Apple Makes at Least $200 Per iPad Sold: Report

22 Comments

Maybe it’s a hangover from my days working in electronic retail sales at Best Buy (s bby), but I love hearing about the profit margins companies have for their devices. It’s amazing to me that companies like Sony (s sne) are willing to take a hit and sell devices at a loss in order to sell more software down the road. Apple (s aapl) 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.

22 Comments

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Some of Apple’s promotional material about the iPad implies the device’s Safari browser can load Adobe Flash content. However, demonstration units of the tablet, including the one presented by Steve Jobs, could not, and a consumer has already filed a complaint to the Federal Trade Commission alleging false advertising.

Venkatesh

All of these estimates are suspect. None of them take into account royalty paid to companies like Qualcomm for 3G. Those are calculated on the final selling price of the device and the margins are less that what it shown here.

DistortedLoop

Umm…NO ONE has torn one of these things apart to see what’s inside of them, right? Then how the heck can someone come up with the cost of components in anything other than a wild-ass guess, or at best a semi-educated-maybe-in-the-ball-park guess based on some assumptions of what goes into something similar.

It’s ridiculous. At least iSuppli is showing some common sense by saying we’d like to actually take one apart before we shoot our mouths off.

fat tony

“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.”

What are you smoking? Promising? The only thing it promises is that they are more concerned with bleeding the early adopters for 40-50% PROFIT margins than they are about dominating the market by a more modest price. A 10% margin procing plan would give a potential Kindle or Nook buyer an apples to apples comparison that would no doubt lead to choosing an iPad at the same pricepoint.

Don’t fool yourselves, Apple is just not that into you. Just like MSFT. Just like Google. It’s a company. They want your cash.

DistortedLoop

“Don’t fool yourselves, Apple is just not that into you. Just like MSFT. Just like Google. It’s a company. They want your cash.”

I agree about MSFT and Apple just wanting my cash, albeit with different approaches.

You’re in correct about Google, though. They don’t want MY cash, they want some advertiser’s cash, and are more than happy to use me as a way to get it. Maybe a fine distinction, but a valid one. ;-)

adam jackson

Apple has maintained these 50% profit margins on products for a while now (at least their strictly CE products). Desktops and Laptops are around 35% am I right?

Anyway, no one factors in R&D, Marketing, Support, Warranty, Sales, distribution channels, machine tooling,

There’s much more that factors in and yes that is factored into the product price. I wouldn’t be surprised that Apple gets 10-15% kick back from AT&T on that 3G connection you’re paying for and then the 30% profit on app sales and finally small margins on media (music & video)

They’re smart so I’d vote for 25% profit on each device sold for the first 6 months and that factors in all I listed above then parts and R&D is paid off and they start getting 50% margin from 6 months and going forward.

It’s a cash cow like most devices for apple.

Justin

These calculations are for Gross Margin (which generally includes the cost of goods sold, warranty, and sometimes depreciation).

Operating Margins include thing R&D, Advertising, Marketing, which a lot of people mention above.

So, the report is relevant, in that Gross Margin is a useful metric, but it doesn’t tell the whole story. In addition, some of the other costs are shared among different product lines, so its harder to attribute them directly to one device.

KsbjA

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).

Bror

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.

LexM

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.

Mike Perry

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.

Rob

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

Matt J

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.

mike2078

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.

Adam

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.

tys

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.

Christopher

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

mosspuppet

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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