Fun Topic: Cellphone Economics Part 1 (aka. iPhone vs. iPod pricing)

The question I've been asking myself lately is:

"Are cellphone prices heavily inflated?"

So a few weeks ago I had a posting about the rumoured iPhone 5C release and I had a link to IHS/iSuppli breakdown of the iPad Mini. That got me thinking (which is never a good thing...) as I was peeking around at the pricing of the latest generation of iPod Touches and compared that to iPhone 5.

• iPod 5 Touch 16 GB - $229
• iPhone 5 16 GB - $669 (unlocked)

Pricing from Apple.com

 I was *shocked* (although I probably shouldn't have been) that you could get a iPod Touch 5, essentially get a iPhone 5 without the cellular part for less than HALF the price!

What is the *same*:

• 4" retina display (1136x640 @ 326 PPI)
• Almost identical bodies (iPhone is 7.6mm vs iPod 6.1mm)
• FaceTime HD Camera (720p)
• WiFi & BT connectivity
• Apple EarPod headphones

What is *different*:

• iPhone 5 has 8MP camera, iPod 5 has no camera (only 5MP on 32 + 64MB models)
• Qualcomm Golbi MDM9615 4G LTE modem

I checked to see if IHS/iSuppli had a breakdown of the iPod 5 available for public consumption, but they did not. However I did find the iPhone 5, which I was at least a starting point to do some estimates on:

(From http://www.isuppli.com/Teardowns/News/Pages/iPhone5-Carries-$199-BOM-Virtual-Teardown-Reveals.aspx)

So... basically the total cost of iPhone is $199 in parts and $207 in BOM + Manufacturing in 2012. That's about 29.6% of $699 list price. Now if we subtract out the Golbi modem and camera, that's a simplistic subtraction of $52. That leaves $155, or 67.7% of the list price of $229. (Note: I image if I were cut everything we'd be closer to 50% mark... with lesser processor, etc)

That's *shocking*, that the margin on iPod is HALF of what it is on the iPhone.If we interpolated the same mark-up on iPod as the iPhone, we get $306, which is less than HALF again what the list price is. Now there may be more sub-par components in the iPod that I haven't caught cost-wise, but I can't image that you could get the BOM + Manufacturing costs below or around $100. 

(I'm actually more confident in that, after looking at the iPod Nano breakdown, which  IHS/iSuppli pegged at $43.73. This is with only 8MB and tiny display. There is $40 difference alone in LCD display and $6.45 in memory. That would put that almost at $90.20, and we aren't adding in more costs for bigger battery, WiFi and housing ,etc.)

What are looking at here then? I mean the iPod Touch is the closest thing to a cellphone without a cellular modem. Does this mean that Cellphone Companies and the ODMs are colluding together and inflating the prices of "smart-phones"?

This article from CNET had Luke Westaway discuss a very similar comparison with Asus. However I found the article somewhat unsatisfying considering I have the BOM breakdown in front of me from iPhone 5. Processor only accounts for less than 10% of the build cost.

Bottom line is that cellphones have a inherent "luxury" tax over non-cellular versions. This is probably driven by carriers who want very expensive phones that they can heavily subsidize with multi-year plans.  They want to sell you $700-$900 phones, it makes good business for them. 

Note (again): please understand that I am using information from IHS/iSuppli in my analyst which is by no means official pricing from Apple (as I doubt any exists). I have also made a lot of estimates and assumptions. This article was created for education or entertainment reasons *only*. 

Hope that helps...


Wayne Pau.


p.s. So what does that mean for someone frugal like me who might want a iOS device? (ie. for those Candy Crush Saga addicts...not me...personally, I'm OK with my current phone...) I'm wondering if you're better off with a $0 Android phone that you can share WiFi and buy a iPod 5 Touch. The main drawbacks are:

• you won't have integrated calling and contact book 

• you will have to carry 2x devices

• you have to charge 2x devices

but you could be saving yourself like $400! Like you'd also save yourself some data charges as you're more likely to go free WiFi spots than tether to your Android Phone when given the chance @ Starbucks, etc.

I wonder what the carriers would do if everyone did this? Would that deflate or inflate usage charges as maybe more expensive handsets help off-set data, messanging and voice changes?