The materials used to build the Nokia Lumia 900 smartphone cost $209 -- well above AT&T's price for the phone of $100 with a two-year contract, but just 46 percent of Lumia's $450 retail price with no contract.
That's the finding of IHS iSuppli, which did a physical teardown of one of the new Lumia smartphones. The $209 cost for materials does not include an additional $8 for manufacturing.
Nokia, Microsoft and Qualcomm mimicked Apple and its iPhone by closely tying together hardware and software in the new phone to produce greater efficiencies in production, IHS said.
"For the Lumia 900, Nokia and Microsoft worked in close partnership with Qualcomm to develop and optimize the software stack in order to take full advantage of the hardware," Andrew Rassweiler, an IHS analyst, said in a statement.
With the iPhone, Apple uses low hardware costs and a relatively high retail price to win industry-leading margins; Nokia is using a similar production approach to offer an inexpensive phone that competes on price, he added.
Both Nokia and Microsoft are willing to lower their profit margins to gain a foothold in the smartphone market, IHS concluded. Currently, Windows Phone represents less than 3 percent of the smartphone market.
Wayne Lam, another IHS analyst, said IHS believes that Microsoft substantially discounted its software licensing fees on the Lumia 900 to match the overall lower manufacturing costs. Previous Windows Phone smartphones from HTC, Samsung and LG met with limited commercial success, and Microsoft has been willing to "double-down with Nokia to promote Windows Phone 7," Lam added.
IHS compared the Lumia 900's costs for components and hardware with the Samsung S II Skyrocket, an Android phone with a similar set of features. The Skyrocket's costs were $236, or 43 percent of its $550 retail price.
IHS said that Nokia kept the Lumia 900 hardware costs down primarily with the use of a single-core processor and limited DRAM, while still achieving competitive performance with the Skyrocket. The Lumia 900 uses the single-core APQ8055 processor from Qualcomm that costs $17; the Skyrocket uses the dual-core APQ8060 from Qualcomm that costs $5 more at $22, IHS said.
The Lumia has 512MB of DRAM, half the 1GB used in the Skyrocket and many other smartphones, IHS found. The Lumia 900's DRAM and NAND Flash memory costs totslled $27, $5 less than those components cost for the Skyrocket.
IHS compared the Lumia 900 with an Android phone, partly to note how it might compete in the low-cost smartphone market now dominated by Android. Even lower memory densities are possible for use by Windows Phone, IHS said, which would allow production of even more cost-competitive smartphones in the future.
IHS didn't comment on AT&T's $100 price for the phone. Some analysts, including those at Forrester Research, believe Nokia and Microsoft have absorbed much of the difference between material costs and retail price, giving AT&T an exclusive and AT&T's support in promoting the Lumia.
Regarding the full range of components in the Lumia 900, IHS said Qualcomm was the biggest single supplier, providing the applications processor, baseband processor, power management and radio frequency transceiver. Together those components cost $64 of the $209 total cost.
The largest single item was the display and touchscreen from Samsung Mobile Display, which cost $58, or 28 percent of the total. That compares to $64 for the Skyrocket's display and touchscreen. IHS said that Micron Technology supplied the 16GB of NAND flash memory in the particular Lumia 900 IHS tore down, while Elpida Memory made the synchronous DRAM component.
Both the NAND and DRAM are commodity components and Nokia is likely to rely upon other suppliers as well, IHS added.
Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen or subscribe to Matt's RSS feed. His email address is email@example.com.
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This story, "Lumia 900 Materials Cost $209, Point to Low-Cost Approach by Nokia, Microsoft" was originally published by Computerworld.