July 15, 2008

Tearing Down the iPhone 3G

Not only did Apple sell 1 million iPhone 3Gs in three days, but the company is making a healthy margin on each one sold. That's the conclusion of researchers at market research firm iSuppli, who took apart the new device to learn who made what inside, and how much Apple spent on the parts.

The total cost of materials used inside the latest iPhone is $174.33, a dollar and change higher than the preliminary estimate iSuppli made in June [BusinessWeek.com, 6/23/08], about two weeks before the phone was actually released. If the analysis is correct, Apple (AAPL) is spending about $53 less on materials than it did with the first iPhone, which iSuppli says costs $227 to make.

After accounting for a subsidy from AT&T (T), iSuppli reckons Apple makes a per-unit gross profit of 55%. That's a fatter margin than other phone manufacturers tend to make on their own handsets and reflects falling component costs and Apple's ability to negotiate a bargain from suppliers. Nokia (NOK), the world's largest handset maker, averages 36% hardware margins across all its products, while certain high-end models command hardware margins of 45%.

Apple sliced $200 from the price of its least expensive iPhone in part through a generous $300 hardware subsidy from AT&T, the exclusive U.S. carrier for the iPhone. "We think Apple aimed for a more cost-effective design for the 3G version of the iPhone compared to the 2G, in order to lower the retail price," says Andrew Rassweiler, an iSuppli analyst who managed the teardown. "The lower price will encourage adoption and allow Apple to capture more of the market now, while it still has a buzz and a perceived differentiation relative to its competitors."

What's Inside? Many of the companies supplying parts for the latest iPhone have remained the same, iSuppli found. German chipmaker Infineon (IFX) appears to have been a big winner, however, supplying parts that power some of the new features in the second version of the handset. Infineon supplied both the 3G wireless chipsets -- the chips that allow the phone to work with fast wireless data networks -- and the chips that enable navigation via global positioning system satellites. Previously, analysts speculated Broadcom (BRCM) unit Global Locate was the new GPS chip supplier. Broadcom did, however, supply the chip responsible for controlling the iPhone's iconic touchscreen.

At the heart of the wireless chipsets are two cores -- the central brain of a chip -- that come from ARM Holdings (ARMH.O), the Britain-based chip-design house. Chips with ARM-designed cores are widely found in mobile phones. Other suppliers include South Korean electronics giant Samsung, which made the chip that is central to running the iPhone's features, such as playing music and video and running software. Wolfson Microelectronics (WLF.L) provided an additional audio chip.

There are some costs not captured by a teardown analysis, including the cost of assembly, shipping, software, research and development, marketing and packaging. Apple's overall gross margin for the first six months of its fiscal year 2008 was 34%, up from 33% in the first half of fiscal 2007.

Chip by Chip Analysts at iSuppli also unearthed information that could provide clues as to what a next iteration of the iPhone may bring: more memory. The latest models come with memory capacities of 8 and 16 gigabytes. "Adding more memory will mean simply adding another chip," Rassweiler says. "And that chip will only cost Apple $16." In the particular iPhone taken apart by iSuppli, Toshiba (6502.T) supplied the 8GB of NAND-type flash memory and the chips that store the music and video on the phone, but Apple uses other suppliers for NAND, including Samsung.

Marvell Technology (MRVL) supplied the Wi-Fi chip, and CSR (CSR.L), the Britain-based company formerly known as Cambridge Silicon Radio, supplied the Bluetooth chip. Micron Technology (MU), an Idaho-based chip company, supplied the 2-megapixel CMOS sensor chip that is central to the iPhone's internal digital camera.

Other parts found inside the latest iPhone include an accelerometer, which tells when the phone is moving or if its orientation -- vertical or horizontal -- has changed. This part came from the European chipmaker STMicroelectronics (STM). TriQuint Semiconductor (TQNT) supplied three power amplifier chips, while Linear Technology (LLTC) supplied three other chips related to regulating power. Silicon Storage Technology (SSTI) and National Semiconductor (NSM) also supplied some parts.