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Apple's Margins on iPod Nano at 50% [UPDATE]

Thursday, September 22nd, 2005 at 9:15 AM - by

Apple Computer's gross margins on the iPod nano come in at about 50%, according to market research firm iSuppli. In a report obtained by The Mac Observer, iSuppli broke down the costs by disassembling a nano, and looking at component and manufacturing costs. The firm said that 50% gross margins are in line with the rest of the iPod product line.

According to the report, a two gigabyte nano has some US$90.18 in parts, and costs $8 to assemble. This includes $54 dollars for the 2GB of flash memory itself. iSuppli said that the same memory would cost other manufacturers $90, but Apple got a steep discount from Samsung by agreeing to buy 40% of the company flash inventory.

This gives Apple a competitive edge over other digital media device makers, allowing the company to price its products lower than those companies. This serves the dual purpose of boosting Apple's market share and putting enormous pressure on companies trying to keep up.

For those interested in the business side of the iPod, iSuppli also found that the chip controlling the click wheel in the nano was produced by Cypress Semiconductor. Synaptics supplied the click wheel technology in earlier iPods, but Apple switched to a click wheel of its own design.

The company did so because of price, as the chip manufactured by Cypress for Apple costs $.45, as opposed to $1 for the Synaptics product.

The last notable nugget is that PortalPlayer is supplying the audio chip for the nano. PortalPlayer supplies the audio chips for Apple's hard drive-based iPods, but for the flash memory-powered iPod shuffle, Apple turned to Sigmatel, who supplies chips for much of the flash memory digital media device market.

[Update: This article has been updated with additional information obtained in the iSuppli report. - Editor]

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Dean Lewis said:

member since 29 Sep 2001 with 162 posts, unranked, send him a message or view his profile

Thu Sep 22, 2005 10:23 am

Of course, we'd never want to factor in the costs of engineering this little marvel or pay for the designers who ensured that despite its tiny size it'd still be usable by large American hands. And we probably don't have to pay for advertising the thing or work in the costs of bringing all those "cheap" materials together to make the thing.

Taking something apart and counting up the value of each part only scratches the surface of the cost of an item. Break down the human body into its component parts and we're only worth $4.50. Add another $3.50 if you treat your skin like cowhide and sell it for leatherwork. (shiver)

(Source: http://www.coolquiz.com/trivia/explain/docs/worth.asp )

An item is worth more than the sum of its parts. And, in the wonderful world of capitalism, an item is worth whatever a majority of people are willing to pay for it.

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Biff said:

member since 08 Apr 2004 with 1479 posts, unranked, send him a message or view his profile

Thu Sep 22, 2005 11:16 am

Hey man thats why they call it GROSS margin.

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Small White Car said:

member since 02 Jul 2004 with 1960 posts, unranked, send him a message or view his profile

Thu Sep 22, 2005 11:42 am

Well, Dean, the nano doesn't pay for itself. Most likely the money from the iPod Mini paid for the Nano. And the money for the Nano is going to pay for something NEXT year.

That's why I find these kinds of breakdowns to be informative. When I see that Apple's making a lot of money off an item like this, I don't think they're greedy, I think "Great! Now they really get to work on that video-iPod/Intel Powerbook/whatever."

If those margins ever shrink too small you can bet they'll be fewer new products next year so yes, I do like these kinds of breakdowns!

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Biff said:

member since 08 Apr 2004 with 1479 posts, unranked, send him a message or view his profile

Thu Sep 22, 2005 2:23 pm

Dean you must have really crappy organs if the combined worth of your entire body is $4.50. Well either that or you contradicted yourself when you later stated the worth of something is defined by what people are willing to pay for it.

But I'm being overly critical. I realize thinking is hard and just repeating things that you hear is much easier. Fight the power! Down with naughty businesses! Society is evil! Blah blah!

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A guest said: (hide)

Thu Sep 22, 2005 4:34 pm

Biff wrote:
But I'm being overly critical. I realize thinking is hard and just repeating things that you hear is much easier. Fight the power! Down with naughty businesses! Society is evil! Blah blah!

Biff, what the hell is your problem? Can you read and process content? What kind of scores did you get for comprehension in high school? How much longer are your parents going to let you be a troglodyte in their basement?

Why don't you try reading Dean again. All he did was describe how the wonderful world of capitalism works. Any anti-capitalist attitude is purely your perception.

Take a pill, read your baseless attack and apologize, bozo. Then make a resolution to try to contribute to online conversation rather than debasing it with mindless attacks on those who actually contribute.

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Dean Lewis said:

member since 29 Sep 2001 with 162 posts, unranked, send him a message or view his profile

Thu Sep 22, 2005 10:25 pm

Biff wrote:
Dean you must have really crappy organs if the combined worth of your entire body is $4.50.

You didn't go read the link I posted, did you? $4.50 is the value of all the chemical components making up the human body. It says nothing about organs -- which aren't supposed to be for sale anyway.

Guest has it right. You might need to re-read. The whole point of my post was that something IS worth more than the sum of its parts.

Small White Car brings up an excellent point about investing in future products, too, although I'm more inclined to think one has to recoup research and development costs first -- all costs that aren't evident just by taking something apart and seeing some chip costs 40 cents or whatever. Everything after that is gravy, and perfect for reinvestment into the next great thing. Nothing wrong with that; I never said there was. The original article seemed to insinuate there was by pointing out how much "extra money" Apple was making, not me...

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Bryan said:

member since 11 Jun 2001 with 7340 posts, TMO Staff, send him a message or view his profile

Fri Sep 23, 2005 12:56 pm

The importance of iSuppli's report, or at least its intent, is not to point out how outrageously high the margins are, but rather for industry watchers to understand where Apple is with this product.

50% gross margins are very healthy, but they're in line with the rest of the iPod product line, and therefore not unusual.

If you want to understand Apple's fundamental strengths (or weaknesses), however, this information is key.

In any event, it seems as if there was some misunderstanding on the angle of either our coverage, or iSuppli's report.

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