Analyst: IPhone 3G may be Apple's most profitable product

Apple's price includes a roughly 50 percent gross margin over its parts cost

Apple's new iPhone 3G could turn out to be the company's most profitable product, an analyst said.

While much has been made of the iPhone 3G's US$199 price -- and attention has focused on how mobile carriers will subsidize purchases to bring the consumer's cost down -- Apple may be making a lot more per phone than anyone suspects, said Carl Howe, director of the Yankee Group's enterprise software research.

"According to Porteligent and as reported by EETimes, the parts cost of the 3G iPhone may be as low as $100," said Howe in a post to his blog Thursday.

"That means that even at US$199, Apple's price includes a roughly 50 percent gross margin over its parts cost, which is in the ballpark of the gross margins on traditional iPods."

Howe cited component cost speculation by Porteligent, a Canadian company that specializes in "teardown" analysis to break down a consumer electronics device to its parts and then estimate the total cost-to-build. Porteligent's president, David Carey, put the iPhone 3G's hardware costs at US$100, based on current prices of the parts most likely to be used in the new model.

Analysts, however, have generally assumed that AT&T, and the other carriers that will start selling the iPhone 3G this year, will be subsidizing the new lower price by paying Apple the difference between what it sells the smart phone for and Apple's wholesale price. That belief has been fueled by the elimination of the subscriber revenue sharing that Apple demanded -- and got -- last year when it debuted the first-generation iPhone.

"If AT&T is adding in a us$200 subsidy, then the iPhone 3G is anything but a phone requiring a carrier subsidy," continued Howe. "In fact, if these numbers are true and the carriers are subsidizing the phone, the iPhone 3G could end up being the most profitable product Apple makes."

Even if Porteligent's numbers are off to some degree, added Howe, it's likely that they're "closer to right than to wrong" and could, at the least, give Apple more pricing flexibility than most have given the company credit for. The flexibility might also come in handy to deal with currency fluctuations as Apple rolls out the iPhone 3G to some 70 countries before the end of 2008.

Reportedly, Apple will hold the US$199 U.S. price line globally. Few carriers besides AT&T have, however, have as yet announced prices for the new iPhone; one that has, U.K.-based O2, will sell the iPhone 3G for about US$193 at current exchange rates for customers who sign up with one of the two lowest-priced service plans. Customers who opt for either of the two higher-priced 18-month plans receive the iPhone 3G free of charge.

The bottom line, said Howe, is that even at US$199, subsidy or not, Apple's not selling the iPhone at a loss to gain share. That just isn't in Apple's blood. "I've followed Apple for a long, long time, and I've never seen them sell something at a loss," Howe said by telephone Thursday. "They'll make money on each iPhone [3G]."

Porteligent's Carey did not respond to a call requesting additional information about his cost breakdown, and rival iSuppli Corp., also noted for its teardown analysis, declined to provide a comparative cost estimate, saying it would instead hold comment until it had an iPhone 3G in hand next month.

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Gregg Keizer

Gregg Keizer

Computerworld
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