iSuppli is certain that the iPad may be too expensive

> Apple’s ([AAPL](http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?symbol=AAPL)) iPad tablet computer, introduced Jan. 27, may have component costs of as little as $219.35, according to a preliminary estimate by market research firm iSuppli. > > Materials for the iPad, due to go on sale in March and April, include a multitouch-screen display that may cost about $80 and a $17 processor designed by Apple and manufactured by Samsung, according to El Segundo (Calif.)-based iSuppli. > > Even the lowest-priced iPad, with 16 gigabytes of memory and a retail price of $499, may be beyond the reach of some budget-conscious consumers, analysts have said. The relatively low price of the iPad’s materials gives Apple scope to reduce the retail price over time, iSuppli analyst Francis Sideco says. > > “There’s certainly a decent amount of headroom in there,” Sideco says. “If they had to reduce the retail price, they certainly could.” So the article starts off suggesting that the component costs for the iPad MAY be as little as $219. And that leads iSuppli to conclude that Apple CERTAINLY COULD reduce the price.

For starters, it’s important to note here that this is iSuppli’s “preliminary estimate” of component costs. In other words, they’re pulling numbers directly out of their asses, because they don’t have an iPad to analyze. For all they know, the iPad’s inside is made of pure gold. But that’s not going to stop them from putting a hard number on the cost of the product to Apple.

They’re literally playing a guessing game, and Business Week is publishing it as if it were real evidence.

Take the A4 processor, as just one example. iSuppli puts a price of $17 on that. Why? Because $17 sounds reasonable. The processor in the iPhone 3Gs is $14.46, which we know, because we can buy one from Samsung. So the A4 is probably just a little more expensive, right? Who knows?

Here’s an experiment. I’m going to give you $17, and you’re going to make a processor with it. You’re not going to buy one from someone, you’re going to design one of your own, as Apple did with the A4.

Done yet? No? Here’s a hint to get you started:

First, you’ll need the $278 million dollars Apple spent to buy PA Semi conductor. Then, you’re going to need to pay the six-figure salary of everyone you keep on that team for two years while they develop you a new processor. Pay them medical benefits, vacation time, etc. Pay the software developers who are going to work closely with the hardware team to make sure the thing is nice an optimized, and so on.

There’s a bit of overhead involved, you know?

At the end of the day, you may be able to make your SECOND chip for $17, but the first one is going to cost you hundreds of millions.

Even after iSuppli gets a real iPad and examines its components, and even if that raw estimate of component costs were relatively accurate (the preliminary one is pure speculation), there are a ton of other costs that go into any kind of business. You can’t continue to operate if you can’t turn a profit of some kind. Which means you have to charge significantly more for a product than what it costs you to make one.

The design, the testing, the software developers, the box, the labor for assembly, shipping, advertising, the receptionist at the front desk—these things cost real money, and they have to be factored into the purchase price.

What iSuppli is suggesting here is that Apple is being greedy, overcharging once again for their products. That’s an easy story to sell, because it fits in nicely with people’s pre-conceived notions about Apple as a brand. But that doesn’t make it true.

Business Week should know better, and it should have more respect for the intelligence of its readers.