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Sun, 31 Jan 2010 Apple makes $208 on each $499 iPad claims analyst

Most expensive component on his price list was the 9.7-in. LCD touch-sensitive display

Gregg Keizer Computerworld

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The new iPad tablet priced at $499 actually runs Apple about $270 in materials and manufacturing costs, a Wall Street analyst has claimed.

According to a bill of materials (BOM) analysis by Brian Marshall of BroadPoint AmTech, the cost of goods inside Apple 's 16GB WiFi-only iPad totals $270.50. That figure includes a $10 line item dedicated to manufacturing, but doesn't include another $20 set aside for under-warranty service costs. Adding the latter makes Marshall's bottom-line total $290.50.

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The most expensive component on his price list was the 9.7-in. LCD touch-sensitive display, which he tagged at $100. The 16GB of memory and the aluminum case cost about $25 each, said Marshall, while the Apple A4 chip was listed at $15.

Because that model will sell for $499, Apple's profit margin is 42.9 per cent after the $20 warranty set-aside is factored in.

As a hardware expert pointed out Wednesday, the iPad that can connect to the Internet via a 3G data network is even more profitable , since Apple adds a $130 surcharge for those tablets but incurs a very small hardware cost to add 3G.

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By Marshall's estimate, the $629 16GB iPad with WiFi and 3G costs Apple $306.50, just $16 more than the WiFi-only model, giving the company a profit margin of 52 per cent, a jump of nine percentage points.

In all cases, the WiFi+3G iPad provides a bigger margin that the same configuration in WiFi-only. The $599 WiFi-only iPad, which includes 32GB of flash storage, costs Apple $316, for a margin of 48.1 per cent; the same iPad with 3G has a $729 price tag, but runs Apple only $332, a margin of 55.1 per cent. That's the highest of any iPad according to Marshall's analysis.

Apple's iPad line as a whole enjoys a margin of approximately 50 per cent, assuming that the lower-priced WiFi-only tablets sell much better than the 3G models. In a research note to investment clients, he called the iPad "another grand slam for Apple," and upped his estimate of iPad sales during 2010 from 2.2 million to 7 million.

High profit margins are standard for Apple, which earlier in the week boasted that its corporate margin for 2009's final quarter was 40.1%. Some products, in fact, have estimated margins even higher than Marshall's iPad numbers: The consensus for the iPhone 3GS is above 60 per cent, for example.

"If [Marshall] is right, this shows that there's room going forward for Apple to reduce the price of the iPad," said Ezra Gottheil, an analyst with Technology Business Research. "I think the $499 price point is very aggressive, but if they dropped [the price] it would really put the iPad in the netbook range. At a lower price, consumers will have to decide what they want for a portable work and play device, a netbook or get an iPad."

Marshall was one of the first to put numbers on how much Apple stands to make from its newest product. iSuppli, a research firm in El Segundo, Calif. that's noted for tearing apart electronics to build detailed BOM models, declined to provide its own estimate today, saying that it was working on a preliminary price list that it would publish sometime next week.

"We really want to wait until we know a little more about what's inside," said Andrew Rassweiler, the director of iSuppli's teardown services. "We'd rather not just throw numbers at it yet."

Even so, iSuppli has come to some preliminary conclusions about the iPad. "It does seem like a gigantic iPod Touch," said Rassweiler, "which means that although some costs would just scale up from the iPod, like the display and the touch screen, a lot won't." The iPad components that provide WiFi, Bluetooth and GPS, for example, will likely be the same parts used in the iPod touch.

Rassweiler will be conducting an iPad teardown as soon as Apple ships the tablet, which is slated for late March.

Among the mysteries he hopes to solve then is what powers the iPad.

Apple has acknowledged that the iPad contains Apple-designed silicon, which it's labeled an Apple A4 chip, but hasn't confirmed what most analysts assume - that the A4 was created by P.A. Semi , the Santa Clara, Calif., boutique microprocessor design company Apple acquired in 2008.

The Apple A4, said Aaron Vronko, CEO of Rapid Repair, a firm that services Apple's mobile hardware, is actually a "system-on-a-chip" that almost certainly includes the a single-core ARM Cortex-A9 processor running at 1 GHz.

iSuppli's Rassweiler said that until he could look at the chip, examine what he called "the geometry of the die," he had no more information about what the A4 actually was than anyone else. "I'm betting it's not off-the-shelf components," he said, talking about the A4's CPU and graphics processor, "but instead that it's a customized version from standard building blocks."

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Comments received


iyengar said on Sun, 31 Jan 2010

Apple does not bank these margins. Why not add in cost of R&D, Distribution Cost, Ongoing support, marketing expense etc etc All of these have to be included before you get to a net profit before tax.
And what is wrong about deciding to measure the profitability of your product on the program as a whole, especially if the market is price sensitive. It is obvious what Apple have done. just a sensible pricing strategy

Dragonfly said on Sun, 31 Jan 2010

How many years have they been developing and testing this product, 2 or 3 possibly ? Hardware, OS, App store updates, developing iBooks Store, Think of the cost of all of that, it must run into millions. That'll need to be recovered.

Should we factor in some of the $278 million used to purchase P.A Semi as well as the $15 per processor cost ?

What about the cost of registering trademarks and future lawsuits. Have Apple acquired rights to use the iPad name from Fujitsu yet ?

How much mark-up do resellers get when they sell the product ? Apple won't get the full $499 with those sales. The Apple event they've just held... what do you think that cost to set up ?

It's ok basing everything on BOM costs, but that's only a very small part of the story.

Greendave said on Mon, 01 Feb 2010

Poor article by MacWorld as iyengar and Dragonfly show. This is just reporting for a headline without doing any research or trying to explain the whole picture. Shoddy work MacWorld.

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