With all the latest gadget releases, it’s hard to believe sometimes how much they cost. A good example of this was Apple’s release of the iPhone 3GS to which AT&T had to come in and offer better upgrade plans or fear customer’s wrath. Without a contract, the latest development from Apple costed about $600. The cost of components to make? $179.16 according to market research firm, iSuppli. Factor in some labour costs and you still have to figure that Apple is making over 100% profit on each iPhone sold.

Of course, that might lead some Apple haters to cite how bad the Apple tax really is, but it’s becoming almost standard across the board. Consider that the Palm Pre only costs about $138 to make yet costs $200 (with $100 mail in rebate) and requires a service agreement with Sprint. I guess only Sprint knows how much Palm is getting per phone. Furthermore, the Blackberry Storm costs about $200 in parts, but is retailing for $500 without contract from Verizon Wireless. Even factoring a $100 per unit for R&D and labour still leaves a margin of 80% or so.

Truth be told, cell phones fall into a very unique market category. They are both viewed as essential and status symbols. If you want to surf the internet really well, then you pretty much have to buy a really expensive smartphone. Yet surfing the net on the go isn’t a luxury, it’s viewed as essential by many people. What I mean is that smartphones are not subject to the same market as say, Rolex. A cheap $20 watch can technically function just as well as a Rolex, although it won’t have the look or the status attached with it. Or consider the Amazon Kindle, which has a 100% margin but due to its non-essential status, has had less than stellar sales. In contrast, in the smartphone market, perhaps due to the large R&D, it’s almost essential to have a “Rolex” phone (Apple, Blackberry) if you want quality surfing (essential to many). Surfing-on-the-go is just one example of an essential service that smartphones provide, albeit internet anywhere is definitely one of the top desires.

The question remains though: does this trend continue upwards, or does it level off somewhere? Is double the manufacturing cost to be continuously expected for smartphones, or will we see a point where the technology as a whole has stabilized enough to allow prices to come down? Only time will tell, but it’ll be interesting to track margins in the coming years. After all, if Apple can release a best-selling iPhone with 100% margin on manufacturing costs in a recession, think of what they can do in boom times!

Inspiration: http://finance.yahoo.com/family-home/article/107263/consumer-electronics-teardowns.html

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