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Apple Peels Away iPhone Costs

Apple Inc. (Nasdaq: AAPL) has managed to cut the production cost of its new 3G iPhone model by $53 compared with the original 2G version, according to a new report from ISuppli Corp. .

The research firm says it has done a "virtual teardown" on the manufacturing cost and bill of materials for the 8GB 3G iPhone and estimates the total cost per unit is $173 (excluding software development, shipping and distribution, packaging, and other costs), compared with $226 for the original 8GB model.

The 3G iPhone doesn't hit stores until July 11, so nobody will be able to break the device into little pieces until then. (See 3G iPhone Is Loose and iPhone Goes Global July 11.)

A reduction in component costs is now even more important for Apple under the new business agreements it's striking with service providers. With the 3G version, the vendor won't be taking a share of its carrier customers' service subscription revenues, an arrangement it managed to broker with its 2G iPhones.

Instead, Apple will make its money solely from the sales of its 3G devices: iSuppli estimates Apple will sell the 8MB model to AT&T Inc. (NYSE: T) for around $499 -- the same price at which the original iPhone was introduced.

And with AT&T set to hold on to all of its 3G iPhone subscription and service revenues, the carrier is prepared to subsidize the new device quite heavily -- it will sell the 8GB version for $199 and the 16GB model for $299. (See AT&T’s iPhone Pain.)

iSuppli says the new arrangement makes it "imperative that the company cut a profit on the actual hardware."

The cost of the phone will naturally fall over time as components, such as the Infineon Technologies AG (NYSE/Frankfurt: IFX) 3G chipset that's at the heart of the phone, decline in price. iSuppli estimates that the manufacturing cost will fall to $148 per unit in 2009.

— Dan Jones, Site Editor, Unstrung

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