Samsung Aims for Higher Profit Margins Than Apple's IPad
The Galaxy Note 10.1 could deliver a better margin than the market-leading iPad -- but only if Samsung can maintain its target selling prices -- according to a physical dissection of the media tablet conducted by the IHS Teardown Analysis Service.
A preliminary analysis of the component cost of the Galaxy Note 10.1 reveals the HSPA+ version of the media tablet carries a bill of materials (BOM) of $283. When basic manufacturing costs are added in, the cost to produce the tablet increases to $293. This version sells for approximately $640 in the world market.
Table 1 below presents the preliminary results of the IHS iSuppli teardown analysis of the Samsung Galaxy Note 10.1 media tablet. Please note that this teardown assessment is preliminary in nature, accounts only for hardware and manufacturing costs and does not include additional expenses such as software, licensing, royalties or other expenditures.
For the Wi-Fi-only version of the Galaxy Note 10.1, the BOM is estimated to decline to about $260. U.S. retail pricing for this version has been announced at $499.
In comparison, a similarly equipped third generation new iPad with Wi-Fi and 16GBytes of NAND flash memory carried a $316 at the time of release and a retail price of $499, Samsung will be able to garner a larger margin on the Galaxy Note 10.1 than Apple did for the iPad -- on paper.
"With the Galaxy Note 10.1, Samsung continues to seek the magic formula for a media tablet that can rival the iPad's market penetration," said Andrew Rassweiler, senior director, teardown services for IHS. "And where some other tablets introduced in recent times generated small or no hardware profit, the Galaxy Note 10.1 could turn a decent per unit margin for Samsung, and stands to be a money maker -- if the company can extend the recent success of the Samsung Galaxy Note smartphone to its tablet line."
At their original sales prices and BOMs, the Google Nexus 7 and the Amazon Kindle Fire generated little or no hardware profit -- instead trying to make money using more complex business models involving online services.
However, maintaining the opening sales price over time has proven to be the Achilles' heel of many a vendor.
"The hardware profit margin for the Galaxy Note 10.1 only holds true if Samsung is able to maintain its initial price. And therein lies the rub: no Apple rival has yet demonstrated the capability to actually sell in volume at $499, instead falling back on price cuts in order to drive volume," said Rhoda Alexander, director, tablet and monitor research for IHS.
As IHS recently noted, one of Apple's major competitive advantages is its dominance in semiconductor spending. This allows Apple to command more favorable pricing from its suppliers, helping to reduce its costs and expand its profit margins. However, Samsung can counter this advantage by leveraging its own internal sources of supply.
"Samsung is a behemoth in the electronic industry and its competitive strength lies in its control, via internal sourcing, of a large percentage of the components that go into its final products," Rassweiler said. "This allows Samsung to keep costs down, while delivering competitive differentiation. The company's internal sourcing strategy is certainly in evidence in the Galaxy Note 10.1, where Samsung supplies the memory -- both flash and DRAM -- as well as the core processor, battery and many other components."
Furthermore, some of the key components in the Galaxy Note 10.1 that are sourced from other suppliers are identical to devices found in other current Samsung products.
"By using cross-platform components, Samsung can better leverage pricing with outside suppliers, and further reduce the incremental cost of developing other devices," Rassweiler observed.
The Galaxy Note 10.1 features a quad-core Samsung Exynos processor, the same recently found in the Samsung Galaxy S III handset. The tablet also has the same Intel Corp. wireless chipset found in the Galaxy S III, which includes the PMB9811 and PMB5712 devices.
No Technological Trailblazer
The IHS iSuppli teardown of the Samsung Galaxy Note 10.1 reveals the tablet isn't breaking new ground in terms of technology. As is usually the case with such hardware releases, each device offers only an incremental set of improvements compared to the previous generation.
However, the new Samsung Galaxy Note 10.1 in some regards does up the ante for media tablet hardware.
The new-generation quad-core processor is sure to make a tangible performance improvement, and will be the main upgrade driver for many consumers.
A feature that the iPad does not have but which the Galaxy Note 10.1 possesses is the hybrid touch screen, which features not only conventional capacitive touch sensing, but also gives users the option of using a Wacom digitizer pen. Wacom's pen is passive: it requires no battery or power source, or cords -- like a mouse -- but works using inductive pen sensing. Essentially one can use the Galaxy note to write on, but still utilize it as a conventional touch tablet.
Battery Charge Up
Samsung supplied its own battery pack, which features higher-than-average energy density for a Li-Polymer battery pack at about 520Wh/L energy density, compared to the typical 450Wh/L for Li-Polymer.
Beyond the BOM
Although the IHS iSuppli Teardown Analysis Service bill of materials numbers might lead some to conclude that Samsung stands to make about 50 points of margin on this Galaxy Note 10.1, there are more cost pieces to this puzzle than materials and manufacturing costs.
As IHS always notes, our BOM costs do not include non-material and other expenses, such as software and development. Once these additional costs are factored in, what might appear to produce a massive margin for Apple and Samsung is somewhat smaller.
As recent court documents surfacing from the patent battles between Apple and Samsung show, Apple's gross margins for the iPad are not nearly as high as those for the iPhone.
Based on IHS iSuppli BOM estimates and expected retail prices, Samsung may be able to yield slightly better margins per unit than Apple on this product.