This study — Who Captures Value in a Global Innovation System? The case of Apple’s iPod — is one of the best I’ve heard of in a long time. The researchers traced the parts and assembly of the iPod and attributed the value generated by each step by part and by country. A few key stats: of a $299 video iPod, Apple gets the largest piece of the pie: $80. The other portions are relatively small; China only gets $4 for assembly.
Hal Varian of the New York Times made this key observation about how Apple’s capabilities generate their benefits:
The real value of the iPod doesn’t lie in its parts or even in putting those parts together. The bulk of the iPod’s value is in the conception and design of the iPod. That is why Apple gets $80 for each of these video iPods it sells, which is by far the largest piece of value added in the entire supply chain.
Those clever folks at Apple figured out how to combine 451 mostly generic parts into a valuable product. They may not make the iPod, but they created it. In the end, that’s what really matters.
I’m encouraged by studies that highlight the value of concept design given my work in this area. Here’s a question for you: how would you most like to learn more about concept design: a book? videos? something else?
Responses
I think the point of that article is not that the iPod’s design (at least from a market strategy or UX approach) was *not* the reason for its success, but rather the clever engineering that managed to squeeze large profits out of a potentially-expensive product to manufacture.
I remember a few years ago Apple’s iPod mini gained 14% in profits in one year due only to one or two small improvements in the manufacturing process and the parts supply chain.
The article’s use of the word “design” is unfortunate. To a user experience designer, or a product strategist or marketer, Apple’s triumph here is good old fashioned “engineering”. I’m not going to lay exclusive claim to the right to use the word “design”, of course, but it is frustrating that the word has such ambiguous meaning.
And I don’t see what this has to do with “concept design” — a concept design process, by your own definition, “set[s] aside immediate technical and situational constraints in order to generate new options.” This article is *all about* how the technology development was a critical factor in the success of the product.
It is a fascinating article precisely because it implies that even if the iPod looked like shit and was marketed by monkeys, Apple would still make tons of money from the sale of each unit.
It also has a nice implication for concept designers — you can design for a technology “black box”, where anything you do is possible, but it helps to have an amazing engineering team to help make your ideas feasible.
Hi Chris,
Thanks for chiming in. I sort of agree.
Using this definition of design, I would have to guess that the design and engineering couldn’t happen separately. And this is what Buxton argues in “Sketching User Experiences” — that it’s a situation where the scroll wheel and the software and the overall form factor and the components had to work well together; it’s a case of all these designers and engineers following a common goal and working together.
And that goal, at the start, was a concept. Just because concepts can set aside “immediate” constraints (e.g. Apple doesn’t make many of these components and has never done so like this) doesn’t mean it completely ignores what’s feasible and viable. It just allows us to say, “No one has every delivered a product that allows an experience like this before, but rather than follow the constraints of what’s come before, HOW can we do it?”
Victor thanks for posting this. There are so many ways to look at quantifying the value of design, and this one is certainly interesting. Basically, it says that it’s the value over and above the cost of the parts and labor. It’s beautiful in its simplicity!
I’d love to attribute 27% of the iPod’s retail value to design, but I don’t think that’s the case.
The way I read the breakdown (and similar breakdowns that happen for most consumer electronics) is that the residual value after component & assembly cost reflects the contributions of _all_ of Apple’s efforts.
That means $80/unit reflects everything from design and engineering to marketing, management and infrastructure (those designers need desks, and electricity. And we need to pay Steve, and cover the costs for the Gulfstream).
Is design a key part of the iPod’s success? Absolutely. Is it 27% of the value? Unfortunately, I don’t see it here.
BTW @askrom, there’s a whole school of thought on “value engineering” about increasing margins through good manufacturing choices.
Jess, you’re absolutely right, and the fact that these researchers didn’t take the time to quantify the value of having the Apple bathrooms cleaned every evening is clearly an oversight. We all know the bathrooms are part of their core capabilities and need study if we’re to understand how companies like Apple do what they do.
Snark aside, you’re confusing the study and Hal Varian’s opinion on the meaning of the study.
I’m easily confused, as you know ;-)
But mostly, I just think Hal Varian is using ‘conception and design’ as a catch-all bucket for all of Apple’s contributions. That generalization undermines any real discussion of design value.
In the study the researchers *do* specifically call out overhead as a factor – they take care to point out that they’ve only isolated gross margins, which still have to pay for the full spectrum activities of the company. Marketing and administration are mentioned specifically, though bathrooms were somehow omitted :-)
And that points to the well-known, much bigger contributions Apple makes to the iPod’s value – creating iTunes (on Windows, no less) and cutting deals with labels and studios for content, and then doing a fantastic job marketing.
That ecosystem and brand awareness are Apple’s biggest contributions to the iPod’s value, as you well know.
And maybe over coffee, outside the constraints of a NYT word count, Hal would bring up all of this and more. But as it stands, the article glosses over the myriad contributions required for Apple’s success.
In the case of the iPod, the focus shouldn’t be just on the device – really understanding how companies like Apple do what they do requires a far broader perspective. I was disappointed not to find that perspective in Varian’s piece.
Finally, I don’t think we can (or should) make the leap from his generalization of Apple’s gross margins to “A Quantified Value of the iPod Design”. That quantitative value just isn’t to be found here, perhaps one reason for an easily confused friend like me to point out Apple’s activities beyond design.
[…] Noise Between Stations) A very interesting analysis of how value is created and captured in the iPod supply chain. They […]