iPhone 7’s High Materials Costs Mean Slimmer Margins For Apple

Take a wild, consulting interview-type guess on how much the materials cost for the new 32 GB iPhone 7.

We’ll give you a moment.

OK. Time’s up!

The estimate is pretty precise: $219.80. That’s the bill of materials (BOM), according to London-based IHS Markit, a leader in critical information, analytics and solutions.

By the way, that’s before the $5 basic manufacturing cost, which makes the total $224.80. But the unsubsidized price at the store is a sharp increase to $649.

How does this compare to the iPhone 6s, which launched last year? This year’s version is $36.89 higher, which was the preliminary estimated total that IHS Markit released last December.

Despite that increase, those margins are shrinking. Experts say Apple still pulls in more margin from hardware over Samsung, but the materials have increased compared to the past.

Of course, we know the big — and, apparently, more costly — differences with the iPhone 7. Similar and familiar shape to the iPhone 6s, wider color display with DCI-P3 and traditional sRGB to improve photos for your selfies and videos with added optical image stabilization (OIS) for better low-light performance. But then, there’s the infamous missing 3.5mm headphone jack (former Apple-man Steve Wozniak has made it clear that he’s not happy about it) allegedly deleted to make room for a larger battery and waterproof microphone, and the static home button, which is not winter glove-friendly.

OK. So, what are the things we don’t tend to talk about that the iPhone 7 has that may actually be beneficial? Storage density is up, starting at 32 GB for the first time, which was previously a higher-end feature. Water resistance is certainly helpful, thanks to added gasketing around important connectors. Antenna speakers are similar to the MacBook, making a headset speaker double as a stereo speaker. And battery life — who doesn’t appreciate that? — up to 1960mAhr capacity from 1715mAh, which is in the iPhone 6s.

Oh, and for the fancy people, there’s the option of a jet-black polished case for 128GB and 256GB models. You’ll certainly pay for it, but don’t get too excited here: The jet-black version sold out immediately and is on back order for awhile. Plus, we hear it’s easy to scratch.

Enough with features, what does this all mean?

“Apple will likely look for ways to simplify the design moving forward, which means one supplier — whether Intel or Qualcomm — will likely dominate, as part of supplier and SKU streamlining,” said Andrew Rassweiler, senior director of cost benchmarking services for IHS Markit. “Total BOM costs for the iPhone 7 are more in line with what we have seen in teardowns of recent flagship phones from Apple’s main competitor, Samsung, in that the costs are higher than in previous iPhone teardown analyses.”

That said, the change of antennas seem to be a questionable pivot point.

Other experts speculate that design limitations may force Apple to return to an all-glass design in order to fit 4x4MIMO LTE antennas and other features, like wireless charging, in the next iPhone model.

As for iPhone — and other smartphone — purchasing numbers, the number seems to be flattening as markets in North America and Europe are more saturated, according to International Data Corporation’s WorldWide Quarterly Mobile Phone Tracker. Emerging markets, like Asia and Africa, gaining traction with introductions to certain devices are expected to grow within the market between 2015 and 2020.