Other costs for a smartphone or tablet are more difficult to pin down: for example, marketing, design, R&D, engineering and licensing. But how those costs are included on a handset’s balance sheet is down to the specific manufacturer. Indeed, the price of certain elements can be offset by a previous device, helping to reduce costs. For example, handset makers can apply the engineering nous garnered by working on one product to the manufacturing process of a similar, later model – a practice which Lam calls “trickle-down design”.
“[Motorola] could say it incurred most of its non-recurring engineering (NRE) costs with the Moto X, so for the Moto G, NRE is virtually zero,” he says. “That all boils down to accounting. They’ve gotten a lot of leverage of the design from the Moto X, a lot of that design has just trickled down.”
NRE costs are a key reason why tablets can be made more cheaply than smartphones. “The components are very similar,” notes Erensen. “Companies take smartphone designs and leverage them to make tablets – and even portable media players such as Apple’s iPod touch – using the same building blocks.”
How to make money
While the specification makes up a large proportion of the cost of a device, it isn’t the key element that goes into deciding the retail price: the company’s business model is. When looking at the price, Labesque notes: “What is the strategy? How does the manufacturer position itself on the market, and how does it aim to make money?”
This is a key reason why Apple products cost more: the company is aiming to make money on hardware. Samsung has the same strategy, but on tighter margins, while Motorola, Amazon and Google are happy to break even. “Vendors adopt different strategies when positioning their products,” says Labesque. “It’s clear that when Google is pushing the Nexus, it isn’t earning money by selling the device, but by selling the content later. There’s an economic model behind that, which means the different players are earning their money in a different way.”
According to Gartner’s Erensen, the business model is the “big piece” of the pricing puzzle. “Apple has very high margins on the iPhone, and that’s where it drives a lot of its profit – it needs those prices to stay high,” he notes. “Apple can justify it because of demand, the brand name and the quality of the product. Look at Google and its Nexus devices – it’s trying to showcase Android as a platform. It’s trying to get it into as many hands as possible, because the company doesn’t makes its money through hardware, but through advertising, search and the services it ends up providing to users.
“Amazon’s another good example: it’s almost willing to sell these devices at cost, because it knows well that once it has them in consumers’ hands, they’re likely going to use them to purchase content – and even physical goods – from Amazon.”
For example, Amazon’s Kindle Fire HD retails at $199, but its BoM was $174, leaving the company little in the way of margin – especially after the marketing and design spend is taken into consideration.
Bit of both
Of course, Apple also sells content via its App Store, and because of its head start in the market, and its premium brand, can earn profit from both hardware and content sales. As iSuppli’s Lam notes: “Why is the Apple iPad so much more expensive than the other guy? Because Apple isn’t operating in the same playing field.”
However, content sales don’t provide as much profit as you’d think, claims Lam. “Apple is making money from hardware; that’s shown in its balance sheets if you look through its earnings. It isn’t a case that they’re pulling in from all angles.” Strictly speaking, the company is pulling in from both angles, but hardware adds much more to its coffers than software or content; in its latest quarterly results, the iPhone contributed $19.5 billion and the iPad $6.2 billion, while the App Store and software sales brought in $4.3 billion – significant, but far from the most important part of Apple’s bottom line.
Samsung also focuses mostly on hardware sales, notes IDC’s Labesque. “What Samsung has is a very large portfolio [that ranges] from the more price-sensitive to the high-end. For Samsung, its strategy is more in the volume [of sales],” she says. However, Samsung is shifting to Google’s model, skinning Android and pushing its own services by including them on its handsets in place of Google’s.
Next: Disruptive change
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