A Peek at the Parts — And Profits — Inside Samsung’s Galaxy Note Tablet

One of the most revealing facts to emerge from the continuing trial between Samsung and Apple in a California federal courtroom is how thoroughly the iPad has dominated the emerging tablet market in the U.S. Court documents showed that from the end of 2010 to the middle of 2012, for every one of any of the three models of Samsung tablet sold, Apple sold 21 iPads.

Samsung’s latest attempt to tilt at Apple’s windmill is the Galaxy Note 10.1. Released in the U.S. on Aug. 16, at a high-profile event in New York, it sells for a starting price of $499.99 for a 16 gigabyte version. Like other tablets from Samsung, it runs Google’s Android operating system, specifically the version from last year known as Ice Cream Sandwich, though an upgrade to the newer Jelly Bean is coming eventually. It has also been reviewed favorably, including last week by AllThingsD’s Walt Mossberg.

Now, the gearheads at IHS iSuppli — the folks who last month dismembered Google’s Nexus 7, and before that Apple’s latest iPad — have taken the Galaxy Note 10.1 apart to see what makes it tick. More importantly, they’ve also estimated how much Samsung spends on the components used to assemble it; from that, it’s pretty easy to guess at Samsung’s profit margin.

Rassweiler says the firm tore down a version of the tablet that includes the ability to connect to 4G wireless networks (it is not yet available in the U.S.), and which sells at retail for about $640. As yet, the only model available in the U.S. is a Wi-Fi-compatible model. All told, the cost of the components — “bill of materials,” or BOM in industry lingo — for that model adds up to $283. Take out the 4G wireless components and leave the Wi-Fi-only, and the BOM estimate comes down to about $270, he says.

Technically speaking, says analyst Andrew Rassweiler, who supervised the teardown, the Note 10.1 doesn’t break any new ground. “As is usually the case, each hardware release offers an incremental set of improvements over the last generation,” he says. The tablet’s main microprocessor chip is the quad-core Samsung Exynos processor, made by its own chip division, and based in part on a design licensed from ARM. The chip has already been seen in the Samsung Galaxy S III smartphone, and costs Samsung about $18.

Also seen in the torndown unit, and spotted before in other Samsung devices, is a wireless chipset from Intel’s recently acquired Infineon division. “By reusing components, Samsung can negotiate better pricing with suppliers, and it shrinks the incremental cost of developing other devices like this tablet,” Rassweiler says. Combined, all the wireless components add about $15 to cost, and a little less in the Wi-Fi-only version.

The Galaxy Note’s main differentiating feature is the digital pen, or stylus, that lets users write and sketch on the screen. The main part that allows that is a hybrid capacitive touchscreen that also allows the conventional touch interface that tablet users are accustomed to. Samsung’s combined cost of the display and touchscreen components adds up to $100. The pen comes from Wacom, the same company known for its graphical tablets favored by digital artists.

Also spotted inside the Note: A gyroscope chip from STMicroelectronics, a power-management chip from Maxim, a touchscreen-controller chip from Atmel, and an audio chip from Wolfson Micro. Some of those companies are also regular Apple suppliers.

Which brings us to another important point: Samsung gets most of the parts from itself. It is the world’s biggest manufacturer of memory chips, and one of the biggest manufacturers of LCD screens. It also ranks at or near the top of the world’s suppliers for chips to smartphones and tablets generally, and even manufactures, under contract, Apple’s own A5 chips used in the iPhone and iPad. “Samsung’s competitive strength is in controlling a large percentage of the parts that go into their final product,” Rassweiler says. Most of the key components — the display, the memory, the main processor and the battery — were all made by different branches of the far-flung Samsung empire.

By comparison, the total cost of all the components on the latest iPad, as estimated by IHS iSuppli at the time of its release in March, was $316. Oddly enough, Samsung made the so-called Retina display that Apple touts as that device’s main differentiating feature. The cost to build the Nexus 7 was estimated at $152.

And while a cost of about $270 might lead you to the conclusion that Samsung is taking a fat $230 on each unit sold, Rassweiler says there are more costs to consider that a teardown can’t account for — software and development costs, for starters.

In the end, Samsung may not be coming even close to denting Apple’s commanding market share, but it may be making a slightly better profit. One fact that emerged from the epic patent lawsuit between Apple and Samsung is that Apple’s iPad gross margin runs between 23 percent and 32 percent. Rassweiler says that even after accounting for software and other non-material costs, Samsung probably makes a slightly larger margin. There is that.