Market research firm iSuppli set out to satisfy the curiosity by
buying the $199 2-gigabyte version of the Nano and tearing it apart.
The verdict? It costs Apple $90.18 in materials to build the unit and
$8 to assemble it, leaving a profit margin before marketing and
distribution costs of about 50%. That’s consistent with the margins
on earlier iPod versions and serves as a reminder of what a profit
machine the iPod family of products has become for Apple since it was
introduced in 2001.
Margins on the computer-maker’s other products tend to be slimmer. An
iSuppli teardown of the Mac Mini found the cost of material and
manufacturing on that computer to be about $283, leaving a gross
margin of 44% before marketing and distribution costs.
WINNERS AND LOSERS. “Historically, Steve [Jobs] won’t accept
anything less than 20% gross margin on any product,” says Creative
Strategies analyst Tim Bajarin. “In the rare cases when the gross
margins have dropped below that, it has been a fluke.” Apple has sold
some 16 million iPods in the first nine months of fiscal 2005, and 21
million since its inception. Thus far in fiscal 2005, the iPod has
brought in $2.6 billion in revenue, accounting for about 25% of
Apple’s total.
Another set of questions answered by iSupply’s exercise: Who supplies
Nano’s components — and who got cut out of the pie? The analysis
found San Jose (Calif.)-based Cypress Semiconductor (CY ) to be a big
winner, at the expense of Synaptics (SYNA ). Synaptics specializes in
touch-sensitive technology that forms the basis of the click wheel
used to navigate between songs on previous iPods.
But Santa Clara (Calif.)-based Synaptics lost out to an Apple-
designed click wheel that has contains a 55-cent chip from Cypress,
says iSuppli analyst Chris Crotty. The Cypress chip appears to save
Apple about 45 cents on a comparable Synaptics chip, which costs
about $1, says David Carey, president of Portelligent, a research
firm that has analyzed other iPod models.
CHIP LEADERS. Snagging the chip inside the Nano is important for
Cypress, says Crotty. The coup is likely to boost interest in the
company’s programmable system-on-a-chip family of components that are
used widely in products ranging from lamps to exercise equipment, he
notes.
The Nano also marks the return of longtime iPod audio-chip supplier
PortalPlayer (PLAY) in Santa Clara, Calif., which has supplied the
audio chips for most of Apple’s iPods over the years but missed out
on the iPod Shuffle, released in January. For that product Apple used
a chip from SigmaTel (SGTL ), based in Austin, Tex.
Crotty says SigmaTel’s chips have often been the favorite of
companies building MP3 players that store music on flash memory
chips, which consume less power, while PortalPlayer has been favored
by companies whose players use hard drives. Before the Shuffle and
Nano, all iPods used hard drives for storage, so PortalPlayer was a
natural fit.
MEMORY HOG. Now, Apple’s decision to use PortalPlayer for the Nano
shows it’s making inroads with customers whose devices rely on flash
memory. “PortalPlayer ruled with hard-drive players, and Sigmatel
ruled flash players,” Crotty says. “Now, we’re seeing them invade
each other’s turf.”
Apple’s choice of memory supplier is making perhaps the biggest
waves. Having tied up 40% of the so-called NAND flash memory output
of South Korean chipmaker Samsung (see BW Online, 8/26/05, “A
Memorable Deal for Apple and Samsung?”), Crotty estimates that Apple
is paying $54 for 2 gigabytes worth of memory. That would cost any
other manufacturer $90, giving Apple a discount of about 40%.
The arrangement not only makes it tough for other manufacturers to
compete on price but will also cause them huge supply headaches,
since Samsung is the world’s biggest flash memory vendor. “How do you
compete if you can’t get the memory you need?” Crotty says. “And even
if you can get it, you’re not able to sell the volume needed to
negotiate a better price.”
NARROWING THE FIELD. Giving Apple a break — and in the process
squeezing other MP3 player manufacturers — also benefits Samsung’s
own MP3 player business, Crotty says. “The market is heading toward
consolidation, with its own big three, Apple, Samsung, and Sony,” he
says.
As of 2004, the top three manufacturers of flash-based players were
iRiver, Creative Technologies (CREAF ) and Samsung, according to IDC
analyst Susan Kevorkian, with Sony (SNE ) lagging far behind the
pack. Other companies in the business include Dell (DELL ) and
Matsushita (MC), which sells players under its Panasonic brand.
Still, some are feeling heat. D&M Holdings, owner of the Rio brand,
recently announced it was getting out of the business.
All in all, it looks like the Nano may have extended the iPod’s reign
– and given a major boon to select suppliers.