New iPhone carries $173 tag, reveals virtual teardown

Apple Inc.'s second-generation iPhone announced this month is expected to carry an initial hardware BOM and manufacturing cost of $173, according to a "virtual teardown" conducted by iSuppli Corp. The virtual teardown offers preliminary analysis and estimates of the iPhone content, suppliers and cost structure.

"At a hardware BOM 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 Jagdish Rebello, director and principal analyst for iSuppli. "The original 8Gbyte iPhone carried a cost of $226 after component price reductions, giving the new product a 23 percent hardware cost reduction due to component price declines."

The table presents iSuppli's preliminary virtual teardown estimate of the 8Gbyte 3G iPhone's costs. It doesn't include other costs, including software development, shipping and distribution, packaging, and miscellaneous accessories included with each phone.

New business model
With the second-generation iPhone, Apple is making a significant departure in its pricing strategy.

"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 8Gbyte 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."

Based on iSuppli estimates, the subsidy paid by wireless carriers to Apple will be about $300 per iPhone. "This means that with subsidies from carriers, Apple will be selling the 8Mbyte version of the second-generation iPhone to carriers at an effective price of about $499 per unit, the same as the original product," Rebello explained.

For the first version of the iPhone, Apple was given a portion of the wireless carriers' revenue from service subscriptions. For the second-generation version, Apple is not getting any service revenue, making it more imperative that the company cut a profit on the actual hardware through carrier subsidies.

"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."

iSuppli observed that Apple's iPod and iPhone products typically are priced about 50 percent more than their BOM and manufacturing costs. With the new iPhone sold at $199 and the estimated subsidy of $300, Apple will achieve an even higher BOM/manufacturing margin, noted iSuppli.



Future costs
Like all electronic products, the 3G iPhone's BOM costs will decrease over time as component prices decline. The BOM/manufacturing cost of the second-generation iPhone will decrease to $148 in 2009, down 37 percent from $173 in 2008, according to data from iSuppli's Mobile Handset Cost Model.

"If the 3G iPhone design is unchanged, the cost will decline to $126 in 2012," said Tina Teng, wireless communications analyst at iSuppli.