IDC likes what it sees inside iPod Shuffle

Analysts at IDC estimate Apple has a 40% margin on the recently launched iPod Shuffle.

Analysts at IDC recently took apart an iPod Shuffle and come up with an estimate of how much the diminutive music player costs Apple Computer to make. They found that Apple makes a healthy 35 percent to 40 percent profit on each player sold, and stands to make even more from iTunes music purchases and expected drops in flash memory pricing.

The iPod Shuffle's flash memory, which was supplied by South Korea's Samsung Electronics in the model examined by IDC, is estimated to be the most expensive component used in the player by far, said IdaRose Sylvester, a senior semiconductor research analyst at IDC.

She estimated the 512M bytes of flash in the cheaper of Apple's two iPod Shuffle models costs the company around US$37.50 for each player. That's about two thirds of the estimated total US$59 that Apple spends on materials needed to make each 512M-byte iPod Shuffle. The product retails for US$99 giving the company a profit of about US$40, or roughly 40 percent.

"Apple is making very, very good margins on the Shuffle," Sylvester said. "We based our cost analysis on fourth quarter production prices, which would have been when they sourced (the components). At some point they'll switch to cheaper flash and the margins will improve."

IDC estimated the average price of the same flash memory will slip to US$31.25 during the current quarter, cutting the materials bill further and pushing Apple's margin on the 512M-byte player to around 46 percent, assuming there are no major changes in the price of other materials.

"Apple's margin can only improve," Sylvester said. "It's certainly not a loss leader."

Any discussion of Apple's profits from the iPod Shuffle must also include the iTunes Music Store, which is an integrated part of the company's business model. Like game console makers, Apple expects hardware sales to drive content sales, in this case music files. However, unlike some consoles Apple is making money on the hardware it sells and isn't so reliant on these later content purchases.

The second most expensive single component is judged by IDC to be the digital music decoder chip, which in the iPod Shuffle is the STMP3550 chip from SigmaTel Inc. That marks a change from the hard-disk drive based iPods which use a chip from Portal Player.

The SigmaTel chip supports MP3 and Windows Media Audio files, although Apple has programmed it to play the AAC and Audible music formats, said Sylvester. The chip also includes a digital-to-analog converter, a controller for the USB2.0 interface, SDRAM (synchronous dynamic RAM) memory for buffering, and the headphone driver amplifier. Other functions present in the chip that aren't used in the Shuffle include an analog-to-digital convertor for voice recording, a driver for an LCD (liquid crystal display) and an FM tuner.

While these unused components are present in the chip, it doesn't necessarily mean Apple will use them at any time in the future, said Sylvester.

"If it had a screen, it would no longer be a Shuffle," she said. "Apple is getting a lot of marketing mileage out of clever slogans about shuffling."

Speaking at the recent Macworld Expo in San Francisco, Apple's vice president of hardware marketing, Greg Joswiak, said Apple had experimented with a screen on the iPod Shuffle but that it hadn't been able to come up with a navigation system that it liked.