Each Apple iPhone sold will generate nearly a 50 percent gross margin for Apple Inc. and partner Cingular Wireless, giving the companies a hefty profit, as well as plenty of room for future price cuts, according to a preliminary functional Bill of Materials (BoM) estimate created by iSuppli Corp.

“iSuppli estimates the 4Gbyte version of the Apple iPhone will carry a $229.85 hardware BoM and manufacturing cost and a $245.83 total expense, yielding a 50.7 percent margin on each unit sold at the $499 retail price,” said Andrew Rassweiler, teardown services manager and senior analyst for iSuppli. “Meanwhile, the 8GByte Apple iPhone will sport a $264.85 hardware cost and a $280.83 total expense, amounting to a 53.1 percent margin at the $599 retail price.”

While iSuppli has a high degree of confidence in its conclusions, these figures are considered preliminary until they perform an actual physical teardown and analysis of the iPhone.

Large margins
For Apple, such a strong hardware profit is par for the course, with the company having achieved margins of 45 percent and more in products including the iMac and iPod nano, according to iSuppli. However, because Apple is facing extensive competition in the music-phone market, the company may need to cut into its margins to reduce pricing in the future.

“With a 50 percent gross margin, Apple is setting itself up for aggressive price declines going forward,” said Jagdish Rebello, PhD, director and principal analyst with iSuppli.

Competition in music phones
Apple faces a bevy of competitors in music phones, with 835 models expected to be introduced by various competitors in 2007. iSuppli estimates that 14 music-enabled mobile phones with features that compete closely with the Apple iPhone already are shipping from manufacturers including Nokia, Motorola Inc., Samsung Electronics Co. Ltd. and LG.

In terms of features and form factors, the closest competitor to the Apple iPhone is LG’s KE850, which will ship later this year, said Tina Teng, analyst, wireless communications, for iSuppli. Other phones with similar characteristics include Nokia’s N800, although this product is aimed more at niche markets than the broad-appeal Apple iPhone, Teng added.

Teng said she expects mobile-phone OEMs to introduce models designed specifically to compete with the Apple iPhone.

“The most successful OEMs will be those already established in the mobile-phone business, that support all file formats and that have excellent sound quality.” Teng said. Successful OEMs also must have excellent supply-chain relationships with suppliers of the kind of touch screen used in the Apple iPhone, Teng added.

However, as tough as the competition is, the growth opportunity in mobile phones continues to make the market attractive for OEMs and others.

Shipments of music-enabled mobile phones will rise to 618.1 million units in 2007, up 39.9 percent from 441.7 million units in 2006, iSuppli predicts. By 2010, shipments of such phones will increase to 1 billion units, as presented in Figure 1. iSuppli defines music-enabled phones as those supporting music file formats, and not necessarily as those tailored specifically for music playback. Thus, this number is much larger than the total available market for music-oriented handsets like the Apple iPhone.

Apple’s goal is to capture 1 percent of these unit sales, which seems attainable, according to Rebello.

Selling the iPhone
Apple will offer the Apple iPhone through U.S. mobile-phone operator Cingular Wireless. Cingular is expected to sell the Apple iPhone at full price, without the kind of discount subsidy commonly seen in the mobile-phone business.

“Cingular stands to benefit enormously from this deal,” noted Dale Ford, vice president, market intelligence for iSuppli. “Subscribers may switch to Cingular to get the Apple iPhone, so the company is likely to gain a tremendous number of net adds in the second half of 2007.”

About iSuppli’s preliminary functional BoM estimate
iSuppli developed its preliminary functional BoM estimate based on an analysis of the capacity and features of the Apple iPhone, combined with information from materials from Apple, company sources and third-party publications. To further help determine the content of the iPhone, iSuppli leveraged the extensive knowledge of its Teardown Analysis service, which has dissected hundreds of pieces of electronic equipment, including music-enabled mobile phones, various models of the iPod and other Apple products.

iSuppli also employed data from its Mobile Handset Cost Model and Design Forecast Tool to determine the cost of Apple iPhone parts and manufacturing.

This estimate differs from iSuppli’s typical teardown analysis of electronic equipment cost, which in the past has been conducted on products including Sony Corp.’s PlayStation 3 and Apple’s iPod nano. iSuppli’s teardowns involve the actual physical dissection of electronic equipment in order to make first-hand observations of equipment content and design. With the Apple iPhone not expected to ship until mid 2007—and thus a teardown not possible until that time—iSuppli has made a preliminary estimate of costs based on available information.

iSuppli plans to conduct a detailed teardown analysis of the iPhone when the product is released. www.isuppli.com

Keywords : Apple, iPhone, music phones

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