The $199 iPhone: still a money maker

SAN JOSE, Calif. — Apple is likely to reap significant profits despite slashing the cost of its updated iPhone in half, said analysts. Although details about the phone are still scarce, sources said they believe Infineon and Samsung have continued to snag the top chip designs in the handset.

The raw cost of materials to build the iPhone 3G could be nearly half that of the original model, according to Portelligent Inc. (Austin) that conducted a teardown analysis of the first handset. The first phone had a bill of materials estimated at $170 at launch, but the iPhone 3G could have a BOM as low as $100 when it debuts July 11, said David Carey, president of Portelligent, a division of TechInsights, the publisher of EE Times.

The cost cut is also strategic for a company seeking to extend its toehold in the massive cellular market. Apple has sold 6 million iPhones to date mainly in the U.S. in a market where nearly a billion handsets ship each year worldwide.

"Gen2 iPhone pricing is aggressive enough that it made me think Apple's really taking the gloves off on this one," said Carey. "They are probably not as worried about iPhone hardware profits as they are about getting a piece of the action on service revenues and getting more Macs in homes and offices all around the globe," he added.

Indeed, Apple launched a new subscription service called MobileMe for the iPhone 3G.

The original iPhone used the 2.5G EDGE network which delivers a maximum 256 Kbits/s. The new iPhone 3G uses the HSDPA version of W-CDMA, a standard which supports a minimum of 1.5 Mbits/s and up to 7.5 Mbits/s on some chips sets, including one from Infineon.

"I do believe they are continuing to use an Infineon baseband and RF transceiver and a Samsung applications processor," said Will Strauss, principal of market watcher Forward Concepts (Tempe, Ariz.) based on information from a source he would not name.

Strauss said he expects the new model also uses a global positioning system chip from Infineon based on technology it licensed from startup Global Locate which was recently acquired by Broadcom Corp.

Carey said some observers speculated the iPhone 3G uses Infineon comms chips based on some of the code seen in the software developer's kit for the new version of the handset.

Last month Samsung launched a handset using the same Infineon and Samsung baseband, RF and processor chips. At the time, Samsung stated the Infineon chips cost 20 percent less than similar chips from rival Qualcomm, Strauss said.

Strauss said he believes the entire bill of materials for the Samsung phone could be 20 percent less than a similar design based on Qualcomm chips.