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Please note that this post mashes together iSuppli’s estimates for component costs, future revenue stream projections, and 3G provider subsidies. That means it’s conjecture and not very likely – unless the iPad struggles to take off.

While the $499 WiFi iPad is in itself a shockingly low price for an Apple Product it’s not the lowest price you might see.

1. Apple itself has said that it might lower prices.  
2. Numerous providers and companies would be open to subsidizing the iPad.  
3. The 3G iPad prices (starting at $629) definitely don’t reflect any subsidies.

Let’s start with iPad’s cost to manufacture.

iSuppli say $499 iPad costs $229 to make

BusinessWeek quotes market research firm iSuppli -

The least profitable is the 16-gigabyte non-3G version, which sells for $499. It’s combined costs amount to $229.35 or 46% of the retail price

The most profitable of the six iPads is the 32-gigabyte version with 3G network access, Sideco says. Its combined materials and manufacturing cost of $287.15 amount to 39.4% of the retail price.

Let’s just repeat that because the numbers are shockingly low -

1. The components and manufacturing cost of the 16 GB WiFi iPad are just $229. It’s listed for $499. 
2. The combined costs of the 32 GB 3G iPad are just $287. It’s listed for $729. 

Of course there’s probably $100 worth of R&D costs and marketing costs per unit. That means the real costs are closer to $329 and $387.

If Apple really wanted to cause mayhem they could just start selling their 16 GB WiFi iPad for $329.

It gets better – we haven’t factored in future revenue and wireless plans. Let’s start with future revenue.

Apple, iPad, and Future Revenue – Subscriptions, iTunes and App Store Subsidies

Let’s say Apple does an analysis and it says -

1. Each iPad user will end up spending $25 per month on Apps, movies, and other iTunes products.  
2. We get 30% of that which is $7.50.
3. Average life is 2 years so that’s $180 lifetime.
4. Let’s put half of that in as a subsidy.

That’s $90 right there.  

Perhaps Apple just teams up with newspaper providers and sells a $15 a month unlimited news and magazines plan. If it takes 30% that’s $4.50 a month.

There are lots of different revenue streams Apple can create and depend on. That means we’re talking about a $100 or so discount on iPad price based on the $200 or more lifetime amount (a conservative 2 years) Apple will earn from subscriptions and iTunes sales.

We aren’t even counting the bonus of locking in customers and the competitive benefit of stealing sales from competitors.

Apple might not be very willing to pony up a $100 discount on the promise of future revenue. However, service providers are – Which brings us to AT&T.

Will AT&T subsidize the 3G iPad?

The $14.99 for up to 250 MB a month data plan is a joke. That’s not even enough for 10 days on the iPhone. 

Let’s look at the real star – the $29.99 for unlimited data plan.

1. That’s $359.88 a year.  
2. If the average iPad owner owns an iPad for 2 years that’s $719.76 for AT&T.

Even without factoring in earnings beyond the second year of ownership and AT&T’s bonus for not losing customers to Verizon we still have $717.76 in revenue for AT&T.

Will AT&T be willing to hand out $100 or $200 or even $300 of that to subsidize iPads?

They might. They certainly weren’t shy about doing it with the iPhone.

Taking a look at all the wiggle room in iPad pricing.

A $299 iPad is doable

First let’s look at the 16 GB WiFi model -

1. It sells for $499 and costs $229 to make. Assuming $100 in R&D and marketing costs. That’s $170 to play around with. 
2. There can be subsidies based on subscription plans and future iTunes revenue. That’s $200 or more assuming 2 years lifetime. 

There’s $370 of wiggle room. That’s more than 75% of the iPad’s $499 price. 

If Apple uses half of that ($185) we get $499 – $185 = $314. Which is very competitive with what the Kindle and Nook cost. That still leaves $185 in profits over the next 2 years.

Even if Apple uses 25% of that ($92.50) we get to around $400. That’s a pretty decent price.

A $299 3G iPad is even more doable

Let’s look at the $629 3G iPad. We’ll assume it costs as much to make as the 32 GB model i.e. $287 (just to be conservative in our estimate).

1. $629 compared with $287 gives us $342 to play around with. Take away $100 in R&D and marketing and we get $242. 
2. Assuming 2 years revenue on subscriptions and iTunes sales we again get $200 or more.  
3. AT&T’s $30 a month unlimited plan would give us $719 in profits over 2 years.

That’s a grand total of $1,161 to play around with. That’s almost double what the 3G iPad costs.

Apple and AT&T could decide to take just $330 out of that $1,261 (it’s only 28.42%) and sell the 3G iPad for $299.

They’d still have $831 in profits to share.

Closing Thought: Apple won’t sacrifice profits – AT&T might

There’s no way Apple cut half of their profits from the 3G WiFi iPad and sell it for $314. At best they’ll go down to $399.

However, the 3G iPad is a different story. The data plan gives AT&T $719 to play around with and they may very well use $200 out of that to knock the 3G iPad price down to $429. They’d probably ask Apple to chip in and get it down to $399.

If the iPad isn’t a runaway hit expect to see $399 iPads very, very soon – Perhaps even $349 iPads.

Filed under: iSlate Apple Slate Tagged: | insane profitability, ipad cost