iPhone 7 Teardown Shows Margins Slimming on Storage, Displays

Take Apart the iPhone 7, in 80 seconds
  • IHS estimates build of materials cost Apple $25 more than 6S
  • Basic model of new phone offered with double storage capacity

Apple Inc.’s iPhone margins have narrowed with the release of its latest smartphone line, the iPhone 7, with higher costs to provide greater storage options, a glossy black cover and more advanced displays, according to an analysis by IHS Inc.

The component analysis firm estimates that the total manufacturing cost of an entry-level iPhone 7, a model with a 4.7-inch screen and 32 GB of storage, is $224.80. This compares with an updated IHS estimate of $200 for an entry-level iPhone 6S in 2015. IHS didn’t perform an analysis of the larger iPhone 7 Plus but said the costs are likely higher than last year’s iPhone 6S Plus due to the presence of additional components.

“The iPhone 7 Plus would also distinguish itself from the iPhone 7 due to display size, larger enclosure costs, the dual-cameras, a larger battery, and an increased presence of power management electronics,” IHS Senior Research Director Andrew Rassweiler said. The iPhone 7 Plus includes longer battery life than the iPhone 7 in addition to two 12 megapixel rear cameras.

While Apple hasn’t released sales numbers for the iPhone 7 line’s opening weekend, the company indicated its initial supply sold out. Despite early knocks against the device for its lack of a headphone jack, reviews have been positive and the company’s stock has gained 5.4 percent since the new phone was introduced about two weeks ago. The iPhone represented about 66 percent of Apple’s revenue last year, and the product’s unit sales, margins, and average-sales-price are critical to the company’s quarterly earnings results.

Based on the IHS breakdown, the margins on the 4.7-inch iPhones have narrowed as Apple maintained the $649 starting price, but the company seems to have offset this by raising the price of the iPhone 7 Plus. The iPhone 7 Plus costs $769 for a model with 32 GB of storage compared with last year’s $749 entry-level price. Apple is also holding up its overall margins by reserving the more costly glossy black manufacturing process for the 128 GB and 256 GB models.

Analysts estimate that Apple will report gross margins of about 38 percent for the quarter ending in September, according to data compiled by Bloomberg. While Apple’s choice to double its storage capacities, starting with eliminating a 16 GB option in favor of 32 GB, is the main source of the lower margins, the component pricing also increased because of the inclusion of new accessories with the iPhone 7 and new displays, Rassweiler said.

“No single thing is driving the cost up,” Rassweiler said, rather it’s a combination of multiple factors. The iPhone 6S’s in-box materials were about $6, according to an updated analysis, while the iPhone 7’s are $11.80, according to IHS. The firm attributes the cost increase to the inclusion of new headphones with a Lightning connector to offset the headphone jack’s removal and an adapter for headphones not directly compatible with the iPhone 7.

While IHS estimates a build of materials, the firm says that “there are other costs, like software, that go beyond build of materials, that are not considered,” so it doesn’t provide a gross margin value. Apple Chief Executive Officer Tim Cook commented on component breakdowns on the Cupertino-based company’s fiscal second-quarter earnings call in 2015 by stating he has “never seen one that is anywhere close to being accurate.”

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