High cost of new iPad components drives down profit margins

Posted:
in iPad edited January 2014


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
Another key component was the system's NAND flash memory, which was sourced from multiple parties including Samsung, Toshiba and Hynix." target="_blank">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 ]

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Comments

  • Reply 1 of 111
    mstonemstone Posts: 11,510member
    We'll make it up on volume
  • Reply 2 of 111
    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.
  • Reply 3 of 111
    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.
  • Reply 4 of 111
    tunetune Posts: 91member
  • Reply 5 of 111
    tallest skiltallest skil Posts: 42,841member
    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.
  • Reply 6 of 111
    Damn! That is pretty technical. But we see now what has to be taken into consideration when you make stuff.
  • Reply 7 of 111
    apple ][apple ][ Posts: 8,360member
    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.
  • Reply 8 of 111
    Quote:
    Originally Posted by Tune View Post






    man that's funny.
  • Reply 9 of 111
    solipsismxsolipsismx Posts: 19,566member
    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.
  • Reply 10 of 111
    postulantpostulant Posts: 1,270member
    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.
  • Reply 11 of 111
    red oakred oak Posts: 606member
    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
  • Reply 12 of 111
    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.



    No, but everything is an estimate.
  • Reply 13 of 111
    vadaniavadania Posts: 425member
    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)
  • Reply 14 of 111
    red oakred oak Posts: 606member
    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
  • Reply 15 of 111
    vadaniavadania Posts: 425member
    Quote:
    Originally Posted by Tune View Post






    I thought that was Talllests' gig.... good one though.
  • Reply 16 of 111
    bushman4bushman4 Posts: 789member
    Nobody knows the real prices that Apple is paying for components. Naturally with the volume Apple is ordering they must get a great discount.
  • Reply 17 of 111
    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.
  • Reply 18 of 111
    tallest skiltallest skil Posts: 42,841member
    Quote:
    Originally Posted by Vadania View Post


    I thought that was Talllests' gig....







    And the occasional Ballmer.
  • Reply 19 of 111
    vadaniavadania Posts: 425member
    Kudos! Definite Kudos for that!
  • Reply 20 of 111
    alienzedalienzed Posts: 393member
    I think Apple can afford to take the 'hit'...
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