Image: iPhone 3G
Apple Inc.  /  AP
Apple's profit on the iPhone 3G is more than the $26 difference between the cost and retail price.
updated 6/24/2008 4:31:38 PM ET 2008-06-24T20:31:38

The cheapest model of Apple Inc.'s new iPhone, which is about to go on sale for $199 in the U.S., costs about $173 to make, according to an estimate by research firm iSuppli Corp.

The phone, which updates last year's model with faster Internet speeds and an improved navigation feature, goes on sale on July 11.

Apple's profit is much more than the $26 difference between the cost and retail price. The retail price is subsidized by the exclusive carrier, AT&T Inc. In effect, the carrier will be buying the phones from Apple at a higher price, then selling them at a loss that it earns back through monthly service fees.

ISuppli estimates that AT&T will subsidize each phone by $300. Other analysts have put it at $350. In either case, the subsidy creates a substantial margin for Apple.

ISuppli said the margin appears to be higher than for other Apple products, which are generally priced 50 percent higher than their cost of materials and manufacturing.

Making original model cost even more
Because the cost of components has come down, the margin is also higher than for the original iPhone, which was introduced last summer. ISuppli then put the cost of the model at $226.

The $173 estimate applies to the iPhone version with 8 gigabytes of internal memory. A model with twice as much memory will cost $299 from AT&T, but the extra memory only costs Apple another $22.89, according to iSuppli.

The most costly components of the new phone are, apart from the memory, the touch screen and the underlying display, at $20 each. The Global Positioning System chip, missing from the first iPhone, costs $3.60.

The cost estimates don't include software development, packaging, shipping or included accessories like headphones.

The phone will go on sale in 21 other countries on July 11, at varying prices, all subsidized by carriers.

Apple shares rose 9 cents to close at $173.25.

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