How Profit is Made

In today’s Toronto Star is an interesting breakdown of the Apple Ipad: cost and source of components, and price Apple reaps from it. According to the Star article, none of the machine is made nor assembled by the “brand name” company. It is entirely outsourced.

This is not to poke at Apple specifically; this phenomenon is widespread and this is just today’s clear example. Yet one might ask, how come the suppliers of components get $X for their real efforts and equipment, and the retailer of the assembled device gets $3X for a profit of $2X on every device?

So today’s dumb question is, How is Profit Made?

The answer is in a book entitled, Information Feudalism, by Peter Drahos with John Braithwaite. The New Press. ISBN 1-56584-804-7 on my copy.

Patent protection, and copyright protection, and worldwide enforcement of such protection, is the story told in this book. It is a factual account of how, starting with the head of Pfizer in 1995, aided by the head of IBM and eventually something like 1400 trans-national companies, the United States Trade Representative was put in an interesting position of being in need of information supplied by these companies. Eventually, the book climaxes with the entire 2005 Doha round of negotiation being about patent and copyright protection. African countries agreed to prosecute anyone who sold unlicensed copies of AIDS drugs, for example.

The backroom negotiations detailed in the book are fascinating and frightening. Read it for yourself and see.

These intelligent people foresaw a world in which the usual manufacturers would be outsourcing all possible jobs to the cheapest place possible. They anticipated the hollowing-out of the Western world economies by this displacement of jobs.

Disclaimer: I have no financial interest in the book, its authors, or publishers; I have no financial interest in Apple or any of its suppliers.

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