Analysts at IDC recently took apart an iPod shuffle and came up with an estimate of how much the diminutive music player costs Apple Computer to make. They found that Apple makes a healthy 35 per cent to 40 per cent profit on each player sold, and stands to make even more from iTunes music purchases and expected drops in flash memory pricing.

The iPod shuffle's flash memory, which was supplied by South Korea's Samsung Electronics in the model examined by IDC, is estimated to be the most expensive component used in the player by far, said IdaRose Sylvester, a senior semiconductor research analyst at IDC.

She estimated the 512MB of flash in the cheaper of Apple's two iPod shuffle models costs the company around $37.50 for each player. That's about two thirds of the estimated total $59 that Apple spends on materials needed to make each 512MB iPod shuffle. The product retails for $99 giving the company a profit of about $40, or roughly 40 per cent.

"Apple is making very, very good margins on the shuffle," Sylvester said. "We based our cost analysis on fourth quarter production prices, which would have been when they sourced (the components). At some point they'll switch to cheaper flash and the margins will improve."

IDC estimated the average price of the same flash memory will slip to $31.25 during the current quarter, cutting the materials bill further and pushing Apple's margin on the 512MB player to around 46 per cent, assuming there are no major changes in the price of other materials.

"Apple's margin can only improve," Sylvester said. "It's certainly not a loss leader."

Music in store

Any discussion of Apple's profits from the iPod shuffle must also include the iTunes Music Store, which is an integrated part of the company's business model. Like game console makers, Apple expects hardware sales to drive content sales, in this case music files. However, unlike some consoles Apple is making money on the hardware it sells and isn't so reliant on these later content purchases.

The second most expensive single component is judged by IDC to be the digital music decoder chip, which in the iPod shuffle is the STMP3550 chip from SigmaTel. That marks a change from the hard-disk drive based iPods which use a chip from Portal Player.

The SigmaTel chip supports MP3 and Windows Media Audio files, although Apple has programmed it to play the AAC and Audible music formats, said Sylvester. The chip also includes a digital-to-analogue converter, a controller for the USB2.0 interface, SDRAM (synchronous dynamic RAM) memory for buffering, and the headphone driver amplifier. Other functions present in the chip that aren't used in the shuffle include an analogue-to-digital converter for voice recording, a driver for an LCD (liquid crystal display) and an FM tuner.

While these unused components are present in the chip, it doesn't necessarily mean Apple will use them at any time in the future, said Sylvester.

"If it had a screen, it would no longer be a shuffle," she said. "Apple is getting a lot of marketing mileage out of clever slogans about shuffling."

Speaking at the recent Macworld Expo in San Francisco, Apple's vice president of hardware marketing, Greg Joswiak, said Apple had experimented with a screen on the iPod shuffle but that it hadn't been able to come up with a navigation system that it liked.