February 25, 2005 9:30 AM PST

A voyage inside the iPod Shuffle

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A look under the hood of Apple Computer's iPod Shuffle shows the company is making music with two chips.

IDC analyst IdaRose Sylvester recently dissected a 512MB iPod Shuffle, purchased at retail, to determine what the tiny music player is made of. Her report, published earlier this month, reveals that Apple used two main chips spread over two separate circuit boards to foster the compact design of the music player, which was introduced in January.

The Shuffle Sylvester dismantled was based around an MP3 decoder chip from SigmaTel and a flash memory chip from Samsung--which means the device uses many fewer chips than hard-drive-based iPods, she wrote.

The MP3 decoder, mounted to one board, takes charge of a multitude of functions. Its handles music, including the playing of MP3, AAC and Audible format files. It harbors a USB 2.0 converter, SDRAM for buffering data and a headphone driver.

The chip is capable of handling Windows Media music file decoding and voice recording, and could send images to an LCD screen and work with an FM tuner, she wrote. Those features go unused in the Shuffle, though.

The Shuffle's Samsung flash memory chip is mated to a separate circuit board. The two boards are sandwiched together at the top of the Shuffle, leaving room for its battery below.

The Shuffle's lithium-ion battery takes up the bottom half of the device; it sits between the boards and the player's USB (Universal Serial Bus) connector. Sylvester surmises that because of the Shuffle's design, it may not be possible for the battery to be replaced by a consumer, if at all.

As with any electronic device, Apple had to make some trade-offs. The Shuffle's twin-board setup, integrated MP3 chip, built-in USB connector and the circuitry required to support recharging its battery via USB amount to a fairly complex design.

However, she concluded that Apple seems to be making a decent profit on the Shuffle.

Sylvester believes it costs Apple about $59 for the materials to build the 512MB device. The most expensive component in the Shuffle is its flash memory chip, which right now costs about $31, Sylvester wrote.

Thus Apple appears to have a "margin" of about 40 percent on the 512MB player, she wrote. Sylvester estimated that Apple's margin on the 1GB Shuffle is slightly smaller, about 35 percent. However, the report did not mention costs beyond the components, such as marketing, packaging, labor and other overhead. Also, while Apple sells iPods directly, it would not receive the full retail price of those sold through other stores.

Over time, the memory chip's price should decline, giving Apple even higher margins.

Apple could not immediately be reached for comment.

12 comments

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Apple Profit on iPod Shuffle
The parts may cost X and the product may cost Y, but that
doesn't mean that the difference = profit. There's R&D,
production, distribution, marketing & advertising in there too.
After all that is taken out, what remains is profit. Kinda basic,
but it apparently bears repeating.

gmcv
Posted by avocadoworship (7 comments )
Reply Link Flag
yep
they seem to have gotten confused somewhere between revenue and profit. even with a 90% revenue, if they don't sell enough it won't cover r&d, advertising (very expensive), and production/distribution overhead.
Posted by mortis9 (370 comments )
Link Flag
Gross vs. net
You're talking about the difference of gross profit vs. net profit, which is all well and good. In that case don't forget to subtract the cost of packaging and shipping as well, since Apple is offering free shipping if you buy from their web site.

The thing that the analyst forgot is that the gross profit isn't the difference between the cost of materials and retail price, it's the difference between the cost of manufacture (materials and labor if nothing else) and the *wholesale* price. It's fine if Apple is supposedly making 40% when they sell it on their web site, although I suspect that actual gross profit is significantly lower. But when Apple sells it through other retailers (Amazon, Micro Center, etc.) their profit margin will go down significantly because the retailers have to get their cut as well, which I'm guessing will be in the 20-30% range.
Posted by whitewater (28 comments )
Link Flag
No anatomy pictures?
Love to see pictures of the inside of this thing. Dang.
Posted by shoffmueller (236 comments )
Reply Link Flag
what no wma/mp3 playback bad idea
The report shows a number of very serious short comings of this unit,including the lack of ability to play wma files(not Napster compatable). The current competitors in this field offer better value for money, Apple will have to do a lot of work to address this units shortcomings as currently released. Undoubtedly, Apple's battery replacement policy charges, for this unit will follow it's bigger brothers, empty your wallet policy.
Posted by heystoopid (691 comments )
Reply Link Flag
Well, you didn't take into account
that WMA SUCKS. It's the next worst format to Real's technology. Why should they include the ability to play crap, when MP3, MP4, and Apple Lossless are superior quality in every single way?

And Napster? Yeah. Cos we want the songs we download to not be owned by us. We'd rather them shut off music when we stop subscribing, meaning all downloads lock and can't be played. PFT. People call Apple proprietary and a music-monopoly. Least you OWN the songs you buy from Apple.
Posted by (461 comments )
Link Flag
good idea
Actually, the iPod shuffle does support MP3 playback. Also, not
supporting WMA is a good idea if you think about it, since Apple
has a competing music format, QuickTime and AAC, and
whenever someone buys an iPod or uses iTunes, that's one less
customer using WMA to listen to their music. It's Apple hitting
on two fronts with one device. What the disabling allows it that if
customers suddenly demand WMA support and refuse to
purchase iPods without it, Apple can quickly activate it with a
firmware update.

Just so you know, iTunes for Windows will convert unprotected
WMA files into AAC files so an iPod can play them, so technically
Apple does support WMA.
Posted by iKenny (98 comments )
Link Flag
iTunes converts WMA to AAC + MP3
go to www.apple.com/ipod OR www.apple.com/itunes

iPods play MP3,AAC,WMA & Audible book files.

iTunes will convert any UNPROTECTED / DRM Windows Media File music to MP3 or AAC.

Get the facts & stop the disinformation.
Posted by Llib Setag (951 comments )
Link Flag
My shuffle is empty, I don't how it's working!
I opened it up and it's empty. Go figure.
Posted by technewsjunkie (1265 comments )
Reply Link Flag
Margins According to Apple
"Oppenheimer (Apple CFO) was asked about lower iPod margins.
In 2004, the
company saw its margins on the popular music player drop from
27 to about 20 percent. Oppenheimer explained that this was
due to increased production of the iPod mini, its own price cuts,
and an increase in its production of iPods sold to Hewlett-
Packard. Oppenheimer noted that margins on the iPod shuffle
are "below the aggregate" of the margin for Apple's hard drive-
based players."

I would imagine this is not as much as a guess as is the authors
opinion in the article.
Posted by jmmejzz (107 comments )
Reply Link Flag
Very poor analysis
Shame for such a poor analysis. Very much an amateur job from a respected organization. Makes you wonder about their other reports, doesn't it?
Missing costs to produce the product include: the manufactuer's direct labor (the people building it), indirect labor (others needed to support the assembly operation such as qc engineers and testers, buyers, managers, etc.), the manufactuer's profit and overhead (not Apple's, but their supplier), packaging instructions, shipping, and Apple's own support to the manufacturer and their R&D. If these are factored in, along with the distribution channel's margin at non-Apple stores, the conclusion is quite different. This story has been picked up by many papers and just perpetuates erroneous information. As I journalist I find this regrettable. How about a retraction from IDC?
Posted by phil0248 (1 comment )
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