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Inside the BlackBerry Bold

Research firm iSuppli says it costs Research In Motion $169.41 to make the smartphone, lower than some Street estimates—and promising for RIM's profit margins

The smartphone race between upstart Apple (AAPL) and incumbents like Research In Motion (RIMM) is well under way. Picking winners has as much to do with what's inside these advanced wireless devices as the fancy features evident on the outside.

That's why market research firm iSuppli did an analysis of the guts of the Bold, one of the recent additions to Research In Motion's lineup of BlackBerry smartphones. The firm's so-called teardown analysis of the Bold shows that the parts and materials used to make the phone cost $158.16, and that assembly and testing add another $11.25, for a total cost of $169.41.

The Bold, already on the market with wireless carriers in Britain, France, Canada, India, and other markets, is expected to debut soon in the U.S. with wireless carrier AT&T (T) at a price of about $300 for a two-year contract. Rogers Wireless (RCI) in Canada sells the Bold for the Canadian equivalent of about $254 with a contract. AT&T hasn't yet confirmed that price, and a spokesman declined to comment. A RIM spokeswoman had no comment.

Pricey to Take on Apple

RIM is certainly spending more on the components of its most recent line of phones, a reflection of the high price of competing with Apple. RIM spent $103 in materials and assembly cost for the Curve, RIM's older mainstream device that works on an older network technology than the Bold. RIM, based in Waterloo, Ont., introduced the Bold among three new devices going head-to-head with Apple's iPhone and devices like the T-Mobile (DT) G1 that run Google's (GOOG) Android operating system.

Still, the analysis from iSuppli could lessen concerns over how much RIM's margins may narrow as it boosts spending to defend its turf. "That's a nice price," says Charles Wolf, an analyst at Needham & Co. in New York. Assuming RIM sells the device to carriers at about $350, the component costs imply a gross margin of about 45%, in keeping with the gross margins on other RIM devices, he says. The cost estimates from iSuppli don't include several expenses, including software, marketing, and shipping, and so don't give a precise indication of the device's margins.

RIM indicated recently that margins would come under pressure as the company packs new phones with added features. The company said on Sept. 25 that gross margins would be closer to 47% in the current quarter and in the "mid-40s" beyond that, compared with 50.7% in the first two quarters of the year (, 9/26/08). The company's shares have dropped more than 60% from a historic high of 148.13 on June 19, closing at 55.75 on Oct. 15.

Other Devices Likely to Hit Margins

The other two new devices from RIM are the Pearl Flip, RIM's first flip-design phone, and the Storm, a touchscreen device that dispenses with the traditional QWERTY keyboard that has been a BlackBerry feature (, 10/8/08). "It would appear to me that it's the other new RIM devices, the Flip and Storm, that are going to be dragging the overall gross margins down," says Wolf.

He may be onto something. Francis Sideco, an analyst at iSuppli, also speculates that the Storm will carry a higher materials cost. "Once you start getting into touchscreens, that display is going to have a lot of silicon and a lot more programming behind it to make it work," he says.

On Oct. 15, Wolf upgraded his rating on RIM to hold from underperform, resetting his target price at 77, after downgrading it before over concerns that the iPhone would eat into RIM's sales. "Recent data suggest that iPhone sales are in fact materially higher than initial forecasts," he wrote in a research note. "However, we now believe that RIM's share price more than compensates for any slowdown in the growth of BlackBerry sales in the consumer market that might occur in the November quarter."

Insight into RIM Suppliers

Analyst Samuel Wilson of JMP Securities is also turning more bullish on RIM. On Oct. 8, Wilson reiterated his outperform rating on the stock and set a price target of 80. "I was expecting a cost of about $200 or so," he said of iSuppli's cost estimate. Investors have been driving the stock down assuming that gross margins at RIM are going to consistently spiral downward quarter after quarter, but that's unlikely as components become cheaper over time and volumes ramp up, Wilson says. "This definitely suggests that the Street has been too pessimistic about RIM's gross margins going into 2010," he says.

The teardown also gives insight into RIM's stable of suppliers. The most costly component is a chip from Marvell Technology (MRVL) that handles both the wireless communications and the applications running on the device and costs a little more than $34. The second-most costly component is the screen, supplied by Samsung, which costs $16. Samsung also supplied memory chips that cost another $10.45. The handset's internal camera came from OmniVision Technologies (OVTI) and cost a little less than $10. Two parts from Texas Instruments (TXN) cost a combined $7.72, while SiRF Technology (SIRF) supplied a $5 GPS chip.

The materials cost is similar, if slightly lower, than iSuppli's estimate of the cost of the iPhone 3G, which is $174.33 (, 7/15/08). That estimate was lower than the $226 cost estimate on the first iPhone, released in 2007.

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