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Summary:

A new report about production costs for the iPad reveals a wide profit margin on a per-device basis. The entry-level $499 model apparently generates $208 in profit, while the top of the line $829 model more than doubles that, raking in $446 per unit.

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Maybe it’s a hangover from my days working in electronic retail sales at Best Buy, but I love hearing about the profit margins companies have for their devices. It’s amazing to me that companies like Sony are willing to take a hit and sell devices at a loss in order to sell more software down the road. Apple is clearly no fan of this kind of sales strategy, and the brand new iPad is no exception.

A new report by BroadPoint AmTech analyst Brian Marshall about the cost of production of the iPad based on the going rate for component parts, manufacturing cost and built-in warranty repair costs reveals quite a wide profit margin on a per device basis. The entry-level $499 model apparently generates $208 in profit, while the top of the line $829 model more than doubles that, raking in $446 per unit.

Marshall estimates that the cost of making the 16GB Wi-Fi model of the iPad runs around $270.50, plus $20 for warranty costs for a total of $290.50. Most of that cost accounts for the 9.7-inch touchscreen display, which Marshall guesses costs around $100. Apple sees considerable savings on its own in-house A4 chips, which run around $15 per unit. With a cost of $290.50 and a selling price of $499, Apple stands to see a profit margin of 42.9 percent with each sale.

On other models that margin ranges from 48 to 55.1 percent, giving the iPad line as a whole an overall profit-generating power of about 50 percent, a number which assumes that the Wi-Fi models will sell considerably more than the 3G-capable devices, a reasonable assumption. Computerworld points out that while the number seems fairly high, it is in fact on par with Apple’s other hardware offerings:

High profit margins are standard for Apple, which earlier in the week boasted that its corporate margin for 2009′s final quarter was 40.1%. Some products, in fact, have estimated margins even higher than Marshall’s iPad numbers: The consensus for the iPhone 3GS is above 60%, for example.

iSuppli, a research firm which is well-known for its Apple product tear-downs and component analyses, has refrained from making any estimates about the iPad’s cost to build as of yet, though it does acknowledge that there’s reason to believe many costs will be similar to those found in the manufacture of the iPhone and iPod touch:

We really want to wait until we know a little more about what’s inside. We’d rather not just throw numbers at it yet. It does seem like a gigantic iPod Touch, which means that although some costs would just scale up from the iPod, like the display and the touch screen, a lot won’t.

Considering that the iPad is a brand new product just getting out of the gate, news that it already enjoys such a wide profit margin is a very promising sign of things to come for future Apple customers. Just like it eventually became profitable for Apple to sell the iPhone 3G at a subsidized $99 price point as parts became cheaper and manufacturing costs went down, so too is it conceivable that we will eventually see a significant dip in the price of the iPad. If the 1G iPad sticks around when Apple eventually introduces a 2G camera-equipped model, for instance, 1G pricing could drop to a point where it would decimate netbook sales.

There’s also the possibility that the iPad will eventually get the same subsidy treatment the iPhone currently enjoys, though Apple doesn’t appear to want to go that route with consumers just yet, preferring instead to keep the device unlocked and therefore theoretically available to a broader buyer-base. Subsidies attached to contracts could reduce the initial purchase price considerably, and I wouldn’t be surprised to see $199 as the cost of entry for the 16GB Wi-Fi/3G model.

  1. D’uh. Someone should factor in costs for hw developing, licenses and SOFTWARE.

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    1. I think the point there is that since this is just a big iPod Touch (which is fine because the Touch is AWESOME), then they’ve already paid those costs. You know, with the iPhone and iPod Touch sales.

      It’s a goddamn brilliant business move.

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  2. I’d be all over that $199 AT&T subsidized model!
    I’m going to pay for the data plan anyway, might as well get a contract and save a few hundred up front.

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  3. The great thing about the iPad is that there was no development costs for hardware or software. There’s also no advertising or marketing costs associated with the device. Nope, none of that going on so that’s $200 of pure profit.

    Seriously, why does anyone believe these tear down costs? There’s more the price of a product than the sum of it’s parts.

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  4. Don’t be fooled by such short sighted calculations… As if Apple was run by robots and slaves.
    You know, they have to pay salaries, offices, marketing and an army of lawyers to run their business! Someone has to pay for all that.
    I think they still calculate with a margin be between 10-20%.. but I can live with that.

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  5. Has anyone else noticed how all Apple products are basically just protons, neutrons and electrons? Those things are just floating around in the air for free! Apple therefore has a profit margin of ∞%! Greedy bastards.

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    1. *Grabs seemingly empty air* I have an iPad!!

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  6. Yeah, apparently the custom silicon they developed for the iPad CPU/graphics just fell out of the sky into their laps for free.

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  7. Darrell Etherington would do well to read any of several books by the marvelously lucid Thomas Sowell: Basic Economics, Applied Economics, and Economic Facts and Fallacies.

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  8. At best, assuming Marshall got the component costs right, this gives us a rough idea of Apple’s gross margin on the iPad. However, a gross margin isn’t a profit margin because it doesn’t take account of marketing costs and other associated overhead – exactly the things others have adverted to in the comments. Tech journalists should read some economics (as Mike Perry suggests) and learn some basic accounting before commenting on how much “profit” Apple or any firm makes from its products.

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  9. Anything the analysis is missing is the difference between wholesale and retail price. The iPad will sell for $499 to consumers, which mean that Apple probably won’t get more than $400-$450 absolute maximum for each unit. I read somewhere that Best Buy’s margin is about $50 for laptops. Most iPads will of course be sold through the Apple Stores, but they also have to pay rents and salaries as far as I know.

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  10. Good tactic – daring, rewarding, and keeps a backup plan (the price can always be turned down, so no fear of greater limited-time discounts either).

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