iPhone’s expected profit margin to top 50 percent

Apple has always been known for its high profit margins, but can the company …

How much will the iPhone really cost Apple to make, and how much of a premium on top of that will consumers be paying for it? A preliminary analysis by iSuppli of Apple's recently-announced iPhone shows that, based off of the estimated cost of materials, Apple has priced the iPhone with over a 50 percent profit margin on both models.

iSuppli estimates that the hardware Bill of Materials (BoM) for the 4GB version of the iPhone will be $229.85, and with the addition of nonhardware costs (such as royalties to EDGE, an operating system, and various software), comes out to a total price of $245.83. With a projected retail price of $499 from Apple and Cingular, that puts the 4GB iPhone at a 50.7 percent profit margin. The 8GB model's profit margin is slightly higher—with an estimated hardware BoM of $264.85, total cost of $280.83, and retail price of $599, the 8GB iPhone will have roughly a 53.1 percent profit margin. iSuppli says that the company has a "high degree of confidence" in these figures, but that until an actual teardown of the iPhone takes place, the numbers are considered preliminary.

Can Apple survive in the cutthroat mobile phone world with such high margins? The company has succeeded in the past in charging similar margins on the iPod nano and the iMac (45 percent, according to iSuppli), so the iPhone's apparently hefty margins come as no surprise. However, the mobile phone market has so many players and so much competition (about 835 new models are expected to come out this year, with at least 14 models that have features similar to the iPhone) that Apple may have a hard time thriving in such a vastly different market.

iSuppli Director and principal analyst Jagdish Rebello said that "With a 50 percent gross margin, Apple is setting itself up for aggressive price declines going forward." The fierce competition is only exacerbated by service providers who are always pushing deals on handsets as a part of new contracts. Apple's multiyear tie-in with Cingular will limit Apple's reach in the market too, since there are still entire states that have yet to be blessed with Cingular coverage.

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