Apple set to profit from 3G iPhone due to cheaper parts, memory

Despite its new capabilities, the new 8 GB 3G iPhone will cost Apple $100 less than its predecessor a year ago, indicating the company is set to drastically increase its profit margin on the device thanks to its new arrangement with AT&T.

In a preliminary teardown by hardware analysis firm iSuppli of the 8 GB iPhone 3G -- Apple's less expensive model, at $199 retail through AT&T when it launches July 11 -- iSuppli estimated Apple's bill of materials (BOM) per unit totaled $173.00.

By comparison, iSuppli estimated in January 2007 that Apple was reaping a profit margin of over 53% for its original 8GB iPhone -- at that time, its most expensive model -- with a total BOM of $280.82. In 17 months' time, the new 8 GB iPhone 3G costs 62% less for Apple to build, even with GPS thrown in (a component that costs all of $3.60 wholesale).

Contributing greatly to the reduced manufacturing costs is the continuingly plummeting price of NAND flash memory. Last December, iSuppli estimated that 8 GB of NAND flash contributed $40 to the bill of materials for the new iPod Touch.

Today, six months later, that same 8 GB constitutes just $22.80 of the iPhone 3G's BOM. The display, meanwhile, only costs $2 less today than it did in December.

Although the base iPhone 3G will sell for just $199 at retail, Apple will receive far more than that with AT&T footing the bill as it does with most phones. Wireless carriers subsidize much of the cost of devices and make up the difference with revenue from new and existing subscribers.

For the original iPhone, AT&T shared a portion of that revenue with Apple instead of paying the company a higher price for the phone, which ran $299 after last September's price drop. The iPhone 3G without an AT&T contract, which reflects the cost to the carrier, will likely be priced hundreds of dollars more than its subsidized $199 price tag.

UPDATE Last week, an Oppenheimer analyst presented a conservative estimate of what AT&T may be paying to Apple per unit: about $325. If that's accurate, then based on Tuesday's teardown analysis, Apple's profit margin for the 8 GB iPhone soars to 63%.

But that would be $126 per unit, which is about half of what Apple was making per sale at the dawn of the first-edition iPhone in January 2007. At the end of that model's reign, BOM estimates had fallen to about $220, and Apple was selling it for as low at $299.

Less conservative estimates say AT&T could be paying as much as $425 in subsidies per unit to Apple. If that's the case, Apple's margin -- not just the percentage, but the amount -- may have returned to what it was at the beginning of last year, around $250.