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iPhone: Still money-making despite cost cut

Posted: 12 Jun 2008     Print Version  Bookmark and Share

Keywords:iPhone 3G  chip designs  handset  cellular market 

Analysts believe that Apple will still reap significant profits on its latest handset despite slashing the cost of its iPhone 3G.

Although details about the phone are still scarce, sources said they believe Infineon and Samsung have continued to snag the top chip designs in the handset. The raw cost of materials to build the iPhone 3G could be nearly half that of the original model, according to Portelligent Inc. that conducted a teardown analysis of the first handset. The first phone had a BOM estimated at Rs.6,803.58 ($170) at launch, but the iPhone 3G could have a BOM as low as Rs.4,002.11 ($100) when it debuts July 11, said David Carey, president of Portelligent.

The cost cut is also strategic for a company seeking to extend its toehold in the massive cellular market. Apple has sold 6 million iPhones to date mainly in the United States, a market where nearly a billion handsets ship each year worldwide.

"Gen2 iPhone pricing is aggressive enough that it made me think Apple's really taking the gloves off on this one," said Carey. "They are probably not as worried about iPhone hardware profits as they are about getting a piece of the action on service revenues and getting more Macs in homes and offices all around the globe," he added.

Indeed, Apple launched a new subscription service called MobileMe for the iPhone 3G.

What's inside?
The original iPhone used the 2.5G Edge network which delivers a maximum 256Kbps. The new iPhone 3G uses the HSDPA version of W-CDMA, a standard that supports a minimum of 1.5Mbps and up to 7.5Mbps on some chipsets, including one from Infineon.

"I do believe they are continuing to use an Infineon base band and RF transceiver and a Samsung applications processor," said Will Strauss, principal of market watcher Forward Concepts based on information from a source he would not name.

Strauss said he expects the new model also uses a GPS chip from Infineon based on technology it licensed from start-up Global Locate that was recently acquired by Broadcom Corp.

Carey said some observers speculated the iPhone 3G uses Infineon communications chips based on some of the code seen in the software developer's kit for the new version of the handset.

Last month, Samsung launched a handset using the same Infineon and Samsung base band, RF and processor chips. At the time, Samsung stated the Infineon chips cost 20 per cent less than similar chips from rival Qualcomm, Strauss said.

Strauss said he believes the entire BOM for the Samsung phone could be 20 per cent less than a similar design based on Qualcomm chips.

Cheaper in 3G
Carey cited several factors that make the iPhone 3G potentially much cheaper to build than the original iPhone.

"I'd suspect the collective volume, learning and engineering changes to the display would mean that the whole touchscreen assembly might be about half the Rs.2,401.26 ($60) or so we estimated for Gen1 a year ago," Carey said. "In addition, the 8GB of MLC NAND is today around Rs.800.42 ($20) compared to the Rs.2,001.05 ($50) that might have been the case in June 2007," he added. Carey estimated Apple may have shaved another Rs.1,000.53 ($25) off the BOM costs based on changes he observed in a teardown of the iPod Touch.

Netting out all the changes Apple may have had a gross profit based solely on cost of hardware for the original iPhone of Rs.9,164.83 ($229) and profits of just Rs.3,962.09 ($99) for the iPhone 3G. "It's always important to point out that hardware BOM costs do not capture many other important facets of product cost such as development costs, software costs, licences and marketing," he said.

Though profits may be lower, Apple is likely to sell many more units with the new iPhone, said Strauss. Some big markets such as Korea and Japan do not use the EDGE network of the original iPhone, but they do use HSDPA.

Apple announced agreements with a wide range of carriers across Asia, Europe and the United States that will sell the iPhone 3G, 22 of them starting on July 11. About another 50 carriers will provide the handset before the end of the year, said Apple CEO Steve Jobs who announced the handset at Apple's developer conference June 9.

"I think Apple is going to do very well with this phone," Strauss said. "The fact they have this updated air interface opens many new markets for them," he added.

Both Carey and Strauss noted carriers might be providing an undisclosed subsidy for the new iPhones. AT&T for example, sold a high-end Palm Treo phone for Rs.7,964.19 ($199) after a subsidy, Strauss said.

Carey said the new iPhone probably contains a larger battery based on claims of longer battery life. Apple could easily maintain the existing weight of the handset by using lighter materials in the casing such as plastics, which could also improve the cellular reception of the device.

- Rick Merritt
EE Times

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