New iPod Nanos Cost 20% Less to Build

An extensive teardown analysis by research firm iSuppli, released this morning on Apple's second generation iPod nano MP3 player announced last week, reveals the company is probably paying 20 percent less to build this new model than for the previous nano generation.

Last April, NAND flash memory and media processor supplier Samsung substantially broadened its contract agreement with Apple, effectively ending Apple's existing relationship with U.S. company PortalPlayer, Inc. Previously, up to 95% of that company's business was in supplying media processors for iPods, which were already using Samsung memory.

But Samsung's new contract apparently enabled Apple to catch a price break on memory, in exchange for iPods using Samsung's digital signal processor instead of PortalPlayer's.

Looking deeper inside the nano, iSuppli discovered the new Samsung DSP also supplies the flash disk controller functionality, which in the previous generation was delegated to a separate part produced by Silicon Storage Technology, Inc.

iSuppli believes that, by going with Samsung's System-on-a-Chip (SoC), Apple saves itself $2.60 per unit in parts costs. Additional savings, perhaps due to a more power-efficient design, led to a total estimated bill-of-materials cost of $72.24 for the new 4GB nano, versus $89.97 for the previous generation 2GB nano - just a few cents less than when the nano was first introduced last September.

The previous model sold for about $200 on average prior to the new nano's release, which now sells for the same amount.

The fact that the new nano is not video-capable, even though many of its micro-sized rivals are, has baffled iSuppli's analysts, who were expecting "nano video" to coincide with the new model's brighter display.

Senior analyst Chris Crotty believes this could put the nano at a disadvantage against Microsoft's upcoming Zune player, whose pricing information ended up being withheld at the last minute following Apple's announcement gala last week - which did, after all, spotlight iTunes movie downloads.

But Apple might still have time, Crotty said in a statement this morning, to release one more set of iPod enhancements before the holidays, perhaps in a move to throw off competitors. It could also be shifting its development focus from portable to home entertainment, he said, with the announcement of its "iTV" streaming video device under development. That shift of focus could be a signal, he added, of Apple's confidence in its leadership position in portable media.

If the latter is the case, though, the likelihood of a confident Apple making yet another nano adjustment in, say, November could be diminished, thus giving competitors like SanDisk in the micro-player market an opening.