For the upcoming iPhone 3G, Apple has reduced manufacturing and component costs by more than $50 per unit, says iSuppli
Apple packed a lot of features into the latest version of the iPhone but managed to keep a tight lid on the cost of components that go into it. Manufacturing and components for the 8-gigabyte iPhone 3G set Apple back about $173 per unit, according to an estimate by Silicon Valley-based research firm iSuppli, due to be released June 24. Comparable expenses for the earlier iteration of the iPhone were about $226, iSuppli says.
Analysts scour component-price estimates to gauge profit margins on Apple's best-selling products, while keeping a close eye on which supply manufacturers have won the potentially lucrative contracts from Apple. Falling component prices let Apple (AAPL) add new features, including navigation tools and faster Internet download speeds, while maintaining healthy margins, say iSuppli analysts, whose estimates are preliminary. The iPhone 3G is due to be released July 11. "They have done a good job in using what worked well with the first one and making improvements where it mattered," iSuppli analyst Jagdish Rebello says.
Consumers who purchase the iPhone in Apple and AT&T (T) stores will pay $199 for the 8GB version, but AT&T will subsidize a big chunk of the price of each phone—an estimated $499 for each device. AT&T hopes to make up for the expense through monthly service packages but will take a bottom-line hit of 10¢ to 12¢ a share through the end of 2009. After royalties, Apple's per-unit profit on an 8GB iPhone works out to about $281, or about 56%, in keeping with the percentage on other Apple products, iSuppli says. The figure doesn't include other costs, including software development, shipping and distribution, packaging, and miscellaneous accessories included with each phone. Apple also pays fees to its Chinese manufacturing partner, Hon Hai Precision Industry.
Apple added parts that enable faster download speeds and navigation features, via Global Positioning System satellites. One big winner appears to be the German chipmaker Infineon (IFX), which iSuppli says won the contract to supply the 3G wireless chipset. Broadcom (BRCM) unit Global Locate will supply the GPS chipset.
Most Components Unchanged
Aside from those changes, most of the components used in the original are likely to remain unchanged. "It makes sense that Apple would go with the same design and not change very much inside," Rebello says. Samsung is thought to be supplying the same applications processor as on the original iPhone. The specifications of other chips haven't changed much either. The new iPhone's camera boasts a picture quality of only two megapixels—again, the same as on the original. Idaho-based chipmaker Micron (MU) likely stayed in place as the supplier, though at a lower cost, Rebello says.
The most expensive parts are the memory chips. Eight gigabytes worth of NAND-type flash memory costs about $23, and about double for 16 gigabytes. Suppliers of the NAND chips are many, and include Samsung, Hynix, and IM Flash Technologies, a joint venture of Micron and Intel (INTC).
Apple also has to pay about $45, or about 9% of the price of each handset, in royalties for patented 3G technologies, according to the iSuppli analysis. Chief among these collectors of royalties is wireless chipmaker Qualcomm (QCOM), who owns several patents related to a technology known as WCDMA used in the 3G chipsets. Others that may be collecting some royalties include Sweden's Ericsson (ERICY) and Finland wireless giant Nokia (NOK).
Another difference this time around: Apple and AT&T have abandoned the revenue-sharing agreement that gave Apple an estimated 30% to 35% of the monthly service revenue generated from iPhone contracts. Apple is making up for the lost revenue with the subsidy from AT&T.
Apple is also likely to benefit from further declines in the component prices. The component price tag is likely to drop to $148 in 2009 from the current $173, iSuppli estimates. That bodes well for the company's gross margins, which widened to 34% in the first six months of the current fiscal year, from 33% in the year-earlier period.