Benjamin Kuo’s Blog

There’s been some interesting coverage and bounce in Apple’s stock over the past few days over a report by El Segundo-based iSuppli on the bill of materials (BOM) cost of the iPhone.  iSuppli released a report which found that the cost of an iPhone was approximately $265.83 to manufacture, versus a $600 retail price for an 8GB model. There was widespread coverage looking at the numbers and talking about how profitable this is; however, I think there’s widespread confusion that hardware margin = profits, which is not the case. It’s worth looking at this analysis comparing the costs to other high end mobile phones, published in EETimes. In that analysis, they found that other smart phones at the same price point from other manufacturers come in around $130-$180 in BOM costs–meaning the iPhone is much more expensive than other competitors in the market, even without adding marketing and other overhead expenses.

As someone who has torn apart lots of hardware and determined pricing for hardware products (in previous lives working on hardware products, and from several years as a product manager at a hardware company), it’s surprising to me how the more significant costs of a product — for Apple, this would be marketing, in addition to software and hardware development costs–are ignored.  Your BOM cost does not have a one to one relationship to your profitability. Yes, BOM cost is important (in some industries this still makes the difference between the leaders and laggards), but it’s just one of the components.

Apple will probably pull in lots of dollars due to the hype, interest, and marketing of the iPhone, but the cost of the product is really more than bill of materials. An obvious example of an industry where this is absolutely true is the soft drink industry–the bill of materials for one soda versus another is probably fairly constant, the biggest expenses (and determination of profitability) of a soft drink firm is marketing and sales expenses per unit moved of the product. To a slightly lesser degree, this is the case for the personal computer industry, where branding, distribution, and marketing effectiveness is now almost more important than how much it costs you to manufacture a particular PC.

This entry was posted on Thursday, July 5th, 2007 at 11:50 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.