Apple's iPhone 3GS: What it costs to make

Arik Hesseldahl, BusinessWeek
08 Jul 2009

From the outside, nearly everything about Apple\'s iPhone 3GS seems nearly identical to the iPhone 3G released last year. Even Apple\'s TV ads make light of this fact: The phone looks the same as before, the company says, but it does so much more. Still, all the new features in Apple\'s million-selling new phone have to come from somewhere, and there have been some important changes inside the new iPhone, according to an Apple iPhone 3GS teardown analysis by the market research firm iSuppli.

The company routinely takes apart popular consumer-electronic devices in order to determine the identities of key suppliers and also to estimate the costs of components. Last year a preliminary iSuppli analysis pegged the cost of the previous iPhone, the 3G, at $174.33. These estimates help financial analysts make better-educated guesses about the profit margins manufacturers make on each unit sold, though there are many costs that a teardown doesn\'t address, such as software, research and development, and patent licensing costs.

Often the cost to assemble a new generation of a product is lower than it was for the previous generation. However, the 16-gigabyte iPhone 3GS actually costs slightly more to build than last year\'s iPhone 3G"”$178.96, a difference of $4.63. However, that is much lower than estimates for the first-generation iPhone, which pegged the cost at $220.

Chip Prices on the Rise

The main reason that costs may have gone up is that the price of NAND flash memory"”the chips used to store music, video, and applications on the iPhone"”have, after years of falling, started to go up just when Apple started packing more memory inside the phone. The 3GS comes in 16- and 32-gigabyte varieties, whereas the prior model topped out at 16 gigabytes. \'It used to be that Apple could plan on doubling the amount of memory each year for the same cost,\' says Andrew Rassweiler, iSuppli\'s teardown manager. In the 16-gigabyte model of the 3GS, the cost of the NAND chips is $24, he says, and $46 in the 32-gigabyte version.

Apple is one of the world\'s biggest consumers of NAND flash memory, and has cut strategic supply deals since 2005 with chipmakers like Samsung and Hynix, among others, though in the unit used for the teardown the flash supplier was Toshiba (6502.T). \'Apple has been one of the key players in driving the cost of flash memory down,\' Rassweiler says. \'In doing so, they\'ve also benefited from the price erosion over time.\' But with demand for flash declining amid a recession, manufacturers have cut back production to the point that prices have started to rise, though demand has yet to pick up. ISuppli is forecasting that overall the market for NAND flash memory will contract to $11.5 billion from $11.7 billion in 2008, before growing again in 2010.

Some components of the new iPhone are cheaper, even though they\'ve gotten better. Take the multitouch display. While Apple has improved on the screen by adding an oleophobic coating that doesn\'t attract fingerprints and cleans more easily, the cost of the screen and related components have over the past year come down by $1, Rassweiler says, to $16.

No FM Radio Reception

Some parts have disappeared completely from the 3GS. A $1.60 Broadcom (BRMC) controller chip connected to the display found in the second-generation iPhone is missing, Rassweiler says, and seems not to have been replaced by anything else.

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