BusinessWeek: ‘Taking the iPhone Apart’

Friday, 27 July 2007

I wrote yesterday that I couldn’t find a single article on iPhone component costs citing a source other than iSuppli; iLounge contributing editor Charles Starrett emailed with a pointer to Arik Hesseldahl’s article for BusinessWeek earlier this month, citing Austin-based Portelligent for an iPhone tear-down. Portelligent’s estimated component cost for a $599 iPhone: $220.

Hesseldahl writes:

[Portelligent’s] estimate doesn’t include costs of final assembly, but it does give some insight into the gross margin on the device. Historically Apple’s gross margins have run ball park of 50 percent plus or minus a few points.

That’s just not true, unless by “historically”, he means “for a few years in the Sculley era during the late 1980s”. Apple’s gross margins are publicly available in their quarterly financial statements. Here are their gross margins for the last four years:

2007 Q3	37%
2007 Q2	35
2007 Q1	31
2006 Q4	29
2006 Q3	30
2006 Q2	30
2006 Q1	27
2005 Q4	28
2005 Q3	30
2005 Q2	30
2005 Q1	29
2004 Q4	27
2004 Q3	28
2004 Q2	28
2004 Q1	27

There is an interesting uptick in the last two quarters, but even with those two higher-than-usual quarters, the average for these 15 quarters comes out to 30 percent. That’s a lot of “minus” for “50 percent plus or minus a few points”.

Update: Here’s a table with Apple’s gross margins from 1992 until now. The average: 27 percent.

As with iSuppli, I’m not disputing Portelligent’s component cost estimates — nor am I disputing that these estimates are interesting and potentially useful. My dispute is that the sum of the component costs is significantly less than the cost to produce a product. Subtracting the component costs from the retail price does not give you the gross margin. Do Apple products assemble themselves in some sort of Willy Wonka-like magic factory?

Given Apple’s actual historical gross margin of around 30 percent, spending roughly half the retail price on components sounds reasonable to me: half the price for the components; 20 percent to assemble, package, and ship them; 30 percent profit.

Even so, it’s also the case that Apple products, and the iPhone in particular, are not manufactured wholly from off-the-shelf commodity components. Hesseldahl writes:

The most expensive component on the phone, [Portelligent CEO David] Carey says, is the touch screen, for which Apple tapped a little-known German concern called Balda. The estimated cost of $60 per unit is mostly an educated guess. “This screen is like nothing I’ve ever seen before,” says Carey.

Even the fact that Balda made it, is in fact, an educated guess. Carey told BusinessWeek that his analysis found no apparent markings that identified the screen’s origin. But Balda’s role in the screen has been something of an open secret in the wireless industry since the iPhone was first announced by Apple CEO Steve Jobs in January. Even so, Apple apparently took steps to make the source of the screen hard to identity.

So, regardless how reasonable and informed these tear-downs are, they need to be treated by the press as estimates, not facts.