Blog Post

Improved iPhone 5 less expensive to make than iPhone 4S

Stay on Top of Enterprise Technology Trends

Get updates impacting your industry from our GigaOm Research Community
Join the Community!

There are few companies I can think of that improve their products while holding prices and still reaping the rewards of high profit margins. Apple(s aapl), of course, is one of those and the latest iPhone 5 cost estimates from IHS iSuppli only further reinforce the idea that when it comes to managing supply chain costs, Apple is setting the gold standard.

It’s worth noting that the teardown is “preliminary in nature, account only for hardware and manufacturing costs and do not include other expenses such as software, licensing, royalties or other expenditures,” says the research firm. In light of that, IHS iSuppli suggests that the total bill of materials plus an $8 manufacturing cost for the 16 GB iPhone 5 is $207. Bump up the iPhone to 32 GB or 64 GB of memory and that number increases to $217 and $238 respectively; a vast difference from the phone’s full price to consumers, which are $649, $749 and $849, respectively.

Buying a subsidized handset still gets Apple its profit though; carriers pay hundreds of dollars per handset to Apple in return for voice and data plan commitments from the consumer.

iPhone 5 vs iPhone 4S costs

One aspect of the cost breakdown that jumped out to me is that the 64 GB iPhone 5 model actually costs Apple $15 less in parts and production than last year’s phone. The other two models cost slightly more: Apple spends an additional $2 to create this year’s 32 GB phone and $11 more for the 16 GB version, per the IHS iSuppli figures.

Still, if Apple were to sell an equal amount of each model this year; it works out to a net gain: The $13 more to create the two lower models is more than offset by the savings on the high-end model. I’m not implying that Apple actually does sell an equal number across the model line, but it’s an interesting profit hedge scenario. And I suspect that more people — especially existing iPhone owners that are upgrading — gravitate towards the models with more storage capacity.

Samsung memoryWhere’s the big savings this year? The largest is Apple moving away from Samsung for its flash memory. SanDisk memory was found in the iPhone 5 torn down for the IHS iSuppli analysis, although the research firm says that Samsung, Hynix and Toshiba could be suppliers across the line too. This difference is huge by comparison to all other parts. Last year, the memory in Apple’s 64 GB iPhone 4S cost $76.80; this year, that part is $41.60.

Not only does this illustrate how well Apple manages its part supply prices, but also why it’s in a position to do so. Instead of multiple phone models with different sizes and varied components, the iPhone is generally a fixed entity with few major design changes that would impact parts as much as other hardware makers. Sure, this year, the iPhone has a larger screen and form factor, which surely affects production lines and parts, but if history holds true, Apple will likely keep this size and shape for a few years and reap the benefits of superior supply chain management and economies of scale.

12 Responses to “Improved iPhone 5 less expensive to make than iPhone 4S”

  1. I think that i phone 4s users don’t need to buy the new iphone 5 ,they can wait until it become more cheap ,also if you want to feel that you bought something new ,you can buy amazing iphone 4 cases ,it will look totally different and can protect your iphone 4 from being damaged or scratched .
    You can find them in any online gadget accessories shop also you can find there Iphone 5 cases .

  2. Here’s my question. Apple has always produced products at less expenditure yet charges more for these products. In the PC industry, they didn’t have third parties absorbing costs to offset the costs. Carriers know that the average consumer won’t pay much more than the price carriers are charging.

    So, if carriers were to raise their prices to coincide with Apple’s demanded price, I wonder how many iphones would be sold. Paying an extra 300+ dollars out the door seems an impediment for most customers. This is what kept many from purchasing Apple products in years past. Thanks to carriers, People feel like they are purchasing a luxury device at low prices. This has made Apple very rich. Individuals as myself that don’t wish to purchase Apple, seem to be unfairly financially supporting them anyway because of the price plans carriers have changed to accommodate the iPhone. It is great Apple has been able to manipulate everyone in the wireless industry regardless whether we want their products or not.

    John B.

    • Even if that logo would still add a premium, I’m guessing that it might be less of an issue in phones. If US operators would be to throw subsidies to trash today I bet that iPhones would rot in stores. iPhone 5 16gb = 649$ , 64gb = 849$.. However this wouldn’t happen just to Apple’s models. Samsung Galaxy S III is about there in the same prices, maybe a bit lower, and specs are pretty comparable as far as we know.

      These figures are just bad estimates, but if in phones Samsung has similar specs on a 700$ phone, Apple could take 850$. If Samsung had a 700$ laptop, Apple could take 1200$ for it.

      Some other manufacturers, not just Apple, have the possibility ask similar prices for their high end devices. I’m guessing that it’s partly because operators are willing to pay that much if there is really something that can compete with iPhone thus making them less dependent on Apple. I have a hunch that the difference here isn’t as big as it is with Macs or iPods. If you look at counties where subsidies aren’t used, Apple sells still pretty well.

      Anyway, if tomorrow there would be no phone subsidies in US, Apple’s US sales would be in deep trouble. Samsung, Nokia, Motorola etc. all have mid range phones but there is no iPhone mini. Apple surely would introduce one in no time and the logo with bit apple would still cost a bit extra compared to other logos.

      • Thanks Foo.

        Your comment pretty much what I was thinking. My question was to point that if subsidies did go way of trash, I believe Apple would be in the same position as it was years ago. Samsung and other manufacturers are charging what they do because the carriers recoup during contract. If no subsidy is present, I believe Apple would be more expensive than competitors by a fairly large margin. This article brought to light that my generation didn’t purchase Apple due to this practice. While we may have found their products to be well built, it wasn’t worth the extra cash to be locked into such confined quarters. These were just computers. We found solitude in other manufacturers.

        I feel this generation has been celebrating a product/company that they really know nothing about. It is presented as “Lavish” or “Elite” and is within financial means. It is merely a status symbol that if you own an Apple product, you are part of a group. I’ve talked with college students that have changed their opinion of Apple yet feel they cannot leave due to the education enterprise being locked into Apple’s closed ecosystem. If the financial positioning were offset to correspond with the actual pricing of Apple’s DNA history, Apple would be nowhere as large as they are today. Even with low marketshare, they price gouged their products . Because they can charge what they do today, doesn’t change their MO.

        John B.

  3. I don’t care if APPLE miks somebody for cheaper memory. MAPS is an absolute failure. Inaccurate, uninspired and (worst of all) incapable of “helping” in a substantive way (I live in Boston – not exactly off the beaten path). I’m supposed to be happy because the outside is pretty?

  4. “Is it possible to build a better smartphone for consumers that costs less to produce? ”

    Well since you are comparing Oct 2011 and Sept 2012 prices the answer is of course yes, at least if you define _better_ just having better specs. Just take 2011 model and if you upgrade any single spec, this better model would still most likely be cheaper to produce with current component prices, than the original 2011 model was in 2011.

    If you define _better_ more vaguely as something that “when released feels better than the other model felt when it was released” then yes, it probably costs more both so make and to buy. iPhone 5 however probably wasn’t intended to be better in this way, but to as good as 4S, to “feel as good as 4S felt when it was released”, to be at the same level of excitement.

    It would be odd if BOM of these phones that are sold at the same price would constantly rise.