Here’s the SECRET to Apple and Amazon’s Tablet Profits

There is a significant cost premium for a consumer buying a larger memory version of a tablet or other smart device, and it turns out, that is where manufacturers make the majority of their profits.

According to a research report from RBC Capital Markets analyst Doug Freedman, 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, which is a 46 percent drop.

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Freedman goes on to point out that while the cost of the chips has fallen drastically, the final cost to the consumer has not had much impact at all. The Wi-Fi version of the new 8.9-inch version of the Amazon (NASDAQ:AMZN) Kindle Fire HD costs $300 for 16 GB and $370 for 32 GB. Apple’s (NASDAQ:AAPL) iPad sells for $500 for 16 GB, $600 for 32 GB, and $700 for 64 GB. So effectively, every 16GB of memory costs Amazon about $11.20, a figure far removed from the $50 to $70 that buyers of the Kindle Fire pay for the extra storage. According to Freedman, Apple’s memory costs about 40 cents a gigabyte, totaling $6.40 for 16GB. Customers, in turn, pay close to $50 or $100 extra for the memory upgrade.

An IHS iSuppli report confirms that marking up memory costs is where Apple, and other manufacturers, gets most of their device profits from.

“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,” iSuppli analyst Andrew Rassweiler wrote. “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.”

As The Wall Street Journal says, you may be paying for a combination on components when buying a new device, but “when you get an iPad or Amazon tablet with 32GB as opposed to 16GB, extra space is all you’re paying for.”

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