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Besides small differences like a minor camera, fundamentally the difference between the iPhone the iPod touch is the GSM/CDMA antenna and I guess more battery to support the antenna.

Yet the iPhone costs $650 and the iPod touch $200 which is quite surprising to me.

Is it because Apple has a bigger margin on the iPhone or are the components of the iPhone really that much more expensive?

edit: my question is not about the concept of demand and offer. To make it more explicit I'll change the question to how much more margin is Apple doing on the iPhone than on the iPod touch? Original Title: "Why is the iPhone over 3 times more expensive than the iPod touch?"

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Other differences (besides the different display noted below): Bluetooth 4 (LE), GPS, LED flash, a much better camera with image stabilization, Airplay mirroring, and a proximity sensor. Add that to the cellular radios and double the battery and you don't get $450, certainly, but the differences are greater than you portray. –  Matthew Frederick Jun 20 '12 at 4:57
    
Basically ~$100 in components, and the rest went into marketing. –  Fake Name Jun 20 '12 at 6:50

4 Answers 4

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+50

The answer you are expecting won't satisfy you because the cost of making those devices is much less then the price they sell them for...

But in order to answer your question, I've made a table. Unfortunately, I didn't find any records of the iPod touch 16GB and 32GB, but I expect they are quite alike.

enter image description here

I'm sure Apple does get his share on the sold subsidized iPhones too.

The difference between US and Europe is the difference between a locked iPhone and an unlocked iPhone (because in Belgium, you pay this much for an iPhone...)

Here is an interesting article about the difference in production costs between an iPod touch and an iPhone.
And if you want to know what an iPhone costs in detail (every part), take a look at this overview.

So, although it seems like Apple is making an awe full lot of money on these devices, Apple invested billions and billions of dollars in R&D, design, production, marketing, distribution, stores, packaging,...
So in the end Apple is still taking a lot of profit on these devices, but not as much as you might think. In my opinion, they get paid for their hard work.

To answer your question why the iPhone costs more then the iPod touch, I think it's because, as you've pointed out, the design is quite similar so most of the costs of the iPod touch mentioned above (R&D, design,...) are already recouped with the iPhone, since the iPhone was released before the iPod touch.

enter image description here

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Your numbers are really, REALLY wrong. The iPhone 4S 16GB is $649 in the US. The margin is therefore $461! You have it noted as $11... –  Fake Name Jun 20 '12 at 6:46
    
You seem to be confusing the subsidized price with the actual price of the phone. –  Fake Name Jun 20 '12 at 6:47
    
Alright @FakeName. Thanks for pointing this out... I've updated my answer. Please undo your downvote if you find this answer more suitable, since we are all here to help the topic starter with his question. –  Michiel Jun 20 '12 at 7:04
    
I would argue that showing the subsidized cost at all is useless. I would bet the phone companies would be completely happy to subsidize people buying a iPod touch, if they thought they could get away with it. –  Fake Name Jun 20 '12 at 8:51
    
How did you guess production costs? What accounting did you use to come up with margin? GAAP? read it on a blog? I don't mean to be totally negative, but putting numbers in a table like that seems a bit too factual and tidy based on the reality that we don't really know Apple's internal finances. –  bmike Jun 25 '12 at 12:33

The premise that components are the primary cost to bring a product to market doesn't hold much water for any iOS device.

The most astute quip I have seen was by Horace Dediu on twitter as @asymco:

The iPhone is a salesman hired by the operator to sell mobile broadband service.
He gets a healthy commission because he's very good at it.

I wouldn't confuse the initial price point or ongoing price point with the incremental cost to manufacture and sell a mass market product several years after release. The iPhone 3GS is still for sale and clearly it doesn't cost as much to make now as it did on the day it was released. It's also clear that each device released at the $650 retail price point doesn't really cost that to make. Retail pricing is more of a calculated gamble that the market will bear that price. Only months to years later can the margins be measured.

I think the cart is a bit before the horse as I read your question. Also, I wouldn't say the difference between 3GS to 4 to 4S rear camera is small. The iPod touch rear camera is measurably worse than all of the above so I'm not sure how to address that other than offereing a different opinion.

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Also, the Retina Displays of both devices are different. The iPod Touch 4th Gen has a thinner display that lacks IPS and thus viewing angle. Do those two components cost $400? I doubt it. –  Kalamane Jun 5 '12 at 20:31
    
Also - the asymco blog and podcast on the 5by5 network is the best place to learn how hard it is to guess individual margins on products given how Apple reports financial performance as a public company. –  bmike Jun 20 '12 at 1:13

The price for an object is the highest that the market will bear.

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What about when the seller chooses to subsidize a purchase? This seems a little to simplified to address the margin aspect of premium products. –  bmike Jun 20 '12 at 1:10

According to iSuppli (as reported in the link by Reuters), there are $188 in parts in the iPhone 4S.

Adding in the other costs, Horace Dediu over at Asymco suggests that Apple's operating margin on each iPhone is $319. He explains where he gets each number from.

iPod Touch margins, however, are much harder to track down. iSuppli has done a teardown of the components, but the costs are behind a paywall.

You'd take the iPhone component cost and, roughly, subtract out the amount for a cheaper display and less battery, a much worse camera, the cellular radios and antenna, the proximity sensor, the LED flash, the difference between a Bluetooth 4 chips and a Bluetooth 2.1 chip, and some additional circuitry for things like Airplay. However, how much those cost is, as far as I can tell, unknown outside of that paywall.

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