Microsoft’s Surface RT BOM Higher Than iPad’s, IHS Says in Teardown Report

Amazon is losing less money on the Kindle Fire HD than it did on the first-generation Kindle Fire, and Microsoft is making more on its Surface tablet than Apple is on the iPad, according to the IHS iSuppli Teardown Analysis Service.

The first Kindle made headlines last year for costing $201.70 to build while carrying a retail price of $199, but the latest Kindle Fire HD, which retails for $199, costs $174 to build, according to IHS. While Amazon has managed to bump up the specs while incrementally reducing bill of materials costs, Amazon’s strategy remains to make money on the content, not the hardware, noted Andrew Rassweiler, IHS analyst.

Most of the Kindle Fire HD’s cost reduction came from the display, which costs $23 less than that in the first Kindle Fire, while boosting resolution from 1024 x 600 pixels to 1280 x 800 pixels, IHS said. The display/touchscreen subsystem came down in cost from $87 to $64 in the Kindle Fire HD, accounting for 39 percent of the HD’s bill of materials (BOM), compared with 47 percent for the Kindle Fire’s display/touchscreen subsystem last November, according to IHS. While memory doubled from the Fire to the Fire HD to 16GB, cost went up just $1, it said, due to falling semiconductor prices. An upgrade to TI’s OMAP4460 processor added $2 to the cost on the Fire HD, and the battery, unchanged from version one, dropped $1.50 to $15, IHS said.

Microsoft’s $599 32GB Surface RT carries a BOM of $271, according to the preliminary estimate from IHS, which concluded that based on size, feature set and pricing, the Surface RT is “clearly designed to compete with the full-size iPad.” Microsoft sets itself apart with the optional Touch Cover that acts as a full-function keyboard using capacitive-touch sensing, enabling the tablet to operate like a laptop when the cover lies flat. IHS estimated the cost of the Touch cover at $16-$18.

Key to Microsoft’s strategy to transition from a software company to a device and service provider is to create products that generate high profits on their own, “similar to what Apple has achieved” with the iPad, Rassweiler said. From the hardware side, Microsoft has “succeeded with the Surface,” he said, offering “an impressive tablet that is more profitable, on a percentage basis, than even the lucrative iPad” based on current retail prices.

Various divisions of Samsung supply components or complete subsystems for many of the most expensive portions of the Surface, making the company the primary design winner for the tablet, having supplied the display, the NAND flash and the battery pack, IHS said. It noted, however, that most of the parts are available from multiple sources, and other suppliers are “likely utilized” in other Surface tablets. Nvidia supplies the quad-core ARM-based Tegra 2 processor, which comes at a cost of $21.50, or 8 percent of the BOM, IHS said. The Touch Cover and touch controllers are provided by Atmel.

The 16GB iPad Mini base model, with Wi-Fi only, carries an estimated $188 BOM, IHS said, making it “slightly more profitable” on a percentage basis than the comparably equipped New iPad that came out last spring. Despite pricing intervals of $100 each for the $329, $429 and $529 iPad Minis, the incremental cost of the differentiating NAND memory modules is $9.60 per 16GB, IHS said, translating to $90 in additional profit for every iPad Mini above the base model, IHS said.

The iPad Mini’s defining feature is its 7.9-inch display, which is larger than 7-inch models, and drives up the cost of the display, estimated at $80, or 43 percent of the BOM for the entry-level Mini. The high cost of the display forced Apple to look for cost reductions elsewhere such as the A5 chip made with a 32-nanometer process that’s also in the latest Apple TV and the newest iPad. The A5 processor costs $13, accounting for only 4 percent of the total BOM, compared with $16.50 for the Texas Instruments OMAP processor used in Amazon’s Kindle Fire HD, it said.

Amazon’s Kindle Fire tablets and Google’s $199 Nexus 7 “have set new consumer pricing expectations” for tablets in the 7-inch category, posing “a competitive challenge to Apple’s tablet dominance,” IHS said.