http://www.tgdaily.com/2005/10/21/isuppli-dissects-ipod/print.html
While only Apple knows the exact cost to build the video iPod, a market research firm has dissected the device and came up with estimated bill of materials of $151. With a retail price of $299 for the 30 GByte version and $399 for the 60 GByte model, it looks like Apple is raking in a huge profit, but there is much than meets the eye.
iSuppli did a "teardown" and put a price tag on every component. Chris Crotty, Senior Analyst for Consumer Electronics with iSuppli, said that the $151 is the total Bill-of-Materials (BOM) cost or simply just the hardware costs. The BOM takes into account an estimated discount rate for each component and typically large companies like Apple can negotiate a substantial discount because of their buying power. Crotty points to their recent teardown of the iPod Nano (http://www.tgdaily.com/2005/09/22/material_cost_of_ipod_nano_estimated_around_/) where they estimated Apple received a 30 to 40 percent discount on Samsung's flash memory.
Andrew Rassweiler, Manager and Senior Analyst of iSuppli's Teardown Service, has managed well over a hundred teardowns of electronic gear. He told us that, unlike other gadgets, every new product from Apple seems to have a completely different sign approach and they are usually surprised when they open up the devices. "We thought the new iPod would be a Nano with hard-drive, but we were wrong. There are some common chips and the click wheel is the same, but everything else is different," said Rassweiler.
According to iSuppli, some of the materials in the iPod are high-end and expensive. Apple probably spent more than the average company in trying to procure these parts, which are necessary not just for the "Apple look", but for function as well. Rassweiler told us the iPod uses small tantalum capacitors that you would only see in high-end electronics and implantable medical devices. Also the metal backing of the iPod is necessary for something so small and thin, adding "You are pushing the structural integrity of plastic. The metal backing provides a rigid platform and is more than just pretty." Rassweiler adds that the BoM doesn't take into account money spent on design, which could be substantial. Apple tends to cram their devices into ever smaller form-factors, which has made iSuppli's teardowns mean certain death for the device. "Most [other] manufacturers aren't going to any great length to grind every single cubic-millimeter out. With Apple, there is rarely any airspace and the device is packed to the gills. So when we do our teardowns, we realize that it is usually a one way trip.
While the new iPod with video has taken a beating from some members of the press, Crotty warns people not to underestimate Apple. Other companies have had portable video players on the market for a few years, but Crotty says, "You can argue about whether the video quality can compare with other players, but Apple tries to compete with a complete solution of player plus content." In addition, Crotty relates a personal experience he has with how content locks you into the iPod. "I can't really move to another player, because I would lose $300 worth of songs. If I buy a Dell or Creative, I face losing the content or have to resort to illegal means of transferring," says Crotty.
Crotty calls Apple's strategy of hardware and content sales the "reverse razor blade" strategy. "With razors, you give away the razor and make money from selling razor-blades. With Apple, they are giving away the blades to sell the razor," says Crotty. Apple is making a big gamble and is willing to risk thin margins on the content, to make a decent amount on the hardware. In addition, Crotty says that brisk iPod sales have helped Apple push computer sales.
The $151 BoM does not include manufacturing, packaging and literature. In addition, Rassweiler told us that assembly which generally costs from 6 percent to 10 percent of the retail price was not factored into the BoM. While many have suggested that Apple is making a killing off the iPod, Rassweiler says he isn't sure how much margin is left, adding, "The $151 doesn't mean the other 50 percent is profit.
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