A look inside the iPod nano and Apple\'s margins

A recent take-apart analysis of the new iPod nano by market research firm iSuppli reveals that Apple's profit margins on the tiny flash memory-based player are consistent with the margins on earlier iPod versions.

According to a writeup of the iSuppli analysis on BusinessWeek, the $199 2GB iPod nano costs Apple $90.18 in materials and $8 to assemble, leaving a profit margin before marketing and distribution costs of about 50%.

These figures show Apple makes slightly more on each iPod than it does on other products. A similar Mac Mini teardown by iSuppli found the cost of material and manufacturing for the computer to be about $283, leaving a gross margin of 44% before marketing and distribution costs.

Research done by iSuppli also answers some other burning questions about the nano, such as who is supplying Apple with the primary components. The firm found that Synaptics has lost out to an Apple-branded click-wheel, which uses a 55-cent chip from San Jose, Calif.-based Cypress Semiconductor.

The Cypress chip appears to save Apple about 45 cents on a comparable Synaptics chip, which costs about $1, David Carey, president of Portelligent research firm, told BusinessWeek.

Despite tapping SigmaTel to supply the audio chips for its iPod shuffle player earlier this year, Apple has returned to its longtime supplier PortalPlayer with the iPod nano, said iSuppli. The move is expected to increase PortalPlayer's reliance on Apple, which already accounts for about 90% of its total revenue.

Based on reports that Apple has secured 40% of Samsung's NAND flash memory output for the rest of the year — and at substantial discount — iSuppli estimates that Apple is paying only about $27 per gigabyte. The report states that other manufacturers are paying nearly twice as much, giving Apple a 40% discount and advantage.

"The arrangement not only makes it tough for other manufacturers to compete on price but will also cause them huge supply headaches, since Samsung is the world's biggest flash memory vendor," writes BusinessWeek.

"How do you compete if you can't get the memory you need?" an iSuppli analyst added. "And even if you can get it, you're not able to sell the volume needed to negotiate a better price."