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High cost of new iPad components drives down profit margins

post #1 of 112
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A teardown of the third-generation iPad reveals that the device costs at least $316 for Apple to build, more than the previous-generation iPad 2, which means lower margins for the company as the tablet's retail price point hasn't changed.

Market research firm IHS iSuppli on Friday released a report detailing the component cost associated with building the new iPad, and found that the prices of a few key components are costing Apple a substantial amount in profit per unit.

At the time of launch, the preliminary bill of materials (BOM) of a 32GB Wi-Fi + 4G LTE iPad is $364.35 which, when adding in the $10.75 in manufacturing costs, represents 50 percent of the tablet's $729 retail price. In comparison, when the iPad 2 was launched, the BOM of a 32GB Wi-Fi + 3G version was approximately $335.

Because Apple maintains a static pricing strategy when new versions of existing product lines are released, the company will see a drop in profit margin that varies depending on the model.

While the suppliers of the new iPad's internals hasn't changed much from last year's iPad 2, the material cost has spiked for some parts, such as the Retina Display which is the most expensive component in the tablet. Samsung was the largest supplier and provided two of the priciest parts with the $87 display and the A5X processor, which costs an estimated $23. The combined cost of these two parts alone gives the South Korean electronics giant a 30.2 percent share of the 32GB iPad's BOM.

It should be noted that Apple designed the A5X processor and thus holds the intellectual property associated with the component. Samsung is only manufacturing the part for the Cupertino, Calif., company and is thus not able to charge as much as an independent semiconductor supplier.


Breakdown of the new iPad's preliminary BOM compared to iPad 2. | Source: IHS iSuppli


Although it was not plainly demarcated, the battery cell package is thought to be a Samsung product as well, which brings the company's share of BOM to nearly 50 percent.

Qualcomm is furnishing the third-generation tablet's baseband chip, while Broadcom is supplying the device's Bluetooth and Wi-Fi radios. Additional wireless components are supplied by TriQuint Semiconductor. Also making a return are STMicroelectronics and Cirrus Logic, tapped to provide the iPad's gyroscope and audio codec processor, respectively.

The biggest money-maker in any iDevice is the NAND flash memory as consumer demand has allowed Apple to make immense profits through huge contracted deals. For the latest iPad, Apple sourced NAND from multiple parties including Samsung, Toshiba and Hynix.

"The NAND flash memory is one of the key profit-generating components for Apple in the new iPad line, as it has been in previous iPads and in the iPhone family,” said Senior Principal Analyst of Teardown Services Andrew Rassweiler. “Apple makes far and away more money in selling consumers NAND flash than NAND flash manufacturers make selling it to Apple. And the more flash in the iPad, the higher the profit margin there is for Apple.”


Exploded view of Apple's third-generation iPad. | Source: IHS iSuppli


Other parts were carry-overs from previous generation Apple products, like the rear-facing camera that was originally used in the iPhone 4 and the front-facing camera which comes from the iPad 2.

Component pricing will come down as iPad production ramps up, and demand for the iPad is such that Apple will most likely make up for the loss in comparative profit margin.

[ View article on AppleInsider ]
post #2 of 112
We'll make it up on volume

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post #3 of 112
This is actually o-l-d news. Apple will lose some profit points overall, but with the iPad2 in the mix it will be minimal.
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post #4 of 112
Quote:
Originally Posted by Macky the Macky View Post

This is actually o-l-d news. Apple will lose some profit points overall, but with the iPad2 in the mix it will be minimal.

Isn't the iPad 2 a bigger lost now, since it still costs the same to produce but it's selling at $100 less.
post #5 of 112
post #6 of 112
Quote:
Originally Posted by nkingman View Post

Isn't the iPad 2 a bigger lost now, since it still costs the same to produce but it's selling at $100 less.

It would have been had this been its launch day, but component costs for the iPad 2 have come down appreciably, so Apple's probably able to make the same profit on it now (at its current price) as they did at its launch.

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post #7 of 112
Damn! That is pretty technical. But we see now what has to be taken into consideration when you make stuff.
post #8 of 112
This just proves how totally clueless certain people are. You know exactly who I'm talking about. I'm talking about the people who constantly whine and moan about there only being incremental updates. These people with their brilliant minds wouldn't even be able to run a lemonade stand, let alone running a tech company or deciding what sort of features are relevant for inclusion on a tablet.

For the same $499 price as the previous iPad, the new iPad features a display which is significantly more expensive than the previous display. Being on the cutting edge aint cheap homie. It's the best display ever to exist on any tablet. The NAND cost is the same, but the DRAM cost is almost double that of the previous version. The processor cost has also been greatly increased and the new camera costs three times as much as the old one. The higher capacity battery also costs a great deal more. Is it any coincidence that Apple is the first company to be able to release such a display in a $500 device?

The profit margin might be slightly less for Apple, but they'll still be making a pretty handsome profit which all other companies would kill for. While most other tablets are pieces of junk that should never have been made in the first place, the iPad is a technological marvel, a timeless classic that many have attempted to duplicate, but zero have succeeded in.
post #9 of 112
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Originally Posted by Tune View Post


man that's funny.
post #10 of 112
This is certainly far from certain but this is what I suspected would be the result from this iPad. It's just too much of a jump at once, IMO.

PS: I checked with the Apple Store about the yellowish display. Apparently that is how these displays are compared to the blueish tint of the iPad 2... but I prefer a lot of things that I don't get. Çest la vie.


Quote:
Originally Posted by nkingman View Post

Isn't the iPad 2 a bigger lost now, since it still costs the same to produce but it's selling at $100 less.

Possibly, but I think those iPad 2 estimates were taken from a year ago. Typically the cost comes down significantly, though perhaps not in first version models which could explain why they didn't keep the original iPhones and iPads around.

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post #11 of 112
Is iSuppli privy to what Apple pays for components? With Apple's massive economy of scale, there's no telling what they are paying for components.
post #12 of 112
The lowest gross margin assuming the numbers are correct is 37% (for the new iPad 16 GB WiFi). Still very healthy. And as stated already, these costs will rapidly decrease

And of course, all the content purchases are not included... Which is Amazon's sole attempt of making any profit on the Fire. I have a hard time believing the average content sales on the Fire are higher than the average iPad

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post #13 of 112
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Originally Posted by Postulant View Post

Is iSuppli privy to what Apple pays for components? With Apple's massive economy of scale, there's no telling what they are paying for components.

No, but everything is an estimate.
post #14 of 112
So does this mean the "Apple tax" my guy friends are telling me I'm paying are false? Cool! I'm printing this article out. I'll put it under my 'smart' cover. :o)
post #15 of 112
Quote:
Originally Posted by Apple ][ View Post

This just proves how totally clueless certain people are. You know exactly who I'm talking about. I'm talking about the people who constantly whine and moan about there only being incremental updates. These people with their brilliant minds wouldn't even be able to run a lemonade stand, let alone running a tech company or deciding what sort of features are relevant for inclusion on a tablet.

For the same $499 price as the previous iPad, the new iPad features a display which is significantly more expensive than the previous display. Being on the cutting edge aint cheap homie. It's the best display ever to exist on any tablet. The NAND cost is the same, but the DRAM cost is almost double that of the previous version. The processor cost has also been greatly increased and the new camera costs three times as much as the old one. The higher capacity battery also costs a great deal more. Is it any coincidence that Apple is the first company to be able to release such a display in a $500 device?

The profit margin might be slightly less for Apple, but they'll still be making a pretty handsome profit which all other companies would kill for. While most other tablets are pieces of junk that should never have been made in the first place, the iPad is a technological marvel, a timeless classic that many have attempted to duplicate, but zero have succeeded in.

Your absolutely right that a lot of the pundits think this is all so easy. Doing this at this scale and these price points is astonishing

My hope is that the new retina display sets a new standard that consumers will expect. And in turn, sets a new hurdle that many of Apple's competitors cannot clear. This could really widen Apple's lead in tablets over the next 1-3 years

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post #16 of 112
Quote:
Originally Posted by Tune View Post


I thought that was Talllests' gig.... good one though.
post #17 of 112
Nobody knows the real prices that Apple is paying for components. Naturally with the volume Apple is ordering they must get a great discount.
post #18 of 112
Quote:
Originally Posted by nkingman View Post

Isn't the iPad 2 a bigger lost now, since it still costs the same to produce but it's selling at $100 less.

Yes and no. I imagine the iPad 2 now costs less to make than a year ago. Parts are not as cutting edge, and they've built some 50 million of them.

This article from 2011 states a bill of materials + manufacturing is $336 for a 32 GB, 3G iPad 2. They sold it for $629, so they profited some $293.

http://www.isuppli.com/Teardowns/News/Pages/iPad-2-Carries-Bill-of-Materials-of-$326-60-IHS-iSuppli-Teardown-Analysis-Shows.aspx

A 16 GB, 3G iPad 2 now costs $271, and they sell it now for $529. They profit about $258. I'm not comparing the exact same SKU, but that's the best comparison I could offer... In any case it doesn't look like their suffering much. It's probably worth it to Apple to hit that $399 low-end.
post #19 of 112
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Originally Posted by Vadania View Post

I thought that was Talllests' gig....



And the occasional Ballmer.

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post #20 of 112
Kudos! Definite Kudos for that!
post #21 of 112
I think Apple can afford to take the 'hit'...
post #22 of 112
Quote:
Originally Posted by Postulant View Post

Is iSuppli privy to what Apple pays for components? With Apple's massive economy of scale, there's no telling what they are paying for components.

I was thinking the same thing. How do they know what Apple is paying their suppliers when Apple is buying huge quantities and paying cash upfront?

That being said, I'd have to agree that the components should definitely cost at least a little more than what they did for the iPad 2 last year.
post #23 of 112
Quote:
Originally Posted by Tune View Post

...

or maybe in Dell / HP for that matter.
post #24 of 112
Quote:
Originally Posted by alexkhan2000 View Post

I was thinking the same thing. How do they know what Apple is paying their suppliers when Apple is buying huge quantities and paying cash upfront?

That being said, I'd have to agree that the components should definitely cost at least a little more than what they did for the iPad 2 last year.

I may agree on the display, but...

So, all of my schooling about "bleeding edge technology" and you think they're paying the same as they did LAST year?

I don't have time to post the references like Sol, and I wish I could match Tallest's pics...

Can you show me a link please of where the costs are "at least a little more", besides the new display...
post #25 of 112
Apple is going to sell a lot more iPads with 32GB of memory and a lot fewer with 16GB. I bought an iPad 2 a few days ago and opted for the additional memory because apparently application sizes are going to increase as a result of having to upgrade graphics to accommodate the new high resolution display. Without much effort I ended up using up a lot of that memory.

So whatever Apple loses in having to pay more for the Retina display, it makes up in selling a larger percentage of the versions with additional memory. Next year I think we'll see the 16GB models discontinued and a 128GB model added to the high-end version. That, a weight reduction, and some additional processing speed will be what we see in the next upgrade.
post #26 of 112
Quote:
Originally Posted by AppleInsider View Post

...

Because Apple maintains a static pricing strategy when new versions of existing product lines are released, the company will see a drop in profit margin that varies depending on the model.
...

Oh, noes! What is Apple going to do! The profit margin is slipping!

/s
post #27 of 112
Gee. Apple's competitors has always seem to be about market share at the expense of any actual profits. I suppose that is the brilliant strategy Apple should be using.
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post #28 of 112
Quote:
Originally Posted by Red Oak View Post

My hope is that the new retina display sets a new standard that consumers will expect. And in turn, sets a new hurdle that many of Apple's competitors cannot clear. This could really widen Apple's lead in tablets over the next 1-3 years

While I agree with you that I hope the retina display set a new standard for consumers, I hope that Apple's competitors do clear that hurdle. That's when Apple will have to make something even better like holographic iPad screens!
post #29 of 112
Prediction: Average margin will be roughly unchanged because a higher percentage of 4G & 32+ GB models will be sold than were for the iPad 2.

Statement: iSuppli and other cost estimators have significant errors in their estimates.
post #30 of 112
I had to read almost to the end of this article's fifth paragraph before the word "estimate" finally made its long-overdue appearance.

And once again we have iSuppli estimating costs, including for proprietary parts whose prices aren't knowable, to 5 significant figures.

So…pretty much rubbish then.
post #31 of 112
Quote:
Originally Posted by maccherry View Post

Damn! That is pretty technical. But we see now what has to be taken into consideration when you make stuff.

Really? That information is so oversimplified as to be useless.

First, I doubt if any of the components are within 15% of what Apple actually pays.

Second, it doesn't include any of the non-component manufacturing costs (shipping, assembly, quality control, rework, overheads, packaging, testing, etc). It also doesn't include any of the non-manufacturing costs (tech support, development, design, marketing, sales, distributor discounts, etc).

So if you consider that 'analysis' to be 'pretty technical', I'd suggest that you stay away from any careers in manufacturing or management.
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post #32 of 112
Quote:
Originally Posted by Macky the Macky View Post

This is actually o-l-d news. Apple will lose some profit points overall, but with the iPad2 in the mix it will be minimal.

Wall Street, however, will have a cow over this.
post #33 of 112
Quote:
Originally Posted by BUSHMAN4 View Post

Nobody knows the real prices that Apple is paying for components. Naturally with the volume Apple is ordering they must get a great discount.

That was my first thought. This is pretty much speculation based on guess work. I bet Tim got some pretty good deals.

The good news is that with out the sort of volume Apple can buy at, no one else can make a tablet that comes close. The price of these components is even worse news for the Android clones and even for Microsoft's Win8 tablet.

As I see it, by the time the Win8 tablet sees the light of day, supposedly Fall of 2012 we will already be reading the rumors of the upcoming iPad 4 due out, no doubt, March 2013. IMHO Microsoft are between a rock and a hard place in trying to get into this market.
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post #34 of 112
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Originally Posted by lkrupp View Post

Wall Street, however, will have a cow over this.

These types of stories are probably manufactured by stock manipulators shorting AAPL.
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post #35 of 112
Quote:
Originally Posted by mstone View Post

We'll make it up on volume

Many here will argue against that business model.
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post #36 of 112
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Originally Posted by AppleInsider View Post


Although it was not plainly demarcated, the battery cell package is thought to be a Samsung product as well, which brings the company's share of BOM to nearly 50 percent.

And yet Samsung tablets are 1/4 of the experience of using an iPad. \
post #37 of 112
Quote:
Originally Posted by Dunks View Post

And yet Samsung tablets are 1/4 of the experience of using an iPad. \

Well in defense of Samsung its not the HW at fault but the OS and the lack of useful tablet specific apps.
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post #38 of 112
Quote:
Originally Posted by dasanman69 View Post

Well in defense of Samsung its not the HW at fault but the OS and the lack of useful tablet specific apps.

In defense of Samsung??

There is no "defense of Samsung" possible, or any defense of anyone else who had every opportunity to change the game in 2007, and then again in 2010, but instead ended up trying to ape Apple.

Where was Samsung's big January 2010 tablet unveiling? You know, the one where it would be the Samsung CEO sitting comfortably in that easy-chair giving the keynote and astounding the tech world. Or Samsung's opportunity in 2007 to say via their CEO in a landmark keynote "It's an iPod (well, not for Sammy), a phone, and an internet communicator . . . an iPod, a phone, and internet communicator . . ."

What happened? All these game-changers, after which competing devices all began to look like them, (with some people not even being able to tell them apart: http://www.macrumors.com/2011/10/14/...axy-tab-apart/) have Apple logos on the back.
post #39 of 112
Quote:
Originally Posted by mstone View Post

We'll make it up on volume

Not totally sure about that (although such a statement can never be wrong either). Apple is not Amazon. Furthermore, these 3rd party estimates have been known to be way off. Does anyone remember a notable drop in GM when iPhone 4 with Retina Display (not to mention superior camera, faster processor, more RAM, etc.) came out?
post #40 of 112
Quote:
A teardown of the third-generation iPad reveals that the device costs at least $316 for Apple to build, more than the previous-generation iPad 2, which means lower margins for the company as the tablet's retail price point hasn't changed.

It won't placate the "Apple is greedy" trolls.

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