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Tearing it apart


I once had a boyfriend call Will. He was great, unless we went to the cinema. As a massive movie buff he'd break each film down into its constituent parts: identifying bit-part players by what they'd been in before. Spotting locations that had been used in other films and noting which bits of plot had been borrowed from elsewhere. We split up a long time ago but I bet if I wanted to I could find him posting on Rotten Tomatoes.

What I learnt – other than the suit of armour from A Knights Tale, with the Nike swoosh was bought by Phil Knight, owner of Nike – is that a film is more than the sum of its parts. The same (you saw this coming) is true of phones. One of the oft quoted fallacies is the line “you can make a phone for $20”. It's true that if you add up the cost of the parts in a phone you get a bill of materials but that's not a fair representation of what it costs to make. Even that doesn't include what it costs to sell.

The next conclusion is that Moores law drives down costs and that soon all smartphones will cost less than $50. Both hypotheses are wrong.

There are lots of upfront cost. Injection moulding costs about $20,000 per tool. There are typically four or five pieces of moulding in a phone. Sell 100,000 phones and it's cost you $1 a phone, sell a million and it's 10 cents. The material cost is often much less than the tooling. Add in the keypad, display lens and you typically look at $5 a phone but you can see how dramatically variable this is against quantity. And Smartphones rarely sell in the 3m+ quantities you need to hit the $5 price.

Software is perhaps the most misunderstood part of the cost of a phone. Before Symbian went free and open source it cost $2.50 a handset. This was deemed as expensive against Android which was free, but when you look at the real cost of an Android handset, somewhere around $250 as a bill of materials, the operating system licence isn't a major factor.

It isn’t even a major part of the software cost. To build a handset you need a team of programmers. Even in China these are well paid jobs and you need quite a lot of them if you are going to do anything clever like the Motorola DEXT front end. These salaries are usually seen as company overhead and not part of the cost of the phone. Programmers salaries don't obey Moores Law. Indeed the inverse is true as phones add features the burden of testing multiplies. Open source doesn't make this any easier. There is a great comment in the latest issue of the wonderful Make magazine where they describe the need for a hardware failsafe on an autonomous radio controlled plane to be 100% reliable. “We didn't know what people would be doing with our [open source] code and what sort of bugs they might introduce, we thought it was safer to make this circuit standalone”. Just tracking the changes and merging code on an RTOS is tough enough, it gets to be a never-ending problem with open source.

The software cost grows as you add features. Want T9 predictive text? There is a royalty on that, a browser? MPEG player, audio codec, Spongebob game, and it’s a long list. The software royalty cost on a smartphone can easily exceed the hardware cost on a budget phone. That might change with volume but not with time.

For an Android phone you need a fast processor. There is a great article on Engadget comparing Android phones. The conclusion is that a 528MHz ARM 11 isn't fast enough and they need a Cortex A8 (ARM's Atom basher). By contrast the “$20” phones typically run something like a TI locosto (or did until TI gave up on the merchant chip business). That's an ARM 7 processor. Cortex is four generations newer. A generation is at least a couple of years, so Cortex A8 dropping to Locosto levels, even given Moores law it's some way away.

Windows Mobile tends to be more processor hungry than the other Smartphone OSes. It's not for nothing that the first 1GHz phone is the Toshiba, Windows Mobile device, but it's impossible to quantify how much this adds to the cost because it uses a Qualcomm processor and, while other chip manufacturers give out guide pricing, Qualcomm has a price list which reads “who's asking”, “it depends”, “what are you going to make”. There is no way you'll get a sensible figure from iSupply or Portelligent. Note: this paragraph was especially included to annoy the Qualcomm fanbois/shareholders as it drives hits to this site. Thanks guys.

Another of the jelly-to-the-ceiling costs is IP. This factors in two ways. To start with there are the IP royalties on GSM. How much you pay depends on what IP you have thrown into the ring. If you are Motorola, and invented the mobile phone you pay very little. If you are a late-comer like LG you pay a lot. If you are a no-name Chinese manufacturer you generally don't pay and wait for the lawyers to come knocking. How likely they are to knock depends on how successful you are and where you sell your phones. A small manufacturer doing 30,000 phones a year only in China won't warrant the months of fees at $500 an hour for the IP holders to ring their lawyers. Start selling hundreds of thousands of phones around the world through Vodafone and you'll have to pay up. Some manufacturers add the cost to the phone but don't actually pay, they just put the money into a contingency fund in case they get caught.

Beyond the costs you don’t see in the handset are those you don’t see in getting it to market. Packaging, distribution and marketing are all obvious, but return rates, especially no fault found return rates are unpredictable, and support, when every call costs $10 to handle can blow the margins on any handset.

These unseen costs won’t drop in time the way the processor and memory do, most people don’t spot what’s going on behind the obvious although I’m sure there are mobile phone equivalents of Will who would. Perhaps we need a better way of differentiating between the two. Will did that for films. Something that is a cinematic great – Thelma and Louise – is a film. Something instantly forgettable – Turner and Hooch – is a movie. Then perhaps the difference between something great and something cheap would be easier to spot.

Cat Keynes publishes her thoughts on the mobile phone industry every Sunday at www.catkeynes.com you can read the column the previous Friday by subscribing here.

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