Tech Untangled

Some of the popular blogs (see Crunch and TechStartups3.0) and those who link to them are going crazy over the miscalculated profits reaped by Apple’s iPhone. I hope the financial markets don’t use the same logic when buying/selling Apple Stock! Otherwise, someone’s investment could be in jeopardy. The source of this is a product teardown by Portelligent. According to BusinessWeek:

Portelligent estimates that the cost of the materials used in the iPhone add up to about $200 for the 4-gigabyte version, which sells for $499 and about $220 for the 8-gigabyte version, which sells for $599.

From this number, it would be easy but foolish to presume that profit per device is $299 (4GB version) and $379 (8GB version), and at 700,000 units sold in 3 days, that would be a massive haul for iPhone.

The Portelligent report focuses only on the bill of materials (that is the individual components that make up the iPhone), and doesn’t look at any of the other costs associated with launching a product. The picture is far from clear. To get the full picture one would have to consider the following as well:

1. R&D costs - this would be years and years of Research & Development costs
2. Software development costs (let’s keep this separate from R&D)
3. Cost of integration all components into a single device.
4. User Interface and Customer Research costs - I doubt Apple would’ve launched this without seeking user feedback on some form or the other.
5. Testing Costs - the additional cost of testing on the AT&T network. Let’s say that Apple pays at least a part of this.
6. Packaging costs
7. Distribution costs
8. Marketing costs and other overhead.

There are other costs to consider, but I don’t want to bore you with all the details. The other thing to consider is that Apple may receive volume-discounts from the Bill of Materials.

To fully understand the profit picture one has to consider additional revenue sources too. There are rumors that Apple gets a revenue share of monthly subscriptions from AT&T.

It is indeed a nice picture for Apple - I’m confident the iPhone will be huge profitable. We don’t know how much it is just yet!