Take the example of the 8.9-inch version of the Kindle Fire HD. Its Wi-Fi model comes in two options: 16 gigabytes for $300 and 32GB for $370; to enjoy 16 extra gigabytes of storage, a customer pays $70 more. For its smaller 7-inch tablets, Amazon charges $50 more for an extra 16 gigabytes.
Now look at Apple’s iPad. You can get a 16GB model for $500, a 32GB model for $600 or a 64GB one for $700. That’s $100 extra for that first 16GB bump, then a relatively cheap $100 to get from there to 64GB.
Of course, when you buy a new gadget, you’re not just paying for a slab of components. The maker of the product is trying to get you to cover the cost of research and development, manufacturing and advertising, and still rake in some profit. But when you get an iPad or Amazon tablet with 32GB as opposed to 16GB, extra space is all you’re paying for.
And it turns out that the cost of flash memory chips is dropping significantly. In a report issued Friday, RBC Capital Markets points out that the cost to device makers of 8GB of the flash memory used in tablets has declined from $6.82 in the beginning of the year to $3.63 now, representing a 46 percent drop.
Doug Freedman, the analyst at RBC who wrote the report, points out that while the cost of the chips has fallen, the final cost to the consumer has barely decreased at all. Even though Kindle tablet customers usually pay less for storage, Amazon’s markup is still hefty. The memory that Amazon uses costs about 70 cents a gigabyte, according to Mr. Freedman, so every 16GB costs the manufacturer about $11.20 — far from the $50 to $70 that an Amazon customer pays for the storage. Apple’s memory costs about 40 cents a gigabyte, he said, so 16GB costs Apple about $6.40 — far less than the $50 or $100 customers pay.
A report published by IHS iSuppli, the components research firm, in March found that marking up memory costs is where Apple gets a lot of its iPad profits.
“The NAND flash memory is one of the key profit-generating components for Apple in the new iPad line, as it has been in previous iPads and in the iPhone family,” said Andrew Rassweiler, an analyst at iSuppli, in a statement. “Apple makes far and away more money in selling consumers NAND flash than NAND flash manufacturers make selling it to Apple. And the more flash in the iPad, the higher the profit margin there is for Apple.”