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Look For Early iPhone Price Cuts

Apple Has Plenty of Room to Cut Retail Price

January 19, 2007

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Would you pay $499 for Apple's new iPhone? Apple is betting you will, but if not the computer maker has plenty of room to make you a deal. In fact, iSuppli, a market research firm, predicts Apple will quickly cut iPhone's price.

The reason is simple. According to iSuppli, Apple will take advantage of the "must-have" buzz surrounding its new gadget to try and get at least $499 for it, but would have a 50 percent gross profit margin at that price. Price cuts, they say, are inevitable.

"iSuppli estimates the 4Gbyte version of the Apple iPhone will carry a $229.85 hardware and manufacturing cost and a $245.83 total expense, yielding a 50.7 percent margin on each unit sold at the $499 retail price," said Andrew Rassweiler, teardown services manager and senior analyst for iSuppli.

"Meanwhile, the 8GByte Apple iPhone will sport a $264.85 hardware cost and a $280.83 total expense, amounting to a 53.1 percent margin at the $599 retail price."

For Apple, such a strong hardware profit is par for the course, with the company having achieved margins of 45 percent and more in products including the iMac and iPod nano, according to iSuppli. However, because Apple is facing extensive competition in the music-phone market, the company may need to cut into its margins to reduce pricing in the future.

"With a 50 percent gross margin, Apple is setting itself up for aggressive price declines going forward," said Jagdish Rebello, PhD, director and principal analyst with iSuppli.

Apple faces a bevy of competitors in music phones, with 835 models 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 Inc., Samsung Electronics Co. Ltd. and LG.

Shipments of music-enabled mobile phones will rise to 618.1 million units in 2007, up 39.9 percent from 441.7 million units in 2006, iSuppli predicts. By 2010, the company estimates that shipments of such phones will increase to 1 billion units.

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