Apple iPad a Low-Margin Product? Nah.

I’m not certain where news sites have gotten the idea that the lower-end iPads will ship with razor thin margins (or as a loss-leader) for Apple. Let’s do a quick analysis.

Based on what we know about the iPhone 3GS’ components, we can extrapolate a significant portion of the iPad’s hardware cost. ISuppli’s analysis shows that the 16GB iPhone 3GS costs Apple around $178 to source and manufacture. Based on the specifications and feature-set of the iPad, it’s not a giant leap to assume that many of components are shared between the iPad and the iPhone/iPod Touch, such as the NAND and controller, BlueTooth, audio decoder, and more.

Now, the entry-level iPad doesn’t have a camera (-$9.55) or 3G module (-($13+2.80+1.35)). That brings the cost down to close to $150.

Clearly, there are elements which add significant cost to the iPad. The much larger display, touch panel and the chassis material will cost more than their equivalent on the iPhone/iPod Touch.

The display + touch module on the smaller devices cost approximately $35. Looking at area and resolution, the new panel is around 6-7x the size. Yields of panels decrease with increasing sizes, but at the same time, the cost of the display controller doesn’t scale linearly with panel size. Plus, the panel itself probably has pretty high yields, considering there’s a plethora of ~10″ panels out there. The touch overlay may be another story, with its thousand-point multi-touch sensors. Let’s assume overall cost is just about linear with area, which brings us to around $200. That estimate is likely quite high, assuming worst case scenario.

That brings the cost of the iPad to approximately $320. Now, factor in the added cost of the larger battery and casing, plus some additional licensing cost for the ARM A9 core, if that is indeed what the Apple A4 processor is based on, and $350 is a reasonable estimate.

That means Apple is pulling in around 30% margins on the entry-level iPad. Upselling to the 3G models or more storage only increases that number. Most hardware manufacturers would harm small animals for that sort of pricing power.

Of course, this is all a rough back-of-the-envelope calculation, and in particular, my estimation for the panel may be off by quite a bit. However, an analyst at BroadPoint AmTech seems to think along the same lines. Apple is not going to take a huge margin cut on the iPad, even the entry-level model. His $100 estimate for the 9.7″ panel and touch overlay is also far more aggressive than mine.

We’ll see what the component list for the iPad looks like for certain, come late-March. I doubt Apple’s pushing its first loss-leader piece of hardware.

2 thoughts on “Apple iPad a Low-Margin Product? Nah.”

  1. Ah, a fresh blast of cool common sense. Apple, the king of high margins, has no plans to market a loss-leader….they don’t have to! All the fanboys and even some not-so-fan-boys are drooling all over themselves to get their hands on one. While they may not be taking their 100%+ margins on the entry-level introductory ipad, you can bet their newer feature sets will come at a steep cost to make up for lost margins and slowing growth. Like google, there is nothing angelic about Apple – they want your money more than your puppy-dog eyes and praise.

  2. Nice analysis on the manufacturing cost. The only thing I’d add is that there’s more to cost than components. Apple also needs to account for support, warranty, returns and other costs along with retailer margins for units sold outside of Apple’s own channel. Let’s assume Best Buy wants a 20% cut and net price is then down to a bit over $400 on the low end model. Assume 5% are returned and that’s another $17.50 ($350 cost x 5%). As you can see, the total gross margin is indeed getting quite thin. Not to mention Apple needs to recoup R&D out of profit as well.

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