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Subsidy Puts Apple
Subsidy Puts Apple's iPhone Margin Above 50 Percent

By Jennifer LeClaire
June 25, 2008 9:45AM

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iSuppli has done a "virtual teardown" of Apple, Inc.'s hardware and manufacturing costs for the iPhone 3G and found that wireless carrier subsidies will boost Apple's margins. iSuppli estimated the iPhone 3G will cost Apple $173 to make, less than the first generation, so Apple will net more profit with a price of $199 and a $300 subsidy.
 

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Two weeks ago, Apple CEO Steve Jobs announced the much-anticipated iPhone 3G. Now iSuppli is sharing how much it costs Apple to build the mobile device -- and the company's profit.

Apple's second-generation iPhone will have an initial hardware and manufacturing cost of $173, according to a preliminary "virtual teardown" by iSuppli. The new iPhone 3G goes on sale July 11.

"At a hardware bill of materials and manufacturing cost of $173, the new iPhone is significantly less expensive to produce than the first-generation product, despite major improvements in the product's functionality and unique usability due to the addition of 3G communications," said Dr. Jagdish Rebello, director and principal analyst for iSuppli.

The Virtual Teardown

In advance of the iPhone's release, iSuppli used insights from its analysis staff to develop estimates of iPhone content, suppliers and costs.

The original 8GB iPhone cost $226 after component price reductions, Rebello explained. That figure doesn't include other costs like software development, shipping and distribution, packaging and miscellaneous accessories included with each phone.

"The original 2G phone was sold at an unsubsidized price of $499," Rebello noted. "However, at a retail price of $199 for the low-end 8GB version of the new 3G model, wireless communications service carriers will be selling the product at a subsidized rate, using a common business model for the mobile-handset market."

A New Business Model

The subsidy the wireless carriers pay to Apple will be about $300 per iPhone, iSuppli estimates. That means that with subsidies from carriers, Apple will be selling the 8GB version to carriers at an effective price of about $499 per unit, the same as the original product, iSuppli said.

For the first version of the iPhone, Apple received a portion of the wireless carriers' revenue from service subscriptions. With the second-generation version, Apple will not receive service revenue, making a profit on hardware sales imperative.

"Hardware is vital to Apple profits, valuation and revenue in the consumer-electronics and wireless-communications realms," Rebello said "In fact, 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."

Hitting the Margins

Based on teardown analyses of multiple products, iSuppli has observed that Apple's iPod and iPhone products typically are priced about 50 percent more than their cost. With the new iPhone 3G sold for $199 plus an estimated subsidy of $300, Apple will achieve an even higher margin, the firm predicted.

As with all electronic products, the iPhone 3G's cost will decrease over time as component prices decline. The cost of the second-generation iPhone will decrease to $148 in 2009, down 37 percent from $173 now, according to iSuppli's Mobile Handset Cost Model.

"Apple is one of the most effective technology companies in leveraging component costs and suppliers and maximizing margins," said Tim Deal, a senior analyst at Pike & Fischer. "When it comes to computer products, Apple has always had industry-leading gross margins because of premium pricing and its ability to ink valuable and cost-effective component deals. When you buy in volume you get the discounts, and that helps your gross margins."
 

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