iPad costs give Apple room to cut prices, says researcher

32GB 3G iPad is Apple's 'sweet spot,' with a profit margin of 61%, says iSuppli

The iPad costs Apple Inc. between $229 and $346 in materials and manufacturing expenses, giving the company plenty of room to cut prices, a research analyst said today.

According to iSuppli Corp., an El Segundo, Calif.-based market research firm known for its teardowns of consumer electronics products, the least expensive iPad, which Apple will retail for $499, contains $219 in parts and $10 in manufacturing costs, providing a profit margin of 56%. Meanwhile, the $829 top-end iPad has a build cost of $346, for a profit margin of 58%.

Those numbers leave Apple lots of wiggle room should it choose to drop prices. "There's definitely room for them to do that, if they so desire," said iSuppli principal analyst Francis Sideco. "But they never do that without some reasonable rationale that retains their value proposition. If they do cut the price, they're going to put a spin on it."

Not quite never; Apple hasn't always managed to spin price cuts.

In September 2007, when it dropped the price of the then top-end 8GB iPhone by 33%, CEO Steve Jobs managed only this explanation: "We want to make iPhone even more affordable for even more people this holiday season."

Analysts were divided over whether the $200 price cut was necessary to jump-start sluggish sales, but owners who just two months earlier had waited in line for the new smartphone were furious. Within hours, Jobs announced a $100 store credit for all current iPhone owners.

ISuppli's analysis was, of course, done without an iPad in hand, Sideco acknowledged. Instead, the company used a computer-generated model it developed to estimate the part costs of yet-unreleased devices based on their disclosed feature sets. "It's a pretty robust model," Sideco said. "We've used it prior to the actual release of the last two iPhones, and it's been within 1% or 2% of the actual [teardown] analysis once we took apart the phones."

ISuppli did not factor things such as software, royalties and licensing fees into its estimates. "Remember, this is a hardware-only estimate," said Sideco, who cautioned against assuming that the bill of materials was the only cost in the iPad.

Sideco dubbed the 32GB 3G iPad as the sweet spot in Apple's tablet line. The iSuppli virtual teardown pegged the material and manufacturing costs of that model at $287. Because Apple will sell it for $729, that configuration has a profit margin of nearly 61%, the highest of any model.

"They've priced the 32GB as the sweet spot, so we're assuming that's the one they believe they'll sell the most of," said Sideco.

Others have pointed out that the $130 Apple added to the price of the 3G-compatible models makes those iPads the most profitable. And iSuppli noted the disparity between the actual additional hardware costs of 3G and the $130 surcharge. "For the 3G-enabled versions of the iPad, the cost of the wireless subsystem -- comprising the baseband IC [integrated circuit], the radio frequency components, the power amplifier and other parts -- is estimated at $24.50, equal to 8.5% the [bill of materials of the mid-range [32GB] version," the company said in a statement that described the teardown in detail.

Apple also makes more money on models that include more memory, said iSuppli. While the company lists the 32GB iPad at $100 more than the 16GB device, the actual increase in cost to Apple is only $29.50.

Last month, BroadPoint AmTech analyst Brian Marshall came up with an iPad materials and manufacturing costs estimate that's higher than iSuppli's, and with a correspondingly lower profit margin. Marshall, for instance, put the build cost of the $499 iPad model at $270, compared to iSuppli's $229, and he estimated that the highest profit margin of any configuration was 55%, not the 60% iSuppli figured.

Apple unveiled the iPad last month but will not begin selling the media tablet until late next month, when it rolls out the WiFi-only models. The 3G-equipped iPads will go on sale in late April.

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

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