Apple cuts iPhone costs by $5 for Verizon version

May have trouble squeezing all the parts for an AT&T iPhone 5 into the same design, says iSuppli

Apple cut component costs of the Verizon iPhone by about $5, a decrease of about 3% compared to what Apple pays now for the parts in the iPhone 4 that runs on AT&T's network, an analyst at electronics research firm IHS iSuppli said today.

The drop was smaller than what iSuppli had expected going into its analysis of the Verizon iPhone, said Andrew Rassweiler, the senior director of the El Segundo, Calif. company and the manager of its teardown group.

"If you were to do an apples to apples comparison, no pun intended, [the Verizon iPhone 4] is not that different in cost than the AT&T iPhone is now. It's only a few dollars lower, somewhere around $5 lower."

Rassweiler's estimate differed from one cited in earlier reports about the cost difference between the two phone models. In a Thursday press release , iSuppli compared the Verizon iPhone's "bill of materials," or BOM -- a list of component cost estimates -- with the BOM it assembled last June after the iPhone 4 debuted on AT&T.

According to that press release, materials and parts for the new CDMA 16GB iPhone 4 run Apple $171.35, 8.7% less than the $187.71 estimate the company put on last summer's model. Most news outlets seized on the press release's figures, and calculated that the Verizon iPhone was almost 9% cheaper for Apple.

But last year's number for the AT&T iPhone is outdated, Rassweiler acknowledged, which is why a more accurate comparison is to a new estimate for the AT&T iPhone 4 that iSuppli completed just last month for a client who wanted to know Apple's then-current costs.

"Instinctively, we knew that the CDMA iPhone [for Verizon] would be cheaper to make, but that's really not borne out by the numbers," said Rassweiler.

The lower costs in the AT&T iPhone between June 2010 and January 2011 are due, said Rassweiler, to Apple's appetite for components -- it sold 30 million iPhones in the last six months of 2010 -- and thus its ability to drive down costs with ever larger orders from suppliers.

The BOM of the Verizon iPhone and iSuppli's accompanying teardown of the device illustrates Apple's aggressiveness in producing leading edge designs and optimization of the smartphone, continued Rassweiler. "Apple is trying to optimize and keep the costs down, which makes total sense," said Rassweiler.

He cited a number of changes to the Verizon iPhone to prove his point, ranging from the GPS functionality integrated with the Qualcomm baseband processor to the shrinking of the Wi-Fi and Bluetooth module.

The latter got special credit from Rassweiler, who said Murata, the maker of the Wi-Fi and Bluetooth component, has a stellar history of embedding components such as resistors, freeing up more logic board space for other parts.

"They can produce a smaller module than the other guys," said Rassweiler as he explained why Apple picked it over Broadcom for the Wi-Fi/Bluetooth component in the Verizon iPhone.

"Apple is always at the leading edge, and uses the smallest possible components," said Rassweiler, referring not only to the iPhone, but also to its other products, such as the iPod and iPad. "This [Verizon iPhone] is super super integrated, one of the most integrated phones we've seen."

But Rassweiler was unsure whether Apple would be able to duplicate the design of the Verizon iPhone in the next-generation device for GMS networks, such as AT&T's. A GSM iPhone requires more components -- a SIM card slot, for one, more radio components to handle the additional frequency bands required for those networks, for another -- and Apple may find it tough to squeeze those extra parts onto the already-packed Verizon iPhone's logic board.

"The board inside the Verizon iPhone is already almost the same size as the [older design] used by the AT&T iPhone," Rassweiler said. "But that doesn't mean Apple doesn't have tricks up its sleeve for the iPhone 5."

That next iPhone, which analysts have said Apple will introduce June 6 at its Worldwide Developers Conference (WWDC), may resemble the Verizon iPhone but boast, say, a smaller Apple-designed processor to free up board space necessary for GSM-specific parts.

"You will see some changes in the iPhone 5 that are more incremental, larger in scale," Rassweiler predicted. He expects Apple to use the smaller Wi-Fi/Bluetooth module from Murata, for example, in the next iPhone , again to save space on the logic board.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer or subscribe to Gregg's RSS feed . His e-mail address is gkeizer@computerworld.com .

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