The Real Cost of High-Tech Products

You paid several hundred dollars for your super-cool new phone, not to mention that service contract you signed. But how much is your smartphone or tablet really worth?

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BOM vs. Retail

Let’s start with the much-talked-about iPhone. Parts estimates come from teardown firms such as TechInsights (formerly Portelligent). Product teardowns are pretty much what they sound like – someone systematically disassembles the product while recording each step and calculates the cost of materials (also known as the bill of materials, or BOM). Firms like this charge quite a bit for these reports, which average around 100 pages, as tech companies often use them to determine what their competitors are up to.

In the case of the iPhone, according to wireless experience management experts (WDS), you pay an average of $610 for the new iPhone. The teardown reports show that the BOM is around $203. The estimate includes $26 for the A5 processor and $31 for the Retina display, which Apple touts as the highest-resolution screen ever.

Its larger cousin, the iPad 2, has a BOM of $336.60, if manufacturing costs are included. The starting price for you on theApplestore is $499 without service – going up to $829 for the 64GB with Wi-Fi+3G.

The little guy, iPod Nano 8GB version, starts at $129 on the Apple store. The BOM comes in at $43.73.

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Moving into non-Apple devices, the HTC Android Incredible™ has a BOM of $163.35. The manufacturing cost is $8.90 – bringing the total cost of your device to $172.25. The price you pay starts at $529.99.

The BlackBerry Torch™, the first BlackBerry device with a QWERTY slide-out keyboard, OS 6, and faster browser, will cost you $529.99 at Best Buy. Its BOM is $171.05.

Hanging up the phones, the Kindle Fire™ sells for $199 on Amazon,  while its BOM is $201.70. [12] Whoops, they aren’t going to make any money that way – or are they? Amazon reportedly does not make much money on the device itself, but what you download to use on the device more than makes up for it. Between books, MP3 music, and the AppStore, it’s estimated that Amazon is averaging $136 in downloads for each Kindle Fire sold.

The Samsung Chromebook™ costs $332.21 to manufacture. Google’s version of the notebook will cost you around $500.

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This is just a sampling of devices, yet you can see a definite trend. Outside the Kindle™, the huge price gaps may make your blood boil, but there are other costs above and beyond the manufacturing of your device that you may want to consider.

The Most Expensive Part

It may seem like the manufacturers are making a killing off of a bunch of plastic and wires, but there is an element that you do not see. The most expensive components of all come before the product is ever made: research and development. Once it’s built and tested and passes the muster of the FCC, your device may have cost millions before it was ever made. It’s a gamble that tech companies must make, but one that is obviously paying off if you consider the likes of Apple’s $7.31 billion profits in the third quarter and $6.62 billion in the fourth quarter of 2011.

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Connectivity Costs

Actually, you aren’t really just buying plastic and wires; you’re buying functionality, design, and not just a little bit of hype. Now we know that what you spend the most on is not the device itself, but the cost of using that device – your service plan. Why do you think that they are willing to discount the price of your device (and sometimes even offer it for free)? Service providers make all that back and so much more over the course of your contract. In fact, according to Bill Morelli of IMS Research, service could be up to 75% more than the cost of the device.

To illustrate this principle, let’s revisit the iPhone. According to the Apple store, you may buy the 64GB version for $399 when choosing a network carrier. If you want it unlocked and contract free, the same model is $849.

The Price of Technology

As you can see, when it comes to mobile devices, the whole is definitely worth more than the sum of its parts.