Why the iPhone 3GS Doesn't Cost Apple $179


iSupply gets a lots of headlines, like this one from Reuters, guestimating the raw component costs of popular gadgets like the iPhone 3GS. And good for them.

Media literacy 101, however, demands we remind again that the iPhone 3GS didn't pop into consumers' hands fully formed from a Star Trek transporter or the toes of the frost-giant Ymir (Bing it). It cost money to research and develop both hardware and software, to design and prototype, to test and certify, and it cost money to manufacture, to ship, to stock, to advertise, and to sell.

Even if we stick to iSupply's guesstimates of raw component costs, to paraphrase Aaron Sorkin's hyperbole, while the second iPhone 3GS may have cost $179, the first one cost a billion dollars.

So take that $179 number you'll see all over the net with a grain of salt before you start knocking on the door at 1 Infinite Loop demanding your iPhone 3GS at "cost".

[Thanks to the Reptile for the tip, image via rapidrepair.com]

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Rene Ritchie

EiC of iMore, EP of Mobile Nations, Apple analyst, co-host of Debug, Iterate, Vector, Review, and MacBreak Weekly podcasts. Cook, grappler, photon wrangler. Follow him on Twitter and Google+.

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Reader comments

Why the iPhone 3GS Doesn't Cost Apple $179


people always forget R&D costs. Gota love how people who have no idea how to run a tech business make comments like it only cost 179...

The study was pretty clear that it didn't include cost of marketing, R&D and packaging, so I think this post is pretty useless.

@ Sebastien
Agreed. Useless post. It's clearly stated that it doesn't count the cost of of everything out with the price of the components themselves.

True people forget R&D costs, but people also over estimate these costs on incremental releases.
The R&D was paid off by the First Generation phone.
Upgrading to the 3G wasn't even a processor change, so most of the work was integrating a couple more radios (easy because the chip designer companies (like Infineon) essentially do most of this work with/for you). Take out one radio chip, slap in another, adjust software drivers to work. (Remember, this software is basically BSD so drivers are modular).
3Gs required a whole new CPU and Video chip. Those two items represent a much bigger job.
But as we have discovered, not much else in the way of hardware changes. Compass,(new) Camera (out with old, in with new), Memory (same size chip, larger capacity, zero engineering changes). The basic design remained the same. The basic OS gained only tweaks here and there added Apps for Camera.
Certification of the device, (take it from someone who has been thru this many times) is NOT a big deal, and NOT expensive - less than 10 grand and 4 days start to finish. There are companies that specialize in this. You hire one, they put it in their test chamber and put it thru the paces in one afternoon, boilerplate up a report, log into the FCC and submit the paperwork all on line.
Apple is STILL reaping the rewards of their hard work on the 2G. (As well they should).
Granted Apple has a development staff Payroll, physical plant, test labs to pay for. They have a software team, and a hardware team, and a separate App store team which they subcontract to the Mormon Church. (Ok, just kidding about that bit).
That hardware team is not that big. Doesn't need to be. ~20 people. High paid, but not many. Software team, bigger, cheaper guys, kernel hackers and Application people. Maybe ~50 people and associated staff.
But we are no longer talking about Billions for each new rev of the hardware. Millions. 10s of Millions. Worst case, low 100s of millions.
Lets not go overboard on this R&D estimates.

I agree with Ice. Don't leave out the cost of the 3.0 software and upgrades the the SDK which included over 1000 API's which both Apple and 3rd party developers will be taking advantage of. It's not an insignificant cost and wouldn't be included in the Bill of Materials list that iSupply does.

With all that's been said it's still not worth 3/4 of a grand. More to the point. It would not be sold subsidized for $300 if it were worth more. Aplenty knows they can only get the hardcore fan that derives their self worth from the Apple products they own to pay the full price.
Icebike is right someone else really did all the R&D for Apple. It's the same as gathering known parts to build a hackintosh. Someone else already did all the work. Apples real R&D is in the OS and not hardware, because they go to their suppliers and say "we need a thus that can function to these specs" The supplier then eats the cost of R&D because they will make it back through volume.
Stop the spin and admit the only reason to justify the over inflated full price is to make Apple happy for the money they trade for favorable press perhaps. Just maybe. Even Apple knows they have to do some serious marketing to get a quater of the volume from the new model of the models before. The public is getting wise to the needless mark up.
Let's try to agree that it's worth $300 heck even $400, but not $700 +

Paraphrasing Patrick Norton: "Don't even get me started on people complaining about the cost of something manufactured in a country where the workers aren't even paid enough to eat"...
What would iPhone 3GS cost if it were manufactured entirely in the US?

Actually I think the rull retail phone price UNSUBSIDIZED is around $600.
Lets face it, there is a lot of profit in an outright purchase (which is still locked to ATT/Rogers in North America).
No one knows what ATT/Rogers pays for PER handset, but I expect Apple to make at least 100% profit ($359/device) for bulk purchases. (I don't begrudge them this by the way).
ATT is alleged to have a continuing revenue sharing agreement out of subscription fees. Maybe Rodgers too. Apple might give up some handset profit for a piece of long term revenue stream. Or they might get this to justify free OS upgrades.

Typically manufacturing margins need to be at least 50% for it even worth making the device. That is GROSS margin, so take the cost of the phone and divide it by 0.5 = $358. However, Apple has invented a device which has revolutionized the smart phone as we know it; one that makes 10's of thousands of seemingly normal people camp outside of retail stores for hours, even days to get one. From my point of view, they deserve every cent they get.
Also, a product is only worth as much as someone will pay for it. How many millions have these things again?

Its weird, you sound like you think you know what you're talking about but then every sentance you wrote is made up incorrect nonsense. Way to go!

It seems like All of you really know what you're talking about. So does anyone know where to buy all these parts in bulk?