Technology

The Skinny on Apple's New nanos


The computer giant has skimmed fat from the cost of producing its iPods, as researcher iSuppli discovered in its latest peek inside

The iPod family of digital media players keeps growing in sophistication and popularity.

It's also growing more profitable for Apple (AAPL) with each passing revision to the product, says market research firm iSuppli. The researcher has just completed a teardown analysis of Apple's second-generation iPod nano, released Sept. 12 (see BusinessWeek.com, 9/13/06, "Apple's Latest Fruits"). The conclusion: It costs Apple significantly less to produce a player with average memory capacity than it did a year ago.

iSuppli took apart the 4-GB version of the nano and estimated that the materials inside cost $72.24. That's a drop of more than $17 compared with what Apple paid for the guts of a 2-GB version of the first iPod nano device. The new 4-GB players come in four colors and sell for $199.

MORE GIGS, LESS MONEY.

One noteworthy switch Apple made is in its core chip supplier, says iSuppli analyst Chris Crotty. South Korea's Samsung Electronics now provides the main microprocessor, known as a "system on a chip" (or SOC), which replaces a processor from PortalPlayer (PLAY).

Samsung's processor handles all the main functionality for the device, such as the user interface and management of music files. The Korean company announced last April that it would be supplying a chip for Apple's forthcoming iPod but didn't release details (see BusinessWeek.com, 4/21/06, "Is PortalPlayer in Play?"). "Samsung probably made Apple an offer it couldn't refuse," Crotty says. "There may have been a bundling deal where Apple would get a better discount on flash memory if it agreed to use the Samsung system-on-a-chip."

Clearly, Apple has managed to save money on flash chips, getting more capacity for a lower price. "A year ago, Apple got 2 GB from Samsung for $54. Now it's getting 4 GB for $42.50," Crotty says. Other companies that supply flash memory to Apple include Toshiba (TOSBY) and Hynix Semiconductor, but Samsung is still the lead supplier.

A few other contracts have changed. Apple saved money by eliminating a chip called flash disk controller, which it used to purchase from Silicon Storage Technologies (SSTI). That functionality is now built right into Samsung's SOC. Other components inside the player include an audio chip from Britain-based chipmaker Wolfson Microelectronics, a power-management chip from Dutch electronics giant Philips Electronics (PHG), and chips from Cypress Semiconductor (CY) that run the click wheel on the front of the player.

CHIP SWITCH.

Curiously, Apple hasn't bothered to include any kind of video support in the nano. Its nearest competitor, SanDisk (SNDK), has already made that jump, serving up video on a nano-like series of players called the Sansa e200 series (see BusinessWeek.com, 9/19/06, "SanDisk Borrows a Tune from Apple's Songbook").

Apple has nipped and tucked even on such low-end components as transistors and diodes. "These used to cost $3.71 in the old nano, but we estimate the cost has come down to $1.85," Crotty says. "It may not sound like much, but when you think that Apple sells millions of these things, it really adds up."

Only one part of the nano was more expensive than on the prior player: the outer enclosure. The new aluminum casing adds more than $2 to the materials cost of the player, up from about a dollar on the older nano, according to iSuppli.

The analysts note that Apple's logo and name now appear on many of the parts inside the nano, including the Wolfson chip, the Philips chip, and the Samsung chip. "It's not clear if there's an intent on Apple's part to hide the identity of its suppliers, or if it's because those are custom products made for Apple," Crotty says. "The suppliers want very badly to brag about how they're supplying parts to Apple for the iPod, but Apple doesn't let them do that."

Hesseldahl is a reporter for BusinessWeek.com.

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