iPad Component Costs Leave Room for Price Cuts

(This story has been updated to include an analyst's comment.)

Apple's (AAPL) iPad tablet computer, introduced Jan. 27, may have component costs of as little as $219.35, according to a preliminary estimate by market research firm iSuppli.

Materials for the iPad, due to go on sale in March and April, include a multitouch-screen display that may cost about $80 and a $17 processor designed by Apple and manufactured by Samsung, according to El Segundo (Calif.)-based iSuppli.

Even the lowest-priced iPad, with 16 gigabytes of memory and a retail price of $499, may be beyond the reach of some budget-conscious consumers, some analysts have said. The relatively low price of the iPad's materials gives Apple scope to reduce the retail price over time, iSuppli analyst Francis Sideco says.

"There's certainly a decent amount of headroom in there," Sideco says. "If they had to reduce the retail price, they certainly could."

Price Cut Speculation

Credit Suisse (CS) analyst Bill Shope fueled speculation over price cuts when he released a research note Feb. 8 saying Apple may be flexible on pricing if the iPad doesn't attract as many buyers as hoped. "While it remains to be seen how much traction the iPad gets initially, management noted that it will remain nimble," Shope wrote in the note, citing recent meetings with Apple executives.

The cheapest model lacks features some consumers may want in a tablet computer and therefore may not be the most attractive option, says Roger Kay, an industry analyst and president of Endpoint Technologies Associates. "They wanted to be able to say the price is $499 and I think they shaved everything off to get there," Kay says. "You can make the argument that the $499 model appeals only in the most limited range of use scenarios. If you want to put anything significant on it or take it anywhere, you need the more expensive models."

Colin Smith, a spokesman for Cupertino (Calif.)-based Apple, declined to comment on iSuppli's research as well as the prospect of price cuts for the iPad.

Research firms including iSuppli conduct so-called teardown analysis of consumer electronics to determine component prices and makers and estimate margins. Researchers at iSuppli didn't have an actual iPad and instead relied on Apple's public statements on its features. The analysis includes material costs, though not other expenses incurred by Apple, such as marketing.

The iPad's most expensive component will be its 9.7-inch multitouch display, similar to the one found on the iPhone but more than twice its size. At $80, the display will cost Apple about five times the cost of the display used on the iPhone 3GS. South Korea-based LG Electronics (066570:KS) is the most likely supplier of the display, Sideco says. Apple hasn't disclosed the identity of the maker, and LG spokesman John Taylor didn't immediately return a call seeking comment.

A4 Chip Manufacturing

The chip running the iPad is called the A4, the fruit of Apple's 2008 acquisition of PA Semi for $278 million.

Samsung (005930:KS) has supplied the main applications chip used in the iPhone 3GS and two previous iPhone models. In the case of the iPad, Samsung is playing a role akin to a chip foundry, building the chip under contract based on Apple's design, Sideco says.

Chip foundry companies including Taiwan Semiconductor (TSM) and United Microelectronics (UMC), both of Taiwan, similarly manufacture chips for so-called fabless chip companies that don't have the means to build their own semiconductor factories. Sideco estimates the A4 will cost Apple about $17, only about $2 more than the Samsung chip used in the iPhone 3GS, which cost $14.46.

Of the six iPad models Apple plans to release in March and April, three will have access to 3G wireless data networks and three will work only with Wi-Fi, each with 16, 32, or 64 gigabytes of memory. The memory chips are the key variable cost across all six models, Sideco says. The price of 16 gigabytes of flash memory is $29.50 while 32 gigabytes cost $59 and 64 gigabytes cost $118.

The most profitable of the six iPads is the 32-gigabyte version with 3G network access, Sideco says. Its combined materials and manufacturing cost of $287.15 amount to 39.4% of the retail price. The least profitable is the 16-gigabyte non-3G version, which sells for $499. Its combined costs amount to $229.35 or 46% of the retail price, leaving the slimmest potential profit margin of the six.

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