Books written by Ray Sullivan

Monday, 21 November 2011

The Cost of Technology - iPad to Kindle

A British newspaper, the Mail on Sunday, recently paid a technology engineering company to dissect an iPhone 4S to see what was in it and, perhaps more importantly, what it cost in components.  In the UK, outside of a contract, a 4S will cost you just under £500 (just under $800 - but that price could be a result of the strange currency conversion we see in the UK which assumes anything coming from the US has an exchange rate of 1$ = £1).  Anyway the resulting dismantlement of the iPhone concluded that the parts and assembly costs about £113 (less than $180), which implies a massive mark up for Apple.

The irony is that the iPad, although also very expensive, is so much more than an oversized iPhone, yet retails for about the same amount.  Sure, there's no mobile phone included (yet - I think it will in the near future), but some of the more expensive elements of the iPhone include the capacitance touch screen.  Presumably the iPad screen is a lot more expensive, perhaps offsetting the lack of a phone circuit and antenna.

So presumably Apple are making a lot of money from the iPad, and you could argue that this is supply and demand in action.  However the one thing that should keep the price of any device down is competition, which basically works in one of two ways.  First, devices that are the equivelant of the iPad  should make consumers consider either device, splitting the consumer spend and forcing Apple and the competitor to try to compete, usually on price.  However there isn't anything on the market right now that does compete directly with the iPad, thanks to Apple's holistic approach to the whole environment - you don't just buy an iPad, you get the iCloud, seamless integration with other Apple products and iTunes.  Amazon are looking at challenging the iCloud but aren't there yet.

The other way to take on the iPad would be purely on price - OK, market an inferior product but cut the cost of ownership.  But take a look at the Samsung Galaxy, for example, and you find it costs pretty much ball park the same as an equivelant iPad.  It's probably a superb device, it may even be technically superior, but it doesn't have the whole environment thing in place, so in my mind, it should undercut Apple by at least 20% to compensate. But it doesn't, so an opportunity to leverage market forces is lost.

Of course the Amazon Kindle Fire is tackling the genre on price, pitching at $200 a pop (£127 in a sane conversion, probably £200 when it hits the UK) with Amazon's cloud being assembled as we speak.  It's not an iPad direct challnge, as discussed in previous blogs; smaller screen, slower performance, tiddly memory in comparison.  If Amazon can address the main issues yet keep the price down, it may steal Apple's thunder.  If they deliver the rumoured ten  inch Kindle Fire and keep the price reasonable, then Apple should be worried.

But the assembly cost of an iPhone, as determined by the Mail on Sunday's experiment, makes me wonder about the real cost of other devices such as e-readers.  The e-ink technology must be a cost driver, however the unit costs must be driving that downwards.  From my perspective, most of the technology deployed in e-readers isn't challenging.  I suspect that the better e-readers, the Kindles, Sonys and Kobos, don't cost a whole lot to manufacture and I note that the basic Kindle is now $79 (about £50) in the US and I understand that is $10 less than a week ago.  My guess is that there is still a significant margin for dropping the price of these devices, and unlike iPads, they do represent real alternatives to each other.

I know I've said it before, but I can't help feeling the some of this margin is going to be offered up to consumers on the run up to Christmas.  If you're in the market for an e-reader, wherever in the world you live, keep a keen eye out for discounting - I expect the first week in December to see the gloves come off.  However, if you're in the market for an iPad and can't put it off until the New Year, you probably need to look at ordering it now as I suspect Apple will start running out soon.

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