also something that could lead to trouble. Especially if Larry Page is more interested in being "Google" than being a business.

  • Blissios

    Lots of talk about displays with this money, but here us no doubt in my mind that a lot of this money is going flash drives for Mac computers like the Air. Driving these prices down will be key.

    • Steven Noyes

      Nice thought but Apple is not a major player in the "PC" world. Don't get me wrong, they make lots of money on the Macs but supply is not an issue and "locking out" Dell, Toshiba or Acer just is not going to happen. Likewise, nearly 4 billion USD to lock up Flash does not make strategic sense like it did half a decade ago.

      Small, high resolution touch panels, however, makes lots more sense. This is a growth market now that is limited by supply. Demand far outstrips supply at this point int time. Witness Samsung that refused selling their best OLED tech to companies like Mot, HTC and others. Why? Samsung needed them for the Galaxy S line.

      As smart phones and tablets start to really heat-up, there simply won't be the supply of panels available to sell manufactures. You might come-up with the ubber tablet but if you can only ship 100,000/month, it won't matter. The company shipping 4,000,000/month will "win".

      • George Creedle

        When HP can't meet miniscule demand for the 500 slate due to display constraint, you know Apple's strategy makes sense. Apple in the late 1990's and early 2000s frequently ran into supply issues which led to Jobs hiring Tim Cook.

    • dchu220

      I don't know a lot about the Flash market, but I would bet that Apple is investing in areas where there isn't enough investment to fulfill their goals. For example, I highly doubt they are investing in 3.5" displays because the industry is investing a lot already. For the 10" display, they had to create the market for it, so I would bet that they invested in that area.

      As fir Flash, the prices have been falling very quickly on their own with no help from Apple. Perhaps they are pre-purchasing to get the best prices, but I doubt they are investing to inrease capacity.

  • EricS

    Asymco- Please explain how Apple "has an unfair advantage over the market." What is Apple doing that renders its prognostications re. future demand and unfair? I do not see it this way.

    Thanks, EricS

    • asymco

      If you are making iPads at the rate of 6 million a month (for the sake of argument) and if your competitors are making zero tablets per month then you know a lot more about how the demand curve looks.

      The same applies for "retina displays".

      I am assuming Apple has a mountain of market data that competitors don't have.

      • If I may be so bold as to further clarify Horace's explanation, Horace does not mean that Apple has an illegal unfair advantage, just an insight that competitors will never be able to achieve. So it isn't an even playing field in as far as Apple has information far beyond what competitors are able to gain without having similar manufacturing and supply chains in place.

        But please correct me if my take on this is wrong.

      • EricS

        Asymco – Your insights are incisive, and your grammar is accurate and on-point. With that, I must question your us of the word "unfair", as this implies something untoward regarding Apple's strategy. The "mountain of data" that Apple possesses is a result of and reward for their (successful) overall strategy.

        The term "unfair" may similarly be applied to the Apple's cash hoard, which enables the "Bank of Apple" strategy that upu most astutely identify (though again, I do not think this unfair, as this is yet another hard-won market reward).

        Do you see Apple's advantage as inherently unfair, as something that should be shared with competitors? Thanks.

      • asymco

        Sorry about the misunderstanding. English is only the third language I learned so errors in usage are bound to happen.

        To my way of thinking, unfair is not illegal. I think every asymmetric competition is an "unfair" fight. When a competitor is able to launch a product a half the price and twice the value, it may seem "unfair" to the competition.

        Perhaps I should use "asymmetric" knowledge rather than unfair knowledge.

      • EricS

        Thanks for the clarification, Mr. Horace. More important, thanks for producing, time and again, such insightful analysis. I eagerly anticipate each new posting to your site.

        Regards, EricS

      • James Katt

        Rather than "asymmetric", perhaps it is better to use "superior".

        Thus Apple has "superior" knowledge versus the competition. This gives Apple a "superior" competitive advantage to the competition.

      • Yowsers

        "Unfair" is close, but has a certain bias to it that makes us 1-language types (English-as-a-first-language) think "illegal". "Edge" or "advantage" probably captures it better.

        GOOG has something similar from the vast amount of search data it can churn thru over whatever amounts Yahoo or MSFT can get their hands on.

      • davel

        Actually I do not have a problem at all with the word unfair here.

        It is unfair. Economies of scale, large customer seeking more favorable pricing, more favorable access to products, etc.

        It is not an even playing field and that makes it unfair.

      • FalKirk

        EricS, I did not interpret the word "unfair" in the negative light that you did, but I do understand your concerns. Many people connote "unfair" with "illegal" and Seligman, of learned helplessness and learned optimism fame, has even suggested that there may be an evolutionary bias toward punishing those whom we perceive to be "unfair". Perhaps a phrase like "earned advantage" or "inherent advantage" would be less emotive although I fear they would also be less accurate and less powerful.

        Let me go the other way and tell you a story that I heard from a military veteran. He said that if you found yourself in a fair fight, then you hadn't planned properly. I believe that this is how Apple thinks too. Whether in warfare or in business, I want to have the numbers be overwhelmingly in my favor. And whether that means that I have an unfair advantage or merely a huge advantage is simply semantics. The advantage was earned, no matter what name you give it.

    • Alan

      The word everyone is looking for to replace 'unfair' is 'significant' advantage.

  • Tom C

    Horace just trying to make sure I have this correctly. So Apple has basically committed to buying X amount of product from these suppliers and is paying up front for it so the manufacturers can build out their facilities to meet Apples expected demand. Correct? And to your 3rd point about lending to suppliers that commit to producing only for Apple…Could that be considered a monopolistic practice? It makes great business sense to me but makes me wonder about the whole monopoly thing.

    • Kristian

      They are not a monopoly. They are just a rich customer that just happened to buy the whole production of these factories.

    • dchu220

      Hey Tom. I live out in Taiwan and I can tell you that you wouldn't believe how many no-named manufacturers there are for different components. Where Apple is probably targeting are the top tier manufacturers who can manufacture mass quantities of high quality components and most importantly, deliver them on time. I also doubt that these manufacture's can't sell to other vendors, but that Apple has first dibs on any components in return for a guarantee that they will buy a certain quantity.

      • Tom C

        Thanks for the insight. My question arose because of the statement "Thus locking out competitors." It would seem to me that if Apple was locking out competitors (large or small) then they would come under regulatory scrutiny (Sherman Act perhaps). What you're saying makes more sense, that they would get first dibs based on their contracted commitments not really locking out competitors. Horace also answered it by stating its more of a monopsony (new term for me and interesting to read about).

      • FalKirk

        I'm pretty sure that "monopsony" means that your Sony MP3 player is damaged and you're only getting sound out of one speaker. The "p" is silent. As is your broken speaker.

        I'll get back to you on that.

      • Kizedek

        Yes, I think you answered your own question. It's having a "contractor" who is under retainer or a long term "contract" to fulfill certain services. There is nothing that prevents the contractor from signing a similar contract with any one else first, hence there is no untoward "lock-out" or "monopoly".

        But once the contractor places himself under contract to the one proposing the contract and paying him (Apple), then he has certain obligations to fulfill the contract. Nothing new there, and certainly no monopoly. It does, however, mean Apple's competitors are "effectively locked out" from that particular contractor's services — because the contractor is unavailable or unable to take on other work; and there is no need for him to do so, he has all the work he wants. The competitors can't compel the contractor to drop Apple and supply them instead. This is a very fair advantage that Apple has engineered creatively; and of course, there are other contractors out there just waiting to serve Apple's competitors.

        How could that possibly be a monopoly on the part of Apple? If Apple were to take a leaf out of the MS playbook, there would be something like this in the deal… "if you ever build phones, or supply components for, Android phones or tablets, we will pay you 50% less than our negotiated figure per unit, and you will supply us with 50% more units at your expense."

        Of course, the analogy doesn't really work, because the parts supplier (of software in the case of MS) was the monopolist and the computer company (like Apple in this case) was the one who suffered. So, that begs the question: how is it even possible that Apple could act as a monopolist in any way, shape, or form, given Apple doesn't license it's OS out to a bunch of OEM' purporting to play fairly among them? Especially given Apple's small part of the phone and computer markets. Well, I suppose one could look at a carrier by carrier case, and where a carrier is selling the iPhone as some 70% percent of their sales, you could ask if Apple ever hinders them from selling other phones, or gives them an incentive to sell only iPhones. The answer would be a big NO.

        With the iPhone selling on multiple carriers in some 90 countries (like MS on PC OEMs), has there ever been the merest hint of Apple using its influence to influence what the carrier can or can't sell? Never. And I just don't understand how the term "monopoly" can be thrown around in relation to Apple devices and the app store, when your own product doesn't constitute a market that can be monopolized.

      • Tom C

        Very well said Kizedek. I couldn't agree more with your sound logic. Obviously I was way off on perhaps thinking this would somehow constitute any sort of monopolistic practice. Thanks for the excellent replies everyone! Its nice to have civil, insightful discussions.

    • ljp

      Locking in supply wouldn't be a problem unless they tell the manufacturers that they can't supply competitors. That would be anti-competitive.

    • James Katt

      This is NOT a monopoly. It is not even close.

      Apple has less than 10% of the PC market and less than 3% of the cell phone market. Apple is small fry.

      Apple is wisely using its savings to pre-pay for components. The manufacturers are happy because they are getting paid even before manufacturing the components. They can also build up their facilities. Apple is happy by being able to purchase components at a lower price than competitors because it bargained for the lower price.

      • Martin

        Even if Apple did have a large marketshare, it still wouldn't be a monopoly problem. Apple isn't preventing these facility from being built out or even preventing competitors from buying the exact same product – they're just providing the funds to make it happen.

        Ultimately, the problem is that the tech community outside of Apple prays at the altar of low price. You can't build infrastructure and drive R&D on 3% margins. If consumers want that much variety in the marketplace, they need to learn to pay for it.

    • kevin

      In the case of flash memory, Apple did not commit the five manufacturers to only producing for Apple, and did not commit to a fixed period in which it would receive all its pre-paid purchases. But Apple was given top priority (in exchange for the capital investment), so if and when Apple placed an order, it was prioritized higher than the other customers. Apple thus shed some of the risk for the case where the supply needed was not as great as originally forecasted.

    • J Osborne

      "So Apple has basically committed to buying X amount of product from these suppliers"

      Not quite, the article says:

      "By buying an option on production"

      So assume we are talking about peanut butter. Assume peanut butter is $5 in the store. So this says something like "we will give you $500 now, and any time in the next 3 years (starting 1 year from now…) we can buy up to 500 jars of peanut butter for $3 a jar".

      So if Apple needs 500 jars of peanut butter it gets a discount. If it needs no peanut butter the peanut butter vender gets a free $500, and Apple made a bad deal. If Apple needs 500 jars it gets a $1/jar discount. If it needs say 250 jars it manages a $0.50/discount…

      The closer to 500 jars the better the discount.

      The $500 gets payed right away, so if the peanut butter maker needs to buy another tractor it can do that with the money NOW even though the jars won't be bought until later. So that $500 now can well be worth a whole lot more then $500 later…

      • ayedee

        But what about jelly?

    • r00tabega

      Being the only seller in a market is considered a monopoly:

      The opposite, being the only buyer in a market is called a monopsony:

      I wouldn't claim Apple is a monopsonist, but they surely aren't a monopoly.

  • Frumius

    I'm looking forward to seeing how Apple uses the rights it bought for using Liquidmetal Technologies' tech. Their liquidmetal offers some exciting possibilities. Maybe Apple put some of those billions toward that end.
    AppleInsider article from August 2010:
    Part of the text in the article:
    "In a Form 8-K filing with the U.S. Securities and Exchange Commission last week [August 2010], Liquidmetal Technologies indicated that it had granted all of its intellectual property assets to Apple. According to the terms of the deal, Apple was awarded "a perpetual, worldwide, fully-paid, exclusive license to commercial such intellectual property in the field of electronic products in exchange for a license fee."

    Though the licensing agreement grants Apple exclusive use in consumer electronics, Liquidmetal is still allowed to license its products to other companies for any use outside of markets where Apple competes…"

  • Marc in Chicago

    The pull quotes are hard to read because they are italicized, in a smaller font, and grayed out. Couldn't you just pick one or two (or none) of those font effects?

    The indentation and line spacing already indicate that it's a quote so the other three effects are overkill and when used together, decrease legibility.

    • ericgen

      I find them hard to read, as well. I guess Horace's eyes, while quite a bit wiser, aren't as old as mine! 🙂

    • Kizedek

      Along those lines, as long as we are talking about CSS, I have a usability issue: When I read your site on my iPad — using my fat finger instead of a mouse cursor — I often hit the "Reply" below a comment, instead of the Expanding arrow right below it that I am intending to hit in order to see all the threaded comments. So, could there maybe be a gap between Replying and Expanding the comments; or, better yet, float/justify the "Reply" to the right so that it is away from the expanding arrow all together?

    • dchu220

      Give the guy a break. He's a business analyst, not a web designer. Would you rather have spend his time fooling around with CSS or digging through conference call transcripts.

      • asymco

        It's ok to give feedback on design. I should point out that this site uses the Basic Maths theme for WordPress, designed by Khoi Vinh & Allan Cole. Khoi is the former head of design for the New York Times web site (links at the bottom of the page).

  • Onça

    Would locking out competitors in the way suggested in the article be completely legal? The display manufacturers seem to be in the court defending their strategies as they have been, I'd be surprised if further restrictions of competition were legal… Yet another law suit ahead for Apple?

    • asymco

      I'm not a legal expert but this is an example of monopsony power. In other words one buyer facing many sellers. It is an example of imperfect competition. As the only purchaser of a good or service, the "monopsonist" may dictate terms to its suppliers in the same manner that a monopolist controls the market for its buyers.

      As far as I know there is no anti-trust regulation on monopsonies.

      • Tom C

        Ah now that makes sense Horace. I've never heard the term monopsony (looked it up though). Very interesting. But would Apple be a monopsony since they aren't really the only buyer?

    • James Katt

      I go to Walmart and buy out all the TVs at Walmart because I need all those TVs and I can afford to do so.

      That leaves everyone else without a TV.

      Am I locking out everyone else from having a TV. Sure.

      But is that illegal behavior? No.

  • Steve P

    Asymco – I have not been following your site for long but in the time I have I've found your analyses more clear and well reasoned than other analysts. This one is no exception.

    Maybe you've already done this, but with the concept of "Bank of Apple" I'd love to see your analysis of how Apple is using/investing its other cash.
    I don't feel dividends or stock buy backs are appropriate to Apple, but I can't help feeling that Apple is not getting a very good return on the cash they're sitting on. A couple of percentage points higher return on that cash seems – to this financially uneducated person – like it WOULD increase the stock value and be fairly doable without 'substantial' risk.

    Any thoughts? Or perhaps a whole new topic for analysis if it's worth it?

    • ericgen

      Apple keeps doing this in ways no other company is able, or perhaps just willing, to do. Apple is growing in ways no other has really ever done (at least to my knowledge) and, not only without the benefit of a tech bubble, without even the benefit of a decent economy. An yet, a huge amount of people seem to think that they should handle their cash position the same way everyone else does.

      No one's perfect, and there's always a different perspective that may be beneficial, and always more to learn! But, why isn't anyone willing to give Apple the benefit of the doubt about handling their cash position? Someone made a comment here a few posts back (maybe Falkirk or dchu220?) about trusting Apple to handle their cash competently for their goals since they've handled so many other things in a very competent manner.

      Other companies and institutions lost substantial portions of their holdings when the market cratered a few years back. Apple did not. Until they prove otherwise, Apple should be who decides how to best handle their cash. They're doing a great job as a company. Their cash is clearly part of their decision process.

      • dchu220

        Hey Eric. Now I've never said that we should just trust Apple to manage to their cash properly, but I would say that all business is built on trust. No company can do it alone (Just ask google). For people who have followed Apple in depth, we can see proof that Apple is running an efficient engine. For people who just recently started following the company, they can't.

    • gctwnl

      Apple seems to use its cash not just from a monetary perspective, but from a strategic perspective. That means that the result of its investments are more difficult to gauge, as they return as influences on their bottom line through the normal line. If Apple gets a 2.5% return on loaned cash, but it also gets such a price on components that it has a high margin, the investment returns more than the 2.5% cash. It is probably impossible to calculate how much unless you are Apple itself. It's a strategy that only works in a market that is being disrupted though (with high growth, supply constrained), otherwise, Apple is probably better off using the norma l market efficiencies.

      • dchu220

        And to add onto your point. Apple's philosophy is to lead by innovation and therefore to create component markets where the next generation parts are constrained. This strategy fits beautifully within leveraging their business model and development pipeline.

  • HTG

    From Apples 10-Q for Q1, page 17…

    "Long-Term Supply Agreements

    The Company has entered into long-term agreements to secure the supply of certain inventory components. These agreements generally expire between 2011 and 2022. As of December 25, 2010, the Company had a total of $1.6 billion of inventory component prepayments outstanding, of which $183 million is classified as other current assets and $1.4 billion is classified as other assets in the Condensed Consolidated Balance Sheets. The Company had a total of $956 million of inventory component prepayments outstanding as of September 25, 2010. The Company’s outstanding prepayments will be applied to certain inventory component purchases made during the term of each respective agreement. As of December 25, 2010, the Company had off-balance sheet commitments under long-term supply agreements totaling approximately $3.2 billion to make additional inventory component prepayments and to acquire capital equipment in 2011 and beyond."

    The first thing to note here is that Apple is not lending anyone any money… it is making pre-payments under term supply agreements that the supplier may be using to build capacity, or may be using the cash to manage its own working capital position. The trade off for Apple will clearly be lower prices than the spot price because it has pre-committed to production and paid over a chunk of cash under the supply agreements.

    This is nothing more than good procurement practice… it lowers Apple's financial risk to the suppler, because the supplier is being pre-funded, it improves component pricing and it delivers a sound return on capital that won't show up in the interest line…

    The way to think about these agreements is that if Apple didn't do this it would have $1.6b more in the bank, but be at risk on the spot market for component pricing… I suspect that Apple only enters into these agreements where it has a sole supplier or a very strategic supplier, so it will only be limited to a small % of its cost of sales..

    Apples cost of sales were $16.433b for Q1, of which the $3.9b disclosed by Cook equals 23.7%… so the total commitment is roughly 8% of cost of sales… which is not a large financial risk to take…

    It's just sound risk management to lock in pricing and supply commitments – I would expect that if Apple didn't need the components it could exit the contract with minimal penalties as the supplier would more than likely be able to find a buyer elsewhere at the same or better pricing… Everyone wins!

  • gslusher

    A thought: There's been a lot of to-ing and fro-ing about 7" tablets vs 10" tablets. I've read a lot of apologists giving rationalizations for 7" tablets, many of which are spurious. (E.g., "7" tablets are more portable." No, they're not. They don't fit into most pockets, so they'll be carried in the user's hands or some sort of bag–attache case, briefcase, messenger bag, etc, which could also hold a 10" tablet.) Perhaps the reason that the RIM Playbook and most Android tablets have 7" displays is that Apple has bought nearly the entire production capacity for quality 10" displays. Other manufacturers would then essentially be forced to adopt some other form factor/size.

    • ericgen

      I've seen that hypothesis before and it definitely seems plausible. Another variation of it may be that they've tied up so much of the supply that while 9.7" screens may be obtainable by other tablet manufacturers, there cost is so high that the end product is not price competitive with the iPad.

      I believe that this is the jest of the post, that Apple's using their cash to both obtain sufficient supply of critical component and to also do so at good prices.

      • asymco

        It may be the jest, but I intended it to be the gist.

      • FalKirk

        Ha! And English is your third language? Your use of English puts mine to shame. But to be fair, I suffer from a disadvantage. I'm an American.

      • ericgen

        My apologies! And I'm supposed to be a native speaker of English. I guess Texans speak English?Maybe I shouldn't post comments so close to bedtime?

        I typed 'gest' originally and the spell-checker didn't like it. I guess, when tired, I shouldn't try to phonetically spell the somewhat slow Texas drawl sound I hear in my head, which is how 'gist' is pronounced "out in this neck of the woods".

        I changed the spelling to 'jest' which made the spell checker happy. Apparently that was necessary, but hardly sufficient! 🙂

    • dchu220

      Steve Jobs said himself that competitors are having difficulty matching them on price for 10" displays and that's why they are coming out with 7" versions.

    • KenC

      In addition, I think most competitors were using Android, and until Honeycomb ships, running Android 2.2 on a 10" screen is going to be multiple times worse than a 7" screen, which is already bad.

      • dchu220

        Something that I'm interested in seeing with the Honeycomb tablets is if they are simply going to try to implement resolution independence to solve the problem of different screen sizes. As anyone who owns an iPad can tell you, increasing resolution is not an easy tasks and running iPhone apps on your iPad is not the best experience.

    • Yowsers

      I agree with the suppositions of what the other competitors are doing — trying to beat the price in the only way they know how (smaller form factor, cheaper materials), supply constraint, etc. — I also get the sense they're simply throwing everything against the wall to see what sticks.

      They're trying to differentiate, too. What are their options on that score? Copy? Sure. Or do whatever Apple didn't do? That's another direction. But when Apple has taken most of the best ideas, differentiation means you take the remainder. Gotta feel something for those product managers, don't you?

      • dchu220

        Awesome screen name, Yowsers

    • davel

      These are all great debates. I have never held a 7" so it is hard to comment.

      I would be interested if Apple introduces a 7" in the future. It would not be the first time they disparaged an idea only to introduce the same some time later.

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