Taking the iPhone Apart

An analysis from teardown firm Portelligent estimates that the new smartphone costs Apple a mere $220 to make

by Arik Hesseldahl

As the creator of the iPhone, the most highly anticipated piece of consumer-electronics equipment in a decade or more, Apple (AAPL) certainly has much riding on the device's success. So too, in turn, do Apple's many, mostly anonymous suppliers.

Apple, always secretive and tight-lipped about its supply-chain and manufacturing arrangements, almost never says anything in public about its suppliers, not even to disclose names. The exceptions are Intel (INTC), the chipmaker that supplies the microprocessors for Apple's Macintosh computers, and NVIDA (NVDA) and ATI (AMD), which supply the graphics chips for those same computers.

So it's left to teardown firms such as Austin-based Portelligent, to sleuth out not only who supplies all the parts but what it costs to make a device. And David Carey, Portelligent's CEO, did something that few others in the country did after buying an iPhone: He took it apart.

A Hearty Margin

Portelligent estimates that the cost of the materials used in the iPhone add up to about $200 for the 4-gigabyte version, which sells for $499 and about $220 for the 8-gigabyte version, which sells for $599. Their estimate doesn't include costs of final assembly, but it does give some insight into the gross margin on the device. Historically Apple's gross margins have run ball park of 50% plus or minus a few points. "We had taken a speculative stab at what the costs would be back in January, when the phone was first announced and we were pretty close to the mark," Carey says (see BusinessWeek.com, 9/20/06, "The Skinny on Apple's New nanos").

The most expensive component on the phone, Carey says, is the touch screen, for which Apple tapped a little-known German concern called Balda (see BusinessWeek.com, 4/5/07, "Balda: The iPhone's German Accent"). The estimated cost of $60 per unit is mostly an educated guess. "This screen is like nothing I've ever seen before," says Carey.

Even the fact that Balda made it, is in fact, an educated guess. Carey told BusinessWeek that his analysis found no apparent markings that identified the screen's origin. But Balda's role in the screen has been something of an open secret in the wireless industry since the iPhone was first announced by Apple CEO Steve Jobs in January. Even so, Apple apparently took steps to make the source of the screen hard to identity.

How the Chips Fall

Another big winner is Samsung, which supplied the main microprocessor chip. It was stamped with an Apple logo, but with a serial number that matches closely a chip that Samsung sells. Samsung also supplied the NAND-type flash memory that stores data on the phone, including songs, video, and pictures.

Samsung's microprocessor chip, interestingly, is based on a core design that is owned by the British chip technology licensing firm ARM Holdings (ARMHY), which is another big winner among the iPhone suppliers. Instead of selling chips, ARM licenses its patented designs for "cores," or the central working brain of a chip. Customers take those core designs and then build their own chips around them. At least one other ARM-based chip, from NXP Semiconductor, the former chip division of Royal Philips Electronics (PHG), shows up in the iPhone. Other chips might have some ARM technology on them as well, Carey says.