Why Are 3G iPhones So Cheap?

3G tag

In a preliminary virtual teardown report from tech research firm iSuppli, analysts developed estimates of iPhone content, suppliers and costs.

With the 3G iPhone, Apple is making significant changes in its pricing strategy from when the original 2G phone was sold at an unsubsidized price of $499, said iSuppli.

In addition to low BOM and manufacturing costs, the low price of the 3G can also be attributed to wireless service carriers that will sell the phone at a subsidized rate, using a common business model for the mobile-handset market. iSuppli estimates the size of the subsidy paid by wireless carriers to Apple will be about $300 per iPhone.

Calculating in the $300 subsidies from carriers, Apple will be "selling the 8-Gbyte version of the second-generation iPhone to carriers at an effective price of about $499 per unit, the same as the original product," said Dr. Jagdish Rebello, director and principal analyst for iSuppli, in a statement.

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With the first version of the iPhone, Apple was given a portion of the wireless carriers' revenue from service subscriptions. However, with the second-generation version, Apple is not getting any service revenue, "making it more imperative that the company cut a profit on the actual hardware through the carrier subsidies," according to Rebello.

"Hardware is vital to Apple profits, valuation and revenue in the consumer-electronics and wireless communications realms," Rebello said "In fact, two-thirds of Apple's revenue from the iPod still is derived from hardware, while only one-third is from the iTunes service and accessories. The second-generation iPhone is no exception."

Here are some of the BOM cost breakdowns: 8-GB NAND Flash Memory: $22.80 2-Megapixel camera module: $7.00 Improved touch screen: $20.00 WLAN chipset: $4.00 Battery: $4.00 GPS: $3.60 Motion Sensor / Accelerometer: $2.00 HSDPA Digital Baseband: $15.00 Application Processor: $13.50 -RF Transceiver: $4.25 Display: $20.00 64-Mbit NOR Flash Memory, 32-Mbit PSRAM: $1.89.

Considering the overall teardown analysis of multiple products, iSuppli estimates that Apple's iPod and iPhone products are typically priced about 50 percent more than their BOM and manufacturing costs. With an estimated subsidy of $300 and a price tag of $199, the new iPhone will give Apple an even higher BOM/manufacturing margin.

Looking toward the future, iSuppli said that as is the case with all electronic products, the 3G iPhone's BOM costs will decrease over time as component prices decline.

Based on data from iSuppli's Mobile Handset Cost Model, the BOM/manufacturing cost of the second-generation iPhone will decrease to $148 in 2009, down 37 percent from $173 in 2008. And if the 3G iphone design remains unchanged, the cost will decline to $126 in 2012, according to Tina Teng, iSuppli's wireless communications analyst.

The 3G iPhone is set for release in mid-July. Meanwhile, Japan's third largest mobile phone company, Softbank, said it will sell the 3G Apple iPhone starting at roughly $215. Sprint is getting in the game too, and is releasing a clone version of the 3G iPhone, the Instinct, made by Samsung Electronics. The phone will retail for $129 after a $100 mail-in rebate but customers have to sign a two-year contract with the wireless carrier.