Apple gets hefty margin on iPad cost

If Apple Inc. successfully markets its iPad at the current proposed retail prices, the consumer electronic company can expect to garner a more than 50 percent gross margin on each of the products, according to a recent component and manufacturing costs breakdown by researcher iSuppli Corp.

Apple's current pricing schedule shows the various models of the machine retailing for $499 to $829 depending on storage size "16GB to 64GB—and technology offering—with or without 3G.

iSuppli estimates material and production costs for the various iPad models range from $229.35 for the cheapest to $346.15 for the most expensive. The display and touch screen accounts for the highest component cost in each of the categories, except for the two most expensive iPads, where the addition of extra NAND flash pushed prices up to 37 percent and 34 percent of total costs for the products expected to retail for $699 and $829, respectively.

"At a combined cost of $80 for all models, the iPad's display and touch-screen interface represents the most expensive segment of the system, accounting for 29 percent of the bill-of-materials of the mid-range 3G model," said Vinita Jakhanwal, principal analyst for iSuppli in a statement.

"The display employs In-Plane Switching (IPS) technology which supports a wider viewing angle and better picture quality in terms of presentation of color than conventional LCDs. While the iPad's display probably is sourced from three suppliers, LG Display and Innolux are the two most likely suppliers of the iPad's IPS LCD," Jakhanwal said. iSuppli said it believes the "touch-screen controller chip likely is supplied by Texas Instruments Inc."

The favorable manufacturing costs, relative to retail price, means Apple has enough room to reduce costs over the next year to gain additional consumer interest. Many of the negative comments the iPad has attracted from potential buyers involve complaints about the pricing, which many analysts initially said was competitive.

With gross profit margin above 50 percent for each of the iPad models, Apple gains critical pricing flexibility and should be able to cut retail costs if demand is less than expected. Apple is most likely to get its highest profit margins from the midrange iPad products, according to Jagdish Rebello, senior director and principal analyst at iSuppli.

"At a bill-of-material and manufacturing cost of $287.15, and a retail price of $729, the 32Gbyte/3G version is expected to generate the highest profit of any member of the iPad line on a percentage basis," Rebello said. "The 32Gbyte versions of the iPad cost only $29.50 more to produce than the 16Gbyte versions, but their retail pricing is $100 higher. This shows that Apple believes the highest-volume opportunity for the iPad resides in the mid range of the product line."

iSuppli's teardown reveals vendors for the iPad include companies like TI and memory IC vendor Hynix Semiconductor, which the research firm believes is the most likely supplier of DRAM to the consumer electronic OEM. The researcher also said Samsung Electronics is likely to be the wafer source and foundry for the iPad's A4 processor.

"iSuppli believes the processor integrates an ARM RISC architecture microprocessor and a graphics processing unit," the researcher said.

Other component suppliers for the iPad, according to iSuppli, include Broadcom Corp., Infineon Technologies AG, Murata, Samsung Electronics and Toshiba Corp.