What the iPhone will cost to make

Even though it won't be released for approximately five months, Apple's iPhone looks like a winner, given the reaction in the media and among Apple fans who have been blogging incessantly about how badly they want one"”like the author of this article.

But given the complicated economic workings of the wireless phone business, will the iPhone be profitable‾ It sure looks like it. Silicon Valley market research firm iSuppli, which specializes in tearing down popular electronic gadgets to figure out how much they cost to make, estimates that Apple will be sticking to its usual script with the iPhone and pricing the device such that it can expect a gross margin of about 50%. That gives Apple plenty of room to cut prices as component costs fall or to stimulate demand.

The bottom line  

Without having an actual iPhone to take apart, as it has in the past with various iterations of the iPod, the Xbox 360, and the PlayStation 3, iSuppli analysts have relied on intelligence gathered among component manufacturers, published price sheets, and industry insider information to estimate the manufacturing cost of the iPhone.

Adding up the cost of all the parts that Apple is expected to use in the device suggests it will cost about $230 to build the 4GB version that will sell for $499 and about $265 to build the 8GB version that will sell for $599.

The single most expensive part will be the 3.5-inch touch-sensitive display, which iSuppli says will cost $33.50, while the combined cost of the NAND-type flash memory chips"”probably supplied by Samsung"”will run $35 to $70, depending on the model.

And the chipmakers are...

Apple hasn't identified whose chips it will be using inside the devices, and almost never does, but iSuppli analysts Jagdish Rebello and Tina Teng have some good guesses. One is that Micron Technology will supply the CMOS imaging chip for the iPhone camera. Micron sells more CMOS imaging chips to phone manufacturers such as Motorola and Nokia than any other company.

Other suppliers likely to have parts in the iPhone include Marvell Technology, the Santa Clara chipmaker that acquired Intel's wireless chip division last year. Marvell will supply the Wi-Fi wireless networking chip, and CSR, the British firm formerly known as Cambridge Silicon Radio, which will supply the Bluetooth wireless chip.

Samsung, Teng says, is most likely to be the supplier of the audio chip. In previous iPods, PortalPlayer, which recently was acquired by Nvidia  had been the audio chip supplier of choice. But Samsung replaced PortalPlayer in the most recent version of the iPod nano.

Another good bet, they say, is Broadcom, which supplies the video chip used in the video-ready generation of iPods and is a likely candidate for the iPhone.

Mystery guests

Less clear are the suppliers of other parts, including the digital signal processor"”a crucial component in any wireless phone. Texas Instruments is the world's leading supplier of DSP chips, but the only thing certain about the iPhone's DSP supplier is that it isn't TI, Rebello says. 'We know for certain that it's not TI, but that leaves several other possible suppliers of the DSP.' Those names include Freescale, the former chip unit of Motorola; Fujitsu; and Renesas, a joint venture between Mitsubishi Electric and Hitachi, both of Japan.

The company that makes the iPhone screen remains a big mystery. 'We have no guess on the identity of that supplier. We just don't know,' Feng says.

One bit of good news for consumers is that over time, there will be an opportunity for Apple to reduce the price of the iPhone, both as component prices come down and to help stimulate demand. 'It's not unusual for popular phones to come down in price,' Rebello says.

It's also a good time to be getting into the business of selling a phone that plays music and video. ISuppli reckons that consumers around the world will scoop up 618 million music-ready phones this year, and that number will grow to more than a billion phones by 2010.

Hesseldahl is a reporter for BusinessWeek.com.


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