Apple to rake in 50% margin on iPhone

Apple is expected to generate around a 50 per cent gross margin on the iPhone, generating a healthy profit for both the Californian gadget maker and operator partner Cingular Wireless.

Figures published on Thursday by market research firm iSuppli estimate that the 4GB version of the Apple iPhone will carry a $229.85 hardware bill of materials and manufacturing cost, at a $245.83 total expense.

“This means a 49.3 per cent margin on each unit sold at the $499 retail price,” said Andrew Rassweiler, teardown services manager and senior analyst for iSuppli.

In fact, the margin could be even higher than this. The $499 retail price announced at Apple’s unveiling of the iPhone earlier this month is believed to include a subsidy from Cingular. Although, Jagdish Rebello, director at iSuppli told telecoms.com he does not believe Cingular would subside the handset at this point.

Whatever the case, this means fat profits for Apple – something the company is no stranger too after Thursday morning reporting a 78 per cent surge in profits during the last quarter of 2006 to $1bn.

The 8GB iPhone is expected to sport a $264.85 hardware cost and a $280.83 total expense, amounting to a 46.9 per cent margin at the $599 retail price, iSuppli said.

Rebello anticipates that the high margins will set Apple up for aggressive price declines going forward.

“Initially Apple will be targeting the cream of the crop, those who will buy an iPhone at any cost,” Rebello said. Apple has indicated that it will be targeting just 1 per cent of a 1 billion unit market to start with. “Then they will aim for the mass market by cutting prices,” Rebello added.

But Apple faces hefty competition going forward, with 835 models of ‘music phone’ expected to be introduced by various competitors in 2007. iSuppli estimates that 14 music-enabled mobile phones with features that compete closely with the Apple iPhone already are shipping from manufacturers including Nokia, Motorola , Samsung and LG.

Shipments of music-enabled mobile phones will rise to 618.1 million units in 2007, up 39.9 per cent from 441.7 million units in 2006, iSuppli predicts. By 2010, shipments of such phones will increase to 1 billion units. iSuppli defines music-enabled phones as those supporting music file formats and not necessarily as those tailored specifically for music playback. Thus, this number is much larger than the total available market for music-oriented handsets like the Apple iPhone.