Apple's iPad Mini margins run between 40% and 55%

Refuses to bend on high profit, even for less-expensive Mini, says IHS iSuppli after pegging 'bill of materials' at under $200

The new iPad Mini costs Apple just under $200 in materials and manufacturing, an analyst said today, putting an exclamation point on the company's devotion to high profit margins.

IHS iSuppli, which regularly tears apart electronic devices to estimate a "bill of materials," or BOM, pegged the lowest-priced iPad Mini's component costs at $188, with an additional $10 to account for manufacturing. The total of $198 does not include other costs, such as research and development, marketing or capital expenses.

With the 16GB iPad Mini's retail price of $329, the $131 represented a margin of nearly 40%, slightly higher than the 37% margin iSuppli estimated Apple earned on each third-generation iPad when that model debuted last March.

The more expansive configurations -- 32GB and 64GB -- add even more to Apple's bottom line, said Andrew Rassweiler, iSuppli's senior principal analyst for teardowns, in an interview today. Calling Apple's incremental cost for the additional memory "almost insignificant," he and his team put the extra income at $90 for the 32GB, $162 for the 64GB device, both above and beyond the $131 for the 16GB model.

Margins for those Minis range from 52% for the 32GB to 55% for the 64GB device.

"From a cost perspective, the BOM shows that Apple knows how to maintain hardware margins, whether it's a new product or a 'respin,'" said Rassweiler, referring to the fourth-generation iPad, which Apple also launched two weeks ago.

Sameer Singh, founder of Tech-Thoughts, agreed. "The margins do appear to be in line with other iPads," he said via email today.

In August, Singh estimated the materials and manufacturing costs of a then-only-rumored 16GB iPad Mini at $189, or within 5% of iSuppli's Monday number. Later, he used his ball parked BOM to dismiss speculation that Apple would price the smaller tablet at $249.

Apple's business model has always been to make its profit on the hardware, with any additional income -- from music, apps, extra iCloud storage space and the like -- as simply gravy. The company did not deviate from that philosophy even as it entered the smaller, lower-priced tablet market.

Its model is markedly different from rivals in the space, such as Google and Amazon, which sell their 7-in. tablets at or near cost, expecting to generate profit from sales of software, other content and services.

"Amazon and Google will continue to grab market share with their pricing model, but it doesn't seem like Apple will look to compete directly with them," said Singh.

iSuppli gleaned other insights from the teardown and BOM estimate.

Apple could have priced the iPad Mini lower, said Rassweiler, but obviously decided that the resulting 34% margin was insufficient. Before its introduction, most experts had figured Apple would roll out the Mini at a starting price of $299.

That also means Apple has maneuvering room, and, if necessary, could cut prices to drive sales. But Rassweiler doesn't expect that to happen: Instead, he's betting that Apple, as has been its habit, will keep prices static and in the next iteration, boost the processor's speed or the screen's resolution.

And there may be more than madness to Apple's pricing, Rassweiler speculated.

"It's almost reverse psychology," he said, of Apple's $329. "Everyone else says, '$199 is our price point,' but Apple goes above the next 'magic number' of $299, perhaps thinking that would send the message that the product is cheap."

The exterior of the iPad Mini is "typically Apple," said Rassweiler, referring to a polished fit and finish. But the interior was "underwhelming," he added.

"There's nothing inside that's cutting edge, they didn't push the envelope," Rassweiler argued. "Like the Apple TV, they took the safe road and reused components." For example, the iPad Mini's SoC, or "system on a chip," the Apple-designed A5, is the same that runs the still-for-sale iPad 2, the Apple TV and the latest iPod Touch.

iSuppli noted that by reusing components in multiple devices, Apple can increase the size of its orders to suppliers, and thus keep costs low.

If the iPad Mini is a success -- and from Apple's claim today that it sold 3 million iPads, including the Mini, between Friday and Sunday, it already is -- Rassweiler expects Apple will invest more in the 7.9-in. tablet.

And likely sooner rather than later.

Although Apple has made a tradition of upgrading the iPad -- and the iPhone -- annually, it departed from that schedule for the first time two weeks ago when it refreshed the iPad with a fourth-generation model by swapping out the March edition's A5X SoC for the A6X, a dual-core processor similar to the one that powers the iPhone 5, albeit with more graphics processing punch.

"It's more and more common [for tablet makers] to do a mid-cycle respin," said Rassweiler. "I'm going to bet that Apple will do that more often to keep up with the [tablet] market."

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is gkeizer@computerworld.com.

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