iPad costs more to make than first thought, says iSuppli

After teardown of real deal, bumps up cost of goods 12%, cites high number of chips, pricier display

Apple Inc.'s iPad costs as little as $260 to build, but nearly half of that goes toward the 9.7-in. LCD touch-screen display, research firm iSuppli Corp. said today.

The new number is $31 higher than an earlier computer model-generated estimate by the company. The head of iSuppli's teardowns blamed the lowball figure -- iSuppli missed the mark by 12% -- on a greater degree of complexity and pricier parts than expected.

According to El Segundo, Calif.-based iSuppli, which is well known for its electronics teardowns, the $499 16GB iPad contains $251 in parts and costs $9 to manufacture, for a total of $260. In February, iSuppli conducted a "virtual teardown" using a computer-generated model peg the parts costs of unreleased hardware. At the time, iSuppli touted the accuracy of the model, saying that in the past it had come within 1% to 2% of subsequent estimates that were based on teardowns of real products. Based on the computer model, the firm estimated that the $499 iPad's bill of materials (BOM) was $219 in parts and $10 in manufacturing costs, for a total of $229.

"There's more complexity in terms of the circuitry than we expected," said Andrew Rassweiler, director of iSuppli's teardown services, as he defended the earlier number. "The custom screen turned out to be more expensive, as did the battery."

In February, for instance, iSuppli assumed that Apple would slap together a pair of battery cells, not craft a custom-fit battery that could be easily replaced by a service technician. "That's a value-add right there," said Rassweiler. In its February BOM, iSuppli underestimated the cost of the battery by nearly 17% and missed the touch-screen display by almost 18%.

But the additional complexity of the iPad's circuitry was the biggest surprise, Rassweiler said. "We assumed there would be more integrated chips, but it's a first-generation product. It's new and you're trying to get the product out," he said.

One example: The iPad's touch screen sports three control chips, not the one that iSuppli assumed in February. "Hindsight is 20-20, but it's a larger screen than the iPhone and has a lot more sensor points. So there's a lot more upfront processing," Rassweiler said.

Over time, Apple will probably combine some of those chips or integrate them into others. "Once the design has jelled, that's when Apple can design more integration," said Rassweiler.

The iPad's BOM-to-price ratio is in line with those of other Apple products. The least-expensive tablet's ratio is 52%, while the mid-priced $599 32GB iPad costs Apple $289 to make, and the top-end $699 64GB tablet runs Apple $348, for ratios of 48% and 50%, respectively.

Those numbers are in the same ballpark as the BOM-to-price ratios of other hardware products. iSuppli's latest estimate for the iPod Touch, for example, pegged its BOM-to-price ratio at 47%, and the $999 MacBook's at 55%.

The upcoming 3G iPad, which is set to ship later this month, has an even lower ratio -- and therefore will likely yield a higher profit for Apple. According to iSuppli, the 3G parts add only $24.50 to the BOM of the Wi-Fi-only tablet. The $629 16GB Wi-Fi-plus-3G tablet, then, boasts a BOM-to-price ratio of 45%, which is better than that of any Wi-Fi-only model.

Some have called the $130 extra that Apple is charging for the 3G tablet "ridiculous."

But Rassweiler saw a bigger picture than the iPad's parts list or its potential profit margin. The tablet, he argued, represents a design milestone.

"This is a paradigm shift away from the motherboard-centricity of the past," he said, referring to the way PCs have traditionally been designed. "In a notebook, everything is peripheral to the core value of the motherboard and the processor: the display, audio, the keyboard. But in Apple's design [of the iPad] the core value is the human interface."

To Rassweiler, everything in the iPad plays a supporting role to the touch-screen display. The 9.7-in. display is the iPad's priciest part, costing Apple an estimated $65, or 26% of the 16GB model's BOM. The second-most-expensive component is the touch screen, priced at $30, or 12% of the total. Altogether, what iSuppli defined as the iPad's user-interface-related parts tallied up to $109.50, or almost 44% of the BOM.

"The iPad turns the tables on traditional design," Rassweiler stressed. "Here, the electronics are peripheral to the look and feel."

The iSuppli estimate only accounts for hardware and manufacturing costs; it excludes design and software development costs, advertising and marketing expenditures, and royalties and licensing fees.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, or subscribe to Gregg's RSS feed . His e-mail address is gkeizer@ix.netcom.com.

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