Apple Boosts Profit Push

The new pricing power has also translated to the 8-gigabyte nano, which costs $199. According to iSuppli, the bill of materials totals $82.85, about 17% less than half the cost of the device.

iSuppli expects Apple to sell almost 55 million of all iPod models in 2007, an increase of 18%. Wider profit margins will help offset the trend toward purchases of lower-priced units that had lowered the average selling price of iPods in recent quarters.

By most estimates, it looks as if the iPhone will be a success this quarter. The company hit the 1-million-unit sale mark weeks ahead of schedule, and it spurred even more demand by cutting the cost of the device.

Since the iPhone shares components with the new iPod touch, early indications suggest that the company has negotiated lower costs for components by ordering much larger shipments, says Transamerica's Kim. This could prop up margins despite the price cut.

But the economics of the iPhone are somewhat murky because of the fees that Apple charges AT&T (T Quote - Cramer on T - Stock Picks). Apple gets a one-time "bounty" on each device sold, and it also receives a share of the service charges. This adds to the device's profitability and gives Apple's cash flow a boost through a recurring income stream.

But Apple only books a portion of iPhone sales each quarter. By spreading the total sale over a 24-month period, Apple dampens the effect that iPhone sales have on its quarterly results.

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