How the "Apple Tax" Boosts Prices on iPod & iPhone Accessories

• Apple
• iPod
• iPhone
• speakers
• cable
• Tech Clinic Investigates

Last year, when Apple introduced the original iPhone and the latest generation of iPods, another new product came out of Cupertino, Calif., but this one received little fanfare. It was a proprietary authentication chip. The chip works like a silicon key that unlocks streaming video functionality on iPhones and iPods and generally authorizes the devices to work with approved accessories. The advent of the “auth chip” made it impossible for any third-party company to produce iPod-compatible gadgets without dealing first with Apple—the only company selling the chip. Previous-generation iPods could output video over a generic $2 iPod video cable, but new phones and iPods require officially licensed Apple cables—and these can cost up to $50.

The chip has become a headache for many accessory manufacturers, who complain that they sometimes have to compromise on quality to pay for the chip and other Apple licensing fees, while still maintaining price points consumers can afford. “If we didn’t have to pay Apple for the dock and auth chip, we could have made a much better speaker for the same price,” said an official at a major electronics maker, who, like several sources for this story, requested anonymity because of fears that speaking with the press could jeopardize his company’s relationship with Apple.

And that relationship can be a profitable one. The iPod accessory market is formidable, with Apple selling over 22 million iPods in the first quarter of 2008—each one representing a new customer for accessory makers. Analysts estimate that the accessories market is worth $1.8 billion per year, so the dock and cable makers of the world are understandably cautious about rocking the business boat—especially with the new, highly anticipated iPhone 3G hitting stores tomorrow.

The authentication chip isn’t the only cost that manufacturers incur by building iPod and iPhone accessories. In fact, licensing fees, such as the one for the ubiquitous “Made for iPod” sticker, account for the bulk of the so-called “Apple tax.” While revealing exact costs for the exclusive connector and chip would violate nondisclosure agreements, a product decision maker at a global consumer electronics company was willing to list the standard licensing fees paid to Apple, insisting that they had become common knowledge within circles of the industry: “Small accessories like battery-pack adapters, that’s 10 percent the cost of the item, and the other items like desktop audio are $4 per unit.”

A representative from Apple declined to comment for this story or confirm details provided by manufacturers, stating that Apple “does not discuss the Made for iPod program.”

Stephen Baker, who monitors the electronics accessory market as vice president of industry analysis for the NPD Group, was quick to note that there would be no market for iPod and iPhone accessories if Apple had not invented the breakthrough products. “They own the intellectual property,” he says. “They have an opportunity, without hurting their business, to extract some money from these companies who are making money off that business. Are they actively dissuading people? Probably not. Are they encouraging people? Well, a lot of people aren’t encouraged by the idea that they have to pay some kind of tithe to Apple.”

The authorization chip is not an issue for more generic accessories, such as USB connection cables—and prices tend to reflect that. Data-only USB connectors for iPod and iPhone can be easily replicated by third-party manufacturers, and sell for as low as $2 online.

After the quiet introduction of the authentication chip, several manufacturers said they found that their products—already in stores—wouldn’t work with newer Apple hardware, causing a desperate scramble to re-engineer accessory product lines. As one official who oversees a line of iPod speakers explained, “Last year’s announcement of the new iPods and the new iPhone obsoleted a lot of the products that were on the market. [Apple] changed a number of things that caused a lot of manufacturers to have product on the shelf that was just dead product.” Older gadgets without the new chips wound up staying on the shelf for some time: Apple hadn’t informed manufacturers of the new specs, the third-party companies tell PM, until it announced the new security hardware to the general public. This led to a period from June 2007 to January 2008 when manufacturers struggled to update their equipment to work with Apple’s new line.

The added cost of the Apple chip and license fees also increases retail prices for accessories. Basic products such as cabling can now cost up to 10 times their original amount.

10. RE: How the
all other points are covered in the sealed nonchangable battery

9. RE: How the
> I will never own an Apple product or even > a Sony product because they continually > force you to stray from industry standard > accessories. No, that's not true. Apple and Sony are polar opposites in this regard. The iPod dock connector has standard USB and standard analog audio and video, or composite video. The cables are just breakout cables from the necessarily tiny dock connector that has to fit on an iPod nano. Similarly, when iTunes rips a CD for you it makes ISO standard MPEG-4 AAC, and Apple's operating system is almost ludicrously standardized, from top to bottom it's Unix and OpenGL and PDF and their browser is an icon of Web standards. For many years Apple has been transitioning QuickTime from its own format to ISO MPEG-4 H.264/AAC, that is the standard for consumer audio and video. You find it on Blu-Ray also. So what are your complaints, exactly? Maybe you just don't know what the standards are. They've been the same since about 2002, you can look them up on the ISO website, and the W3C, and there is a site about Unix standardization also. When it comes to standards, by far the worst villain is Microsoft. If you are in their bizarro universe then I could see how you'd think Apple wasn't following standards. When Microsoft says "standard" they mean "Windows standard". That is the typewriter standard. E.g. WMA is the way Microsoft recommends you play audio on their typewriters. That has nothing to do with consumer or professional audio standards, which are defined by ISO. MPEG-4 is 6 years old and still Microsoft doesn't support it in Windows, you have to add Apple or other 3rd party software to fix that.

8. Chip
I think the reason the chip exists is to appease content owners. Notice that it didn't exist until movie rental viewing was added to the iPod. In order to close the analog loop for video rentals, apple needed to control the video output in a way that satisfies the content providers.

7. RE: How the
Can you imagine if Microsoft did something like this. The EU and US Justice Dept would have them in court for billions but I guess if you are a small player that it is OK. No wonder the ipod is not as popular outside of the US. $50 for a $5 cable!!

6. RE: How the
I will never own an Apple product or even a Sony product because they continually force you to stray from industry standard accessories. I have had the same charger for my last three blackberries and my wife uses it to charge her Motorola phone. Until Apple and Sony adapt some measure of "industry standards," I'll be staying away. Why should I pay double for a memory stick when an SD card that fits every other device on the market is available. Why can't Apple put an SD slot on the Iphone? Simply put, they can charge an extra 100 bucks per phone for an 8 gig model.

5. RE:ipr 'apple tax' is ok if it results in innovation
QA is a laudable rationale for apple's gatekeeper role (they have a right to monetize access to the platform they created). But it is (the lack of) innovation (not QA or IPR) that is the real missing piece in the i* value proposition! * it is inexplicable that apple's DOCK controller not only removes firewire as an alternative pathyway for apple connectors, but also (apparently) PREVENTS even the possibility for third party's oem's to offer this badly needed/missed functionality. * it is jaw-droppingly insane that the DOCK controller license forbids oems from building any true hubs with a pass-through function (ie apple allows one and only one accessory to be attached to an ipod: so customers are /forced/ to select from an either/or proposition: bluetooth adapter or video capture; fm broadcaster or battery charger; microphone or whatever, etc). * it is unfathomable that apple never supported wifi (until the 6G itouch which is only an "ipod" in name only. * likewise, without an sdk for the ipod (wrf!), simple functions like IR remcontrol were also denied to third-parties (apple had been shipping FrontRow for years with a dedicated IR remcon fob for both macs & appletv, which totally over-looking the need to get serious about their dsigital hub' strategy). * likewise, the inability to integrate with digital radio has been a huge strategic opportunity that apple has missed by locking out oem's who could have added useful RF interfaces (apple belatedly has added a feature to iTunes that allows listeners to build playlists (for future purchase) from digital radio .... if,that is listeners were wiling to fork out an additional $250 for a digital audio receiver! * however, apple's most self-destructive category of "little ipodism", is the complete refusal to support oem's who wanted to use the storage feature of this 'pod' ... namely the "digital pen's" which would have been a natural companion for note-taking (along with the audio-in obstacles). Not to mention the obvious storage for camcorders and cameras (once again, the obsession with a single-ported DOCK meant that plugging in this accessory shut-out all others; of course the photobridge adapter -- and all memory cards in general !! - should have been built-in from the begining!). This same omni-pod principle also applies to scanners, whether desktop beasts or handheld ones. Apple's closed attitude to the DOCK (and an sdk) eliminated all these great opportunities to make ipod into a genuinely versatile (if very highly focused) intelligent storage device (I wont even mention the failure to have a camera edition of the ipod ... ... which would have been a viable premium iPod product in itself ... notwithstanding the larger strategic objectives of helping apple sustain the VideoiPod at a higher price-point in advance of the introduction of the itouch - ie apple created a so large a discontinuity in its bran positioning, that it has not properly prepared the market for the "iPad" as the logical outgrowth of ipod5G/itouch6G. Thus if apple does up-size the itouch to be a more robust pda-centric -- aka "iPad" -- then it will have to work uphill (and after-the-fact) to create the differentiation needed to clearly diffrentiate this newer (and logically distinct) category ... a benefit that apple could have had otherwise for 'free' if it had just been a bit more liberal with oem's on the upper end of the ipod platform. At present, the only niches availible for the (next/larger) itouch are as an e-reader and a game console -- yes, both of these are huge (category killers) all by themselves -- but the transition to a larger format for interactivity would have smoother if there had been a predecssor platform that had also stressed connectivity. so, instead of the market competing to create SERIOUSLY useful accessories, the ipod eco-system got side-tracked making loads of me-too junk that didnt really improve many people's lives .... and certainly did not constitute a reasonable value proposition for the ipod as a platform. fortunately with the iphone/itouch, apple seems to have learned its lesson - albeit still in an circumscribed form ... bluetooth and the camera and gps also seem to b closed interfaces - apple is not even considering licensing access to them! ... and there doesnt seem to be any obvious way (via the sdk) to access the cpu in order to do content description - eg OCR (which especially important to leverage the nascent data-glyph market space which is set to be ignited by a device like the i*); nor TTS and vox reco which is ESSENTIAL to the success of the itouch as an interactive language platform for education (cbt) and for tourism. while we can be glad that apple's platform strategy for the itouch/iphone will modestly succeed in a way that their iPod platform strategy underwhelmed, it is still not to late for apple to broaden the charter for the ipod/itouch and permit oem access to its hardware in a way that is different from the iphone. if apple can understand that the oem's can be used to choke off many slices of the longtail, then apple will have converted the hardware licensing issue from a tactical revenue stream into a strategic way to become the de facto standard for mobiles the same way that microsoft (illeglayy, mind you) became the de facto standard for desktops! it's that big of a deal!

4. The Apple tax is hidden and all mine to pay
It is disappointing that Apple decided that getting the revenue from 3rd party companies was more important than the customers cost. My point, I have the ipod classic. I could buy a cable from Apple itself for video for an earlier unit for around $20. Now a cable for "my" ipod (a newer unit) now cost $50. What a markup, all in the name of security? No ipod was ever "unsecure". Had I known the unit I purchased had this "tax" I would have purchased a Zune.

3. This shouldn't be a surprise to anyone
Steve Job has always been fixated on profit, how much money Apple gets for their products and that their products are superior to everthing else. Back in the 1980s Steve Jobs was shocked and surprised that companies were bypassing the $5,000 Apple Macintosh for the $2,500 IBM PC. Jobs stated that "the Macintosh is so much better than the IBM PC. I don't know why companies are buying the PC." In a way Apple has to maximize it's income any way it can. It is still a niche market player when it comes to computers, more of the company's profits come from iPod and iPhone sales than from computers, and they have some pretty high costs. They have to pay ever increasing construction costs plus rent/lease fees for those pretty stores somehow. Don't get me started on Apple's Every-Three-Years Planned Obsolescence Program.

2. RE: How the
Apple faboyisn is what keeps this company alive folks. Most other mp3 players and cellphones are built with interoperability (with Sony Ericsson being the most notable exception) so you can go out and but the less expensive and ofter as good generic product. This chip is more about maintaining the almighty we are apple we are better than you attitude of the fruit store (read apple and not a derogatory comment on someones sexual choice) and less about quality control. Wake up and smell the cult people buy another product which is just as good if not better, say no to snobbism and save yourself some cash

1. So what?
I see nothing wrong with this. It's apple technology that they are basically licensing to other companies, so they in turn can make money off the apple products. For all you with the iPods / iPhones, it will be this way as long as you're willing to purchase a new device every year and continue to pick up new accessories along with your iDevice refresh.

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