iPhone Profit Foolishness

Posted by: Stephen Wildstrom on July 4, 2007

People who know anything about business, and the tech business in particular, should understand that there’s a huge difference between the bill of materials of a piece of hardware and its total cost. But this isn’t stopping folks from leaping to some ridiculous conclusions about the profitability of the iPhone.

The most striking example was a TechCrunch post today saying that based on an estimate, itself of dubious provenance, that Apple had sold 700,000 iPhones and “would have made a profit of between $200million and $266 million in 3 days (not including marketing costs).”

The starting point for this odd arithmetic is a BusinessWeek.com article by my colleague Arik Hesseldahl citing an analysis by Portelligent that found the bill of materials for an 8 GB iPhone was around $220.

These "tear down" analyses are useful, especially to potential competitors, though the iPhone estimate is subject to greater error than usual because no one really has any idea what the unique display costs Apple. But if the iPhone were just a pile of commodity hardware, nicely assembled, anyone could make one and it would be no big deal. A tremendous amount of engineering effort and software development went into the iPhone and those things don't come cheap. One reason that corporations are so fierce about defending their intellectual property is that it is very expensive stuff.

What the gap between the selling price and the bill of materials does tell us is that the iPhone is potentially an extremely profitable product for Apple. Once the considerable R&D cost is amortized, the gap between the BOM and the price will come a lot closer to representing profit.