It's now been almost a week since Apple (NASDAQ:AAPL) launched HomePod, which is perched at the high end of the smart speaker market with its premium $350 price tag. That positioning is characteristic of the iPhone maker, as Apple prefers not to compete on price and generally doesn't even put all that much emphasis on unit volumes.
It turns out there might be another reason why HomePod is priced at $350: The Siri-powered smart speaker is pretty expensive to build.
Less profitable than rivals
Bloomberg reported yesterday that the bill of materials (BOM) total for HomePod is approximately $216, citing an analysis by TechInsights. The would translate into a hardware margin of approximately 38%, which is in line with Apple's corporate average but well below the iPhone's profitability.
As always, keep in mind that these third-party estimates don't include things like marketing costs, software development costs, warranty and return accruals, and amortization of manufacturing infrastructure, all of which ultimately end up factoring into Apple's reported gross margin. HomePod's actual gross margin from an accounting perspective should be lower after incorporating these variables.
TechInsights estimates that Amazon.com's market-leading Echo fetches a hardware margin of 56%, while Alphabet subsidiary Google's Google Home enjoys a 66% hardware margin. Those products are priced significantly lower than HomePod, but also offer much lower audio quality. HomePod reviews unanimously agreed that the device's audio quality was impeccable, although that doesn't quite compensate for Siri's shortfalls or necessarily justify the lofty price tag.
The estimate helps partially explain why HomePod repair costs are so high. Apple recently detailed out-of-warranty repair costs for HomePod. The company charges $279 to repair the smart speaker, which is almost as much money as just buying a new one altogether.
Two peas in a pod
Of course, there is another strategic purpose of HomePod: help sell Apple Music subscriptions and retain existing subscribers. Apple's music-streaming service is growing faster than market leader Spotify in the important U.S. market, which could potentially help expand the market for HomePod, as the device only supports Apple's proprietary service.
Before you wonder if Apple would consider sacrificing HomePod profitability in order to help encourage Apple Music sales, CEO Tim Cook made it perfectly clear last year that this is generally not a strategy that Apple utilizes. The company does not take profits from one product or service in order to subsidize another. Cook said last May:
The way that we think about pricing is we come up with a price that we think is a good value for the product that we're delivering, and we do that on the hardware side as well as on the Services side. And so that's how we think about it. We're really not thinking about taking profits from one to subsidize the other or vice versa.
HomePod and Apple Music are intricately linked, and it's not clear how much detail Apple will disclose regarding HomePod sales, if any.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends GOOG, GOOGL, AMZN, and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.