A teardown by researchers shows the device's components cost a mere 28% of its retail price—a fat profit margin. Biggest supplier: Samsung
When the first iPod graced store shelves almost eight years ago, it could pack about 1,000 songs into roughly the same space as a deck of playing cards. A new iteration of the digital music player called the shuffle packs the same number of songs into a space that's about the same size as your pinky finger.
There's not much else to the shuffle, released in March. There are no buttons, for instance—only a power switch that also controls whether songs are played in sequence or "shuffled," as the name implies. Other controls for playing and changing the volume have been moved off the device entirely and into the wire running from the headphones.
Nor is there much on the inside of the shuffle, as a teardown analysis of the device by market research firm iSuppli has found. Privately held iSuppli takes consumer electronics apart in order to estimate how much they cost to build. And while a teardown doesn't account for the costs of design, software, manufacturing, or shipping, these cost estimates help fill in the blanks toward estimating the profit on each device sold.
All told, the cost of the shuffle's components, the headphones, and the packaging it ships in comes to $21.77, according to iSuppli's estimates. That's about 28% of the device's retail price. The smaller the component cost as a percentage of price, the higher the potential profit. This suggests the per-unit profit margin on the shuffle is higher than on other iPod models. The component cost for the first iPod touch released in 2007, for instance, amounted to about $147, or about 49% of its $299 retail price. The component cost of the third-generation iPod nano, also released in 2007, amounted to about 40% of its retail price.
Who the Suppliers Are
Analysis by iSuppli also helps determine the makers of the components inside electronics devices. The big winner in the shuffle, says iSuppli analyst Andrew Rassweiler, appears to be South Korea's semiconductor giant Samsung. ISuppli examined the insides of the four-gigabyte shuffle, which goes for $79. The main application chip used in the device, controlling music and other functions, comes from Samsung and costs $5.98, Rassweiler says.
Samsung remains the king of Apple's silicon suppliers, at least for the iPod and iPhone family. It supplies the main applications processor on the iPhone 3G as well as for the iPod touch. And like the other Samsung chips used in Apple devices, the one in the shuffle is based around a core design licensed from ARM Holdings (ARMH), a British chip designer in which Apple used to be an investor.
Samsung also supplied the four gigabytes of flash memory, used primarily to store music, at a cost of about $6, Rassweiler says. Apple is likely to be using other suppliers in addition to Samsung for flash memory, including Japan's Toshiba (6502.T) and South Korea's Hynix Semiconductor. "It's almost like six dollars worth of flash memory tied to some flash and a battery and not much else," Rassweiler says. "It's very basic and downsized." Other suppliers of various parts include On Semiconductor (ONNN), NXP Semiconductor, and Texas Instruments (TXN).
From Tiny to Minuscule
The device contains a tiny lithium ion battery that costs $1.20, and that Rassweiler describes as "the smallest we've ever seen." And for a company that doesn't ignore the tiniest of details, the most mundane of components are the most advanced available. The device's so-called passive components—capacitors and resistors—are unusually small. Known by their numeric label 01005, which in electronics shorthand describes their dimensions in thousandths of an inch, they're about the size of a grain of salt and cost fractions of a penny each. But they're half the size of what had previously been considered the smallest device of their type, those labeled 0201.
It's just one of many ways that Apple continues to differentiate its products from the rest of the pack. "Until recently we didn't see passive components quite this small," Rassweiler says. "Here you see them working on the cutting edge, even on the passives." They also help save space inside.
The components themselves are too small to give even a hint of who made them, but typical suppliers include such companies as AVX (AVX), Vishay Intertechnology (VSH), Kemet, and Rohm (6963.T), Rassweiler says.
There are other costs in addition to components for which a teardown can't account: The time and efforts of software engineers and designers, industrial designers, manufacturing, distribution, royalties paid on patents owned by other companies, and so on. When it last reported earnings on Jan. 21, Apple said its gross margin, a key indicator for profitability that takes into account costs to make all its products, was 34.7%. The company also said it expects a gross margin of 32.5% in the quarter ended Mar. 30, for which it will report results on Apr. 22.