The Apple Watch wasn’t long out before iFixit did its usual teardown. Research firm IHS always takes longer, as it seeks to identify the components and find out what they cost. The result, it says, is that the component cost of the 38mm Apple Watch Sport – the cheapest model – totals $81.20, with manufacturing costs taking the total cost-price to $83.70.
Tim Cook made a pointed reference to this type of cost estimate during last week’s earnings call, saying that “I’ve never seen one that is anywhere close to being accurate” – though he was likely making a broader point …
Component costs are a small element of the total cost of bringing a product to market, especially a brand new product. Research & development and marketing costs in particular make up a huge part of the all-in cost of an Apple product. As the West Wing‘s Josh Lyman might have put it: the second Apple Watch Sport cost them $84, the first one cost them a billion dollars.
We already know IHS got one thing wrong: the company claims that margins on the Apple Watch are higher than for other products, a point directly contradicted by Apple CFO Luca Maestri’s statement during the earnings call that margins on the watch will be lower than the company average for products.
But for whatever it’s worth, below are the IHS numbers, with the display & touchscreen module the most expensive single component at $20,50, and the battery the cheapest at 80 cents.
ABI Research yesterday gave us a detailed look inside the Apple Watch’s S1 chip, revealing the RAM, radios, custom Apple processor and more.
Top image: iFixit
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Fine. I’ll buy your 38mm Apple Watch Sport for $85!
For those “brave ones”. This is just a price for components.
All I’m trying to say is, there’s more that goes into the product as a whole so I do not want to see wrong comments here.
It’s a bit like saying people are made up of 95% water, a handful of minerals, a tub of lard, and a two inch nail, so the value of a human being is about 50p. Production costs are a romantic evening.
Hah, absolutely :D
Makes it sound like an escort service… LOL. Now that you mention it, that high end gold/red watch has “Trophy Wife” written all over it! ROFL.
What about the body, the glass, assembling costs, work, test? If calculating the costs, do it right.
They can’t, because they don’t really know the actual cost. They break down what they can…the low hanging fruit, and put it out publicly as a PR move around a much talked about product…knowing that every low IQ blog will pick it up and write a story about “Apple Tax”. In general, people are pretty stupid, and will pick this “news” up and run with it…which is great for IHS. That we’re talking about it now is worth a few bucks alone in “earned” press.
Next, you’ll have some bozo see $84, and tell his dad that he can make these for under $100 bucks, and sell them for $400…kickstart some thing and burn up a bunch of family and investor money.
The way to think of it is…if you received a watch on Apr 24th, the Sport model alone probably cost Apple about 8X what you paid for it…that day. Then the per-unit cost goes down over time. Their break even on development is probably around 1 million units. In other words…the first million units represent a loss to the business.
I’ll never understand why people bother with these breakdowns, they are entirely meaningless. My shop manufactures components for government contracts, and if you did a tear down you’d find the cost of materials to be far below our own cost to manufacture, not even counting any profit. Accounting for individual components means nothing, there’s assembly, packaging, and billions spent on R&D, prototyping, testing, production setup, marketing, building the supply chain, Watch OS development etc.
Stories like these only serve to spawn very annoying people who say “hey man, Apple ripped you off, that thing is only worth $84”. (sigh)
If the Apple Watch Sport costs $84, then the Moto 360 would cost $60. So?
In the retail model, the cost multipliers can be estimated as 2X for each point in the product chain.
Consumer cost at $400; 400/2 = 200 wholesale cost, 200/2 = 100 OEM cost. That is right in the range of the hardware cost of the watch with some cost of software and band.
These “cost of components” drive me NUTS! On that basis, your soda fountain coke should be free.
I hate when people do these and post them online. It just makes people that don’t understand anything think, “Man, I knew Apple always charged way too much!” When they don’t realize that Apple also is building new machines to manufacture these and the cost of all their work and development is waay more than this.
What are the cost of the material of a pair of Levis jeans? Or for the ingredients of a dinner in a restaurant?
First off, the contention that IHS is wrong on margins because Maestri contradicted that on the call is itself wrong. IHS is referring to the gross margin, whereas Maestri was referring to the net margins. The discussion on the call talking about longer term margin shift bears that out (in other words, how long is Apple going to cost out the R&D in their margins statement). At some point a product’s R&D is paid off; investors want “color” on when Apple is going to define that.
Secondly, a commenter states that the IHS numbers don’t include “the body, the glass, assembling costs, work, test”…IHS does, RTFA.
Every time these things come out, people who have no idea what they’re talking about run out to spout all that they don’t know. Bravo, to those of you, you’ve not disappointed. Does anyone actually EXPECT Tim Cook to come on a conf call and say “You know those tear-down cost analyses that make us kinda look like money-grubbing a-holes? They’re spot on!” No, he’s never going to say that, and he’s under no legal obligation to be honest about these numbers. Further, that he said ANYTHING at all kinda hints to me they’re close enough to cause him to even TALK about them; it is on his mind. If they really WERE tragically low, you’d see other such groups refute them; they aren’t. Cook instead wants to change the conversation to net margins, as well he should. Shareholders on the other hand want to know both. That’s the game. As for the “missing” R&D costs, guess what? They’re not missing at all, they’re also already accounted for under their own heading in Apple’s financial report. The most important aspect of this report is the Cost to MSRP ratio. Comparing that to other Apple products, like the iPhone and iPad indicates that Apple has raised retail prices. That’s something that investors want to know.
There is no magic going on at Apple, they’re doing it just like everyone else. (Well, arguably doing it better.)
“At some point a product’s R&D is paid off” – kind of, but Apple will be doing R&D right now on future models of the watch, as it does for all its products. R&D is an ongoing expense.
There will always be ignorant people who think that a mark-up on a product is immoral, unethical or unnecessary. These people will never run their own businesses. The Sony PlayStation 3 finally turned a profit after 4 years even though it was one of the most successful and popular products by Sony.
It’s a good article and interesting to note the cost of components. People just need to understand that one ad in a national newspaper can cost £70,000 let alone the cost of television, billboard and digital ads. Why wouldn’t you want to drive down the cost of manufacturing in order to maximise profit?!
I’m sure Apple spent several million dollars running that fitness testing lab.
People who bitch and moan about extremely minor issues with 1st gen products, claim they suck, and that are overpriced at $400 really remind me of how hilarious Louis CK’s standup skit on smartphones and airplanes was. I’m 39 years old and I remember when Atari was amazing. I’m telling you, $400 for a tiny computer on your wrist that does ALL these things is absolutely BANANAS and a technological miracle that took 5000 years of science to build.
“The worst cell phone is a miracle! Your phone doesn’t suck, your life sucks around the phone. These things are AMAZING, you can call in an airstrike, you can look down on the top of your own head. I swear this technology is wasted on the biggest piece of shit generation of assholes in the history of humanity, we’re the worst generation so far!”
– Louis CK (paraphrased)
https://www.youtube.com/watch?v=RayfjtzpQ7k (warning, there’s swearing, but it’s hysterical)
Spoiler: Pretty much nothing in this world is sold with the price it costs to make.
You can easily count in marketing, logistics, taxing etc. Also, products are supposed to make a profit, so you have to add in that as well.
Also what isn’t counted in the cost is the actual body, glass, coating, dials and such.
When you consider these facts, there’s actually not that much of ‘air’ in the price after all, huh.
You probably wanna do similar mental exercise to products like Motorola 360, Pebble Steel and other smartwatches too, they all practice similar pricings and costs.
Cost of the materials is irrelevant to how much a creator decides his creation is worth. A pencil sketch from Picasso would’ve costed him 59 cents for the pencil, and 39 cent for the paper; yet worth thousands.
I couldn’t have said it better myself. My hats off to you.