What's Behind Apple's iPhone Pricing Strategy?

Includes: AAPL, GOOG, T
by: Paul Zimbardo

With the iPhone 4’s U.S. release in a few short days the annual ritual of estimating the manufacturing cost of the new iPhone has begun. One of the first estimates was performed by Mobile Magazine and despite major changes to the hardware, the latest version of the iPhone is only marginally more expensive than last year’s version. Specifically, the iPhone 4 costs $181.55 while the last generation of the iPhone cost approximately $178.96. Due to Apple’s (NASDAQ:AAPL) arrangement with AT&T (NYSE:T), it does not rely solely on hardware sales so the gross profit metric is not as critical as with Apple’s other products.


Estimated Cost

iPhone 1


iPhone 3G


iPhone 3GS


iPhone 4




This is obviously just an estimate and many key costs are excluded, such as software, but it is noteworthy that Apple is continuing the trend that began with the iPhone 3G of increasing costs. There are two primary hypotheses that can be causing this development. Firstly, Apple could be facing increasing competitive pressures. Thus, the company may have felt forced to innovate more with this model than with previous editions. Another possibility is simply that component
prices have been increasing more than in the past. While the cost is only 1.4% greater than last year, these are possibilities that should not be ignored by investors as the difference is magnified over millions of iPhones.

Personally, I view this as just another example of the mounting evidence that Apple and Steve Jobs are head-and-shoulders above the competition. Unlike past technology failures such as Motorola's (MOT) Razr, Apple has continued to invest and improve its offering rather than harvest profits. One final insight is that the cost of the iPhone 4 is only $60 less than the cost of the iPad due to the similar components, notably the processor. The logical conclusion is that the iPad will see many of the iPhone 4’s features implemented in its next version, possibly the Retina display and/or camera, when another year passes and technology improves.

Click to enlarge:

Estimated Bill-of-Materials for Apple

Besides the flash memory, the most significant material costs are related to new iPhone features: Retina display ($26), Apple’s new microprocessor ($19.50), and back glass housing ($13). This chart also provides excellent information for those who follow the strategy of buying companies that supply iPhone components.

Image Source: Mobile Magazine

Disclosure: Author holds long positions in AAPL and T. Author also holds an immaterial position in MOT.