Apple squeezes iPhone 3G costs down to $173

New 'virtual tear-down' gives Apple plenty of room for profit, says iSuppli

The cost of manufacturing Apple Inc.'s next-generation iPhone 3G will be 23% lower than the cost of manufacturing 2007's original model, according to a research firm noted for tearing apart electronics.

According to estimates by iSuppli Corp., Apple's new iPhone 3G will come with a bill of materials (BOM) and manufacturing cost of $173, nearly one-fourth less than the $226 the company spent on the first-generation 8GB iPhone, which debuted almost a year ago.

"The new iPhone is significantly less expensive to produce than the first-generation product, despite major improvements in functionality and unique usability, due to the addition of 3G communications," said Jagdish Rebello, an analyst at iSuppli, in a statement issued yesterday.

The most expensive component on iSuppli's speculative price list was the 8GB of flash memory, which it tagged at $22.80. The touch screen and display each cost $20, while the 3G chip is $15, said the company.

ISuppli's breakdown is, of course, speculative. Like other recent "tear-down" estimates of the smart phone's manufacturing cost, iSuppli's is based on information that may turn out to be incorrect. It will be more than two weeks before Apple and its carrier partners start selling the iPhone 3G.

Two weeks ago, in fact, iSuppli declined to match a rival's tear-down estimate with one of its own, saying it would instead withhold comment until it had an iPhone 3G in hand. But it changed its mind and issued a preliminary estimate, citing what it called "strong popular demand for information on iPhone costs and pricing."

Two weeks ago, iSuppli competitor Portelligent Inc. touted its own analysis -- also done without seeing an actual iPhone 3G -- that tallied the new model's costs at around $100, considerably less than iSuppli's figure. Austin, Texas-based Portelligent's number got analysts talking, with some speculating that the phone could become Apple's most profitable product.

At the time, Carl Howe, an analyst at Yankee Group Research Inc., used Portelligent's $100 estimate to question whether Apple required carrier subsidies to make money on the iPhone 3G. "If AT&T is adding in a $200 subsidy, then the iPhone 3G is anything but a phone requiring a carrier subsidy," Howe said. "In fact, if these numbers are true and the carriers are subsidizing the phone, the iPhone 3G could end up being the most profitable product Apple makes."

Although iSuppli's calculation puts the iPhone 3G materials and manufacturing costs significantly higher than Portelligent's, iSuppli's Rebello also thought the carrier subsidy would be larger: around $300 per iPhone. "This means that with subsidies from carriers, Apple will be selling the 8GB version of the second-generation iPhone to carriers at an effective price of about $499 per unit, the same as the original product."

It's imperative that Apple make money on the hardware, Rebello added, since the company will not be sharing in 3G subscriber revenues. "Hardware is vital to Apple profits, valuation and revenue," he said. "Two-thirds of Apple's revenue from the iPod still is derived from hardware, while only one-third is from the iTunes service and accessories. The second-generation iPhone is no exception."

Like Howe of the Yankee Group, iSuppli thinks the iPhone 3G may be an unusually-profitable product for Apple. Earlier iPod and iPhone tear-downs have put Apple's profit margin at around 50% more than the BOM and manufacturing costs. With a $300 subsidy, however, the margin would be nearly 65%. Even with a $200-per-iPhone subsidy, Apple's estimated margin would be around 57%.

Apple will launch the iPhone 3G on July 11 in Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Mexico, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the U.K. and the U.S. The company has also said it would make the new phone available in some 70 countries by the end of this year.

iSuppli will do a real tear-down once it gets its hands on an actual iPhone 3G, said Rebello.

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