“That shiny new Apple Watch Sport may have set you back $350, but from a hardware and manufacturing standpoint it only cost Apple $83.70,” Adrian Kingsley-Hughes reports for ZDNet.
“The most expensive component is the LG display, which is estimated to cost $20.50, while the processor adds $10.20 and the memory a further $7.20,” Kingsley-Hughes reports. “That tiny battery is estimated to cost a mere $0.80, with the contents of the box – which includes a charger and spare wristband – adding $9.00 to the cost.”
Kingsley-Hughes reports, “Note that the analysis does not include logistics, amortized capital expenses, overhead, R&D, software, IP licensing and other costs.”
Read more in the full article here.
MacDailyNews Take: Nor does it contain significant marketing costs or, quite likely and rather importantly, accuracy:
Generally, there are cost breakdowns that come out around our products that are much different than the reality. I’ve never seen one that is anywhere close to being accurate. – Apple CEO Tim Cook, April 27, 2015
Android faux wannabe watch makers will certainly be able to compete price-wise but ecosystem and Continuity wise they will be a distant 2nd or 3rd rate choice. It seems to me this is where Android-tainted devices will not succeed and just falter, much as their premium phones have begun to. Continued scraping the bottom too of the profit barrel can’t be good for Android manufacturers to sustain.
It also does not include watches that need to be remanufactured due to failing quality tests.
What is the point of these analyses if you don’t include the billions of dollars in R&D? Do they think Apple was able to construct this amazing feat of engineering for free? Have they forgotten the long and expensive road that Apple traveled to design the S1 chip in-house? What about the money they spent on changing every single Apple Store to showcase Watch? You think this shit happened overnight?
I think this, like other such analyses, is to show cost of materials used and retained in the final product. This gives a ‘common ground’ on which to compare. Adding costs like logistics, R&D, etc. that is spread across multiple such devices muddies up the comparison. For all we know due to Apple’s large unit purchases the price could actually be lower yielding even more margin.
Surprise! There’s only 2¢ worth of coffee grounds in your favorite cup of coffee!! We happily love and buy it anyway.
Starbucks – for shame! /s
““Note that the analysis does not include logistics, amortized capital expenses, overhead, R&D, software, IP licensing and other costs.”
And is, therefore – even if accurate – a completely stupid and worthless piece of information. Thanks, Adrian.
It is worthless to you. There are many people out there that pay for precisely this information — net value of components built into a device. Which is why there are several companies that provide tear-down pricing information for every new piece of hardware.
Latest startling newsflash from Adrian — the scalpel the surgeon used for your brain surgery only cost $10.
You beat me to it… my thoughts exactly. R&D extended some 5 years, at least, manufacturing set-up costs, Apple’s commitment to GREEN, err… ecologically speaking, advertisement and marketing, and what about the development of the new materials for aluminum, and the new processes for the stainless steel, as well as the new concept for the way the bands can be changed, the brand new, 1st time ever for Apple using the OLED display, we could go on and on, and then there’s the expected and well deserved profit for this forward thinking company…. PULEEZE!
Tear-downs never include R&D, marketing, or anything else.
Let’s repeat this again: Tear-down provides exact sum of prices of each component built into a device. NOTHING more than that. I thought this was clear to everyone, after all these years of tear-down reports on computing and mobile devices.
Are we discussing this again???
Tear-downs are a standard practice for every piece of new hardware that comes out. Their purpose is not to annoy people with presumably massive markups that manufacturers slap on these devices. It is to establish a baseline which allows relatively reliable comparison among different devices. They are not supposed to include impossible-to-measure R&D costs, marketing, support or anything else. Their sole purpose is to determine cost of parts inside a device. Nothing more. And such information has value to many people (investors, competitors, component manufacturers, analysts, etc). That some people don’t find value in them is of no surprise, but hardly means anything.
Over the years, the only comments I have even seen ANYWHERE have all been related to, “The components only cost $x, therefore a reasonable price should be $y.” Absolute stupidity.
And I am also ready to believe Tim that no such breakdowns have even been anywhere close to reality.
Any real company not staffed by complete imbeciles is going to think about their business model based on ALL costs. If components don’t cost much, but a completely new kind of manufacturing machine has to be developed and built, maybe that needs to be taken into consideration? It seems of very little value to investors or anyone to talk about the factor that is a completely unknown, and possibly very small, percentage of the actual cost of a device.
Plus his article heading is simple wrong, wrong, wrong…
“Apple Watch costs under $85 to make”
Even if his component cost is accurate, the heading can only truthfully say, “Apple Watch components cost under $85”.
On “value to many people (… analysts)”
Ahhhhh. THAT’S how analysts give us such profound insights.
There is a disingenuous outraged sense of cheap geektard entitlement to buying devices near to cost with minimal profit to makers. And they love to bust Apple on their margins while touting their inferior cheap knockoff wares someone will provide somewhere and suffer the low profit consequences.
And yet Apple’s guidance for next quarter suggests that their margins on the Watch are lower than for their other products and this will affect their earnings.
Granted, this includes Watches that are defective, but I suspect I trust Apple’s guidance over some internet “analysis”.
What a worthless exercise. Tim Cook already stated that the Watch’s profit margin is going to be less than Apple’s traditional near 40% profit margin. Which means this “analysis” is juuuuuuusst a little outside.
What’s always bogus and silly about these cost breakdowns is that there’s a default attitude that the parts are ‘off-the-shelf’, as if a mere human could throw together the device themselves for the cheap price they quote.
I don’t think so. We’re not talking about throwing together a generic Windows box from bits you found online. We’re talking about products that would never exist unless they were designed and custom manufactured for that specific device. Then, as has been repeatedly stressed, toss in the shipping, marketing, store display and staff, on and on.
Apple is very clear about the percent profit they make on each of their products. Quoting from this week’s quarterly conference call, Apple stated a “gross margin between 38.5 percent and 39.5%”. There you go.
If you look at the way these tear-down companies do their work, the pricing of each component is assessed on the estimated cost of that component that the specific manufacturer is paying to the specific supplier; in our case, Apple paying LG for the display, for example; not the price I would pay for such display at my local Radio Shack (assuming that Radio Shack still existed, and that they carried LG displays for Apple Watch…).
As much as Tim Cook would love us to believe otherwise, these tear-downs tend to be rather close to the actual component cost. These companies have been doing this for a very long time, and they often have sources very close to the manufacturers, who can provide component pricing that is quite accurate.
Unless there is something very peculiar about the component for the Apple Watch that is way different than for any previous mobile device ever made, the tear-down pricing here should be reasonably close.
And then, again, there are the gross margin numbers…
Gross margins are calculated based on the COGS (cost of goods sold). These costs include all manufacturing costs (that means parts PLUS labour, which teardown does not include), plus transportation into channels. As swing geezer said below, the ratio of tear-down components only to retail pricing used to be 7:1 for electronics some time long ago, and it still seems to hold for Apple Watch.
Tear-down information has value to analysts; COGS price includes wildly variable components, such as labour and transportation. The Chinese iPhone manufacturer had had to double the salaries of their assembly line workers at one point, and while they may have absorbed the cost and kept the COGS price they give to Apple, their own margin dramatically changed.
“Tear-down information has value to analysts;”
And we all know what a bunch of imbeciles they are.
I’d also suggest that tear-down information has a similar value to a specs list — very, very low. The fact that many companies produce both for many other companies to look at doesn’t mean that it’s actually sensible.
Oh yawn. I made my point, I don’t see your’s. Good night.
Probably because it was late in the evening…
My point is, tear-down component cost is a meaningful piece information. There are many people who want it and for whom it has a very specific meaning. For them, companies like iFixIt or IHS provide such info. Arguing that it is pointless because it doesn’t include labour, R&D, marketing or any other arbitrary expense incurred in the course of bringing an item to the market makes little sense.
Since the demise of the PC, ZDNet, Kingsley, Turdrot and that ilk are trying so hard to remain relevant.
This is normal in teardown pricing. When I was in the hi-fi business the factor was 7. 7 times the price of the parts was the retail price of the goods. The Watch is not far off that.
According to this genius Adrian Kingsley-Hughes, Leonardo da Vinci’s Mona Lisa probably did cost about five bucks in paint and canvas to produce. The fool.
You don’t seem to understand the meaning and purpose of tear-down pricing.
It is to establish baseline that is universal and common. There are many people who use need this information, which is why there are companies who make it available. While you don’t understand what they mean, that obviously doesn’t mean that this information has no purpose.