Understanding how costs are determined in a product like FC to the manufacturing of an I-phone5 and a MOTO G ... hmmm ...
How much does an iPhone cost to make?
How much do you want to pay for your next smartphone or tablet? If you’re looking to cut costs, you don’t need to skimp on the specification: there’s so much more to pricing devices than what’s in the box. Here's where we tell you how much an iPhone costs to make.
Compare the Apple iPhone 5s to the Motorola Moto G. Buying Apple’s handset SIM-free in the US – we’ll stick with dollars for now, for easier comparison with analysts’ reports – costs $649 for a 16GB model and a whopping $849 for the 64GB version.
How much does an iPhone cost to make
Not long after the arrival of the iPhone 5s, formerly Google-owned Motorola released the Moto G, selling it for $179. How can two similar devices be priced so differently? Is the difference really worth $450?
Of course, the specification matters: component breakdowns show that the iPhone’s parts are worth almost double that of the Moto G’s. Plus, there’s design and licensing to consider. But none of those bridge the gulf in pricing between such devices.
Consumers need to consider how appealing the brand name is, but also how well specified the device is and how much the marketing budget tops out at. Experts agree, as Gartner analyst Jon Erensen says, that the most important consideration is “what this company’s goal [is] and how they plan to make the money”.
Here, we explain what drives prices up – and down.
How much does an iPhone cost to make: Component costs
Analyst firm IHS iSuppli tots up the price of components into a bill of materials (BoM), revealing how much each manufacturer spends on hardware and assembly.
Battery aside, every component of the Moto G is less expensive than those in the iPhone 5s. The Moto G’s 8GB NAND flash and 1GB LPDDR2 DRAM is $6 cheaper than Apple’s 16GB and 1GB LPDDR2 combination; its respectable 1,280 x 720 display is $22 cheaper than the Retina version; and the interface and sensors are almost half the price, partly due to the iPhone’s fingerprint sensor. Even the contents of the box differ – what comes with the Moto G costs Motorola $3.50, while Apple’s inclusions total $7.
All in, according to iSuppli’s preliminary estimates, the Moto G costs $109.75 for components and assembly, while the 16GB iPhone 5s racks up $198.70. However, the Moto G’s retail price is only $73 more than its physical costs, while the iPhone’s final price adds an eye-watering $450.
Moto vs iPhone
“The Moto G has very thin margins – thinner than we’d expect,” says iSuppli analyst Wayne Lam. “Think about it as a budget: everybody has a budget for materials, and then they add on the development [costs] and price it accordingly, with a margin built in. That’s the profitability. For Motorola, since the margin has shrunk, they’re aiming for this product to break-even.”
It’s “a little more tricky to do the design” in smaller devices such as smartphones and tablets, admits Erensen, and you may have to pay for more expensive components to fit smaller form factors, but otherwise the main difference is the radio.
Most tablets don’t have 3G or 4G connectivity, and adding that bumps up the price. For the Nexus 7, mobile connectivity is available only on the more expensive 32GB version, and bumps up the price from $269 to $349. On the Apple iPad Air, iSuppli’s BoM breakdown shows the radio costs at $32, but that option adds $130 to the retail price.
Cost
In reality, connectivity costs aren’t only about the hardware. “You have to work with standards bodies in the different countries to make sure that the device is certified, and work with service providers, and go through all the testing. When you add that cellular piece, there are lots of extra steps that can add up, in addition to the hardware costs,” says Erensen. “Depending on the type, adding cellular can cost anywhere from $15-20, all the way up to $30 if you’re using the latest LTE standards.”
How much does an iPhone cost to make: Moore’s law
Thanks to Moore’s law, component costs fall over time – but that doesn’t mean retail prices will.
“There’s obviously cost erosion over time, most noticeably with the big-ticket items such as displays and memory – specifically flash memory and system memory,” says Lam. “For example, 16GB NAND flash storage that cost $15 two years ago costs only a fraction of that now. These types of erosion are predictable. Memory and display costs will go down over time.
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“These types of manufacturing follow Moore’s law – the equipment gets better, the process gets better, the yield improves, and the costs go down,” he says. “But if you look at how those components contribute to the overall BoM, the proportion of the cost remains the same.
“Handset OEMs typically build around an unspoken BoM budget. If they’re selling a $600 phone, they know that they’re going to throw a lot of resources and cost into the display, memory and processors. That bucket of costs usually remains steady, since [OEMs] can leverage cost improvements over time. A screen that was $40 last year will stay around $40 the following year, because they’ve improved the quality or the size. That’s typically how the BoM cost evolves.”
Indeed, despite Moore’s law, tech costs don’t necessarily fall with each new version, since manufacturers add better-quality parts or new features. The iPhone’s BoM has been steadily increasing: the iPhone 3GS was $179, the iPhone 4S $188, and the iPhone 5s is $199, according to IHS iSuppli data. For example, the price of the processor has increased from $14.46 on the iPhone 3GS to $19 on the iPhone 5s.
Improving specifications can also lead to retail prices going up: the 2013 version of the Nexus 7 was $30 more than its predecessor. “With the Nexus, the new one was slightly more expensive because some of the features, plus memory and connectivity, were improved,” says IDC analyst Chrystelle Labesque. Since the margins on the Nexus are so tight, Google had to increase the price.
How much does an iPhone cost to make: Doubling up design
Other costs for a smartphone or tablet are more difficult to pin down: for example, marketing, design, R&D, engineering and licensing. But how those costs are included on a handset’s balance sheet is down to the specific manufacturer. The true cost of devices isn’t in their specifications or hardware, but rather in how manufacturers run their businesses. Here's where we tell you how much an iPhone costs to make.
Nicole Kobie
18 Apr 2014
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How much does an iPhone cost to make?
Indeed, the price of certain elements can be offset by a previous device, helping to reduce costs.
For example, handset makers can apply the engineering nous garnered by working on one product to the manufacturing process of a similar, later model – which Lam calls “trickle-down design”.
"[Motorola] could say it incurred most of its non-recurring engineering (NRE) costs with the Moto X, so for the Moto G, NRE is virtually zero,” he says. “That all boils down to accounting. They’ve gotten a lot of leverage of the design from the Moto X, a lot of that design has just trickled down.”
NRE costs are a key reason why tablets can be made more cheaply than smartphones. “The components are very similar,” notes Erensen. “Companies take smartphone designs and leverage them to make tablets – and even portable media players such as Apple’s iPod touch – using the same building blocks.”
tablet wars
How much does an iPhone cost to make: How to make money
While the specification makes up a large proportion of the cost of a device, it isn’t the key element that goes into deciding the retail price: the company’s business model is. When looking at the price, Labesque notes: “What is the strategy? How does the manufacturer position itself on the market, and how does it aim to make money?”
This is a key reason why Apple products cost more: the company is aiming to make money on hardware. Samsung has the same strategy, but on tighter margins, while Motorola, Amazon and Google are happy to break even.
“Vendors adopt different strategies when positioning their products,” says Labesque. “It’s clear that when Google is pushing the Nexus, it isn’t earning money by selling the device, but by selling the content later. There’s an economic model behind that, which means the different players are earning their money in a different way.”
According to Gartner’s Erensen, the business model is the “big piece” of the pricing puzzle. “Apple has very high margins on the iPhone, and that’s where it drives a lot of its profit – it needs those prices to stay high,” he notes. “Apple can justify it because of demand, the brand name and the quality of the product. Look at Google and its Nexus devices – it’s trying to showcase Android as a platform. It’s trying to get into as many hands as possible, because the company doesn’t makes its money through hardware, but through advertising, search and the services it ends up providing.
“Amazon’s another good example: it’s almost willing to sell these devices at cost, because it knows that once it has them in consumers’ hands, they’re going to use them to purchase content – and even physical goods – from Amazon.”
For example, Amazon’s Kindle Fire HD retails at $199, but its BoM was $174, leaving the company little in the way of margin – especially after the marketing and design spend is taken into consideration.
How much does an iPhone cost to make: Bit of both
Of course, Apple also sells content via its App Store, and because of its head start in the market, and its premium brand, it can earn profit from both hardware and content sales. As iSuppli’s Lam notes: “Why is the Apple iPad so much more expensive than the other guy? Because Apple isn’t operating in the same playing field.” However, content sales don’t provide as much profit as you’d think, claims Lam. “Apple is making money from hardware; that’s shown in its balance sheets if you look through its earnings. It isn’t a case that they’re pulling in from all angles.”
Strictly speaking, the company is pulling in from both angles, but hardware adds much more to its coffers than software or content; in its latest quarterly results, the iPhone contributed $19.5 billion and the iPad $6.2 billion, while the App Store and software sales brought in $4.3 billion – significant, but far from the most important part of Apple’s bottom line.
Samsung also focuses mostly on hardware sales, notes IDC’s Labesque. “What Samsung has is a very large portfolio [that ranges] from the more price-sensitive to the high-end.
For Samsung, its strategy is more in the volume [of sales],” she says. However, Samsung is shifting to Google’s model, skinning Android and pushing its own services by including them on its handsets in place of Google’s.
Upgrading your phone
How much does an iPhone cost to make: Disruptive change
The biggest changes have come from Google and Amazon, which have both pushed prices well below what Apple and Samsung are selling at.
“People don’t quite understand [that] it’s one of those markets where you have to identify the motivation of the provider: where are they making their money?” Erensen says. “In the case of Amazon, it’s making its money out of the lifetime of the customer. It’s trying to capture them and lock them into that ecosystem. Similarly, Google is offering as affordable a device as it can, so it can keep users within its ecosystem, and provide a platform for its key businesses, which are internet search and advertising.”
Lam agrees, saying that Amazon and Google are playing a longer game. “They’re interested in making money from the lifetime value of the subscriber or customer,” says iSuppli’s Lam. “Amazon has calculated that each Kindle owner will be worth so much additional value through shopping or content – so that’s its business model.”
As far as margins are concerned, Amazon isn’t even the most extreme case: game consoles are sold at a loss, in the hope that customers will shell out enough on games to make up for it. “The new PS4 and Xbox One are still basically wrapping money around each box, since it takes more for them to build than to sell,” says Lam. “That business model goes into the red because the console manufacturers know they can recoup the costs through game purchases.”
Erensen says consumers will realise that they will be getting more for their money if they buy from companies where making a profit on the hardware isn’t the primary motivation.
“You get the most interesting kind of disruptions when you see different business models come into play; all of a sudden, companies aren’t playing by the same rules,” he says. “Some of these companies are looking to do different things, and they’re not making all their money upfront on the hardware.”
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