Apple’s iPod costs likely went up–in a flash

The two new music players introduced by Apple Computer on Wednesday are smaller than the existing iPod Minis–and they probably cost more to make, too.
By using flash memory rather than mini-hard drives in the iPod Nano music players, Apple likely increased its own component costs, said analysts.

Right now, 1GB of flash memory in the volume market costs about $45, according to both Semico and iSuppli. Thus, the 2GB iPod Nano, which sells for $199, contains around $90 worth of flash, while the $249 4GB version has about $180 worth of flash, said Semico’s Jim Handy. “They might have been able to get something for $40, but that’s still $160 worth of memory,” he said.

By contrast, mini-hard drives with the same amount of storage costs about half as much, said iSupply’s Nam Hyung Kim. Typically, hard drives provide more storage for less money than flash. Flash, however, provides better performance and takes up less room. Some experts have predicted that the rapidly declining prices of flash, combined with its ever-increasing densities, will allow it to replace hard drives in many applications. Others, however, have noted that hard drives decline in price just as fast and add capacity often at even a faster rate. Also, major manufacturers of both flash and hard drives often lose money.

Apple likely got a substantial discount from its flash supplier, which Kim and others say is Samsung. Still, the price for flash is likely higher. Samsung’s margins for flash in the second quarter came to around 45 percent, Kim said. Thus, Samsung would have to sell the memory at a loss or close to break even to give Apple a price that would be equal to a price for hard drive storage.

Nonetheless, Kim said that Samsung, or any flash memory maker, would have strong motivations to give a customer like Apple large discounts. An oversupply of flash memory currently exists; thus, a contract with a customer that will consume quite a bit of factory output insulates a manufacturer. The 45 percent margins also give Samsung lots of wiggle room.

“Samsung can also probably raise prices” in the future because its competitors can’t provide the same volumes, Kim speculated. “Apple will probably never go back to hard disk drives.”


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