Apple's Cheap-to-Build nano

A teardown of the new iPod, dubbed "little fatty" by some, points to big savings in parts, which should help maintain hefty sales

When leaked photos of the latest iPod nano first appeared on enthusiast blogs, it quickly gained the nickname "little fatty," owing to the squat shape required to accommodate a wide-screen video display.

But the adjective "fat" could also be used to describe the apparent widening of profit margins on the nano, which has become the most popular member of Apple's (AAPL) iPod lineup in just two years. An analysis of the component costs by the market research firm iSuppli suggests that, despite the addition of a video screen, the new nanos boast the widest margins yet for the line.

After taking apart the nano, iSuppli estimates that all the parts inside cost Apple $58.85 for the $149 model with 4 gigabytes of storage capacity, and $82.85 for the 8GB version priced at $199. For the lower-priced model, that would represent a drop of more than $13 per unit (BusinessWeek, 9/20/06) in costs compared with the 4GB nano that Apple introduced a year ago. That's also more than $31 cheaper per unit (BusinessWeek, 9/22/05) than the parts in the original 2GB nano introduced in September, 2005. (ISuppli has traditionally focused on the "low-end" model, and so did not estimate the component costs for the original 4GB nano.)

ISuppli's estimates don't account for nonhardware costs, including software development, intellectual property, packaging, final assembly, and distribution. Apple declined to comment.

The Bottom Line

The apparent drop in manufacturing costs could represent a real boon to Apple's bottom line. Though Apple doesn't disclose specific numbers relating to sales of particular iPod products, the nano is generally thought to be the most successful member of the product line, accounting for roughly half of all iPod sales since it first debuted. With some 41 million iPods sold over the last three quarters, that would put nano sales in the 20 million-unit ballpark so far for Apple's fiscal year, which ends Sept. 30. ISuppli reckons, conservatively it would seem, that Apple will sell as many as 23 million nanos in its 2007 fiscal year and 28 million in 2008.

Healthier profits on nanos also could help offset the impact of the recent iPhone price cut (BusinessWeek, 9/7/07) and the rebates offered to early purchasers to quell dismay over paying $600 for a device that now costs $400.

Swapping Suppliers

ISuppli analyst Chris Crotty says one way Apple has driven down costs has been to play various suppliers against one another. For instance, with the latest nanos, Synaptics (SYNA) has returned as one of the suppliers of the technology behind the distinctive click-wheel control. Synaptics had supplied the original click-wheel circuitry on the first iPods, but was then supplanted by Cypress Semiconductor (CY). Now both are supplying clickwheel chips. "Apple wouldn't make a change like that unless there was a compelling cost-related reason to do it," Crotty says. The net savings per unit? About 13¢.

Similarly, NXP Semiconductors supplied the power management component on prior iPod nanos. But this time, the former chip unit of Royal Philips Electronics (PHG) has been replaced by Germany's Dialog Semiconductor, a small supplier of power-regulating chips. "For a small company like Dialog this is a huge win," Crotty says.

ISuppli discovered one unexpected supplier in its latest device teardown: Micron Technology (MU) provided the flash memory chips. That doesn't mean, however, that Apple has ditched its usual suppliers of flash memory, including Toshiba (TOSBF.PK), Hynix Semiconductor, and Samsung. "Micron is still a relatively small player as a flash memory supplier," Crotty says. "What we don't know is how much of Apple's flash supply is coming from Micron. If we tore down 10 more nanos, I suspect you'd see more occurrences of the usual suppliers." Indeed, another teardown analysis of the new nanos, this one by the consultancy Portelligent, found that the flash memory was supplied by Intel (INTC), Micron's partner in a new flash memory joint venture (BusinessWeek, 11/22/05).

Tangible and Intangible Costs

One chip supplier retained its position, and it was a big one: Samsung is still providing the main video-audio processing chip inside the nano. Samsung began supplying the chips in the second-generation models introduced a year ago, having won that slot from original supplier PortalPlayer, now a unit of NVIDIA (NVDA). The chip, which costs $8.60, is the same one used in the iPod classic, the hard drive-based player now in its sixth iteration in as many years, Crotty says.

Another video-related chip in the nano, this one an 85¢ part that drives the display and is similar to the one found in the iPhone (BusinessWeek, 7/2/07), comes from Intersil (ISIL). And Wolfson Microelectronics has retained its spot as a nano supplier with a 90¢ audio chip.

Analyst Shaw Wu of American Technology Research cautions that there are other less-tangible costs to consider in guessing the overall cost of the nano. Among them are reserves to cover warranties on defective units. "When you look at all these other costs, which you can't see from a teardown, then you begin to see why Apple's gross margin tends to be in the 30%-to-35% range historically."

That said, the iPod nano's slimmer component costs should at least help maintain the impressive girth of Apple's bottom line.

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