The $199 iPhone: still a money maker

Why the iPhone 3G could be cheaper
Carey of Portelligent said several factors make the iPhone 3G potentially much cheaper to build than the original iPhone.

"I'd suspect the collective volume, learning and engineering changes to the display would mean that the whole touch screen assembly might be about half the $60 or so we estimated for Gen1 a year ago," Carey said. "In addition, the 8 Gbytes of MLC NAND is today around $20 compared to the $50 that might have been the case in June 2007," he added. Carey estimated Apple may have shaved another $25 off the bill of materials costs based on changes he observed in a teardown of the iPod Touch.

Those changes are only slightly offset by new costs for the iPhone 3G. Carey said the additional cost of an HSDPA chip set are only about $15 plus another $5 for the GPS chip. He also noted that the $100 price increase for a model with 16 Gbytes flash adds to the profit margin because the additional memory chips probably cost Apple only about $20.

Netting out all the changes Apple may have had a gross profit based solely on cost of hardware for the original iPhone of $229 and profits of just $99 for the iPhone 3G. "It's always important to point out that hardware BOM costs do not capture many other important facets of product cost such as development costs, software costs, licenses and marketing," he said.

Though profits may be lower, Apple is likely to sell many more units with the new iPhone, said Strauss. Some big markets such as Korea and Japan do not use the EDGE network of the original iPhone, but they do use HSDPA.

Apple announced agreements with a wide range of carriers across Asia, Europe and the U.S. who will sell the iPhone 3G, 22 of them starting on July 11. About another 50 carriers will provide the handset before the end of the year, said Apple chief executive Steve Jobs who announced the handset at Apple's developer conference Monday (June 9).

"I think Apple is going to do very well with this phone," Strauss said. "The fact they have this updated air interface opens many new markets for them," he added.

Both Carey and Strauss noted carriers may be providing an undisclosed subsidy for the new iPhones. AT&T for example, sold a high end Palm Treo phone for $199 after a subsidy, Strauss said.

Carey said the new iPhone probably contains a larger battery based on claims of longer battery life. Apple could easily maintain the existing weight of the handset by using lighter materials in the casing such as plastics which could also improve the cellular reception of the device.