Breaking Google Glass Into Pieces: The Costs of Production and Likely Retail Price

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Google Glass ( GOOG ), the much-hyped augmented reality device, looks like the most promising foray into the wearable tech market by a major company thus far. IHS iSuppli ( IHS ) forecasts that the smart Glass market will hit the $6 billion mark by 2016, with up to 9.4 million units sold by then.

First announced in spring 2012 , Google Glass is now in use by a limited group of Google employees, developers, and about 10,000 early adopters (known as "Explorers") who were chosen by Google.

It costs to belong to that last category; as an Explorer, you have to pay $1,500 for the device and you cannot resell it. In fact, it's cost that might be one of the decisive factors to make or break Glass's market prospects. As the popular technology blogger and Glass Explorer Robert Scoble puts it , "The success of this [device] totally depends on price."

In public talks, he has asked audiences about their willingness to purchase a Glass headset, and found that most people were reluctant to buy the device at $500. But, he says, when he asked crowds about whether they'd purchase Glass at $200, "literally every hand went up."

"This was consistent, whether talking with students, or more mainstream, older audiences," Scoble said.

So how much will Glass cost? And what does it cost Google to make one?

We asked experts and we did some math ourselves. Based on the components used, it should cost less than $210 to produce one device.

The retail price will therefore all depend on what margin strategy Google will choose to use. So far, a Topology Research Institute analyst predicted that the device would carry an initial price tag of $299.

A Question of Price -- and Timing

Google has promised to expand the number of Glass Explorers this year, and the company has said that it will offer "even broader availability next year," which means that regular customers in the US will have to wait until 2014 to buy the device at a retail outlet. (There has been no news about when Glass will be available internationally.)

Google chairman Eric Schmidt delivered a slightly more specific message about the timing of a retail launch earlier this year. "Thousands of these [devices] will be in use by developers over the next months and then, based on their feedback, we'll make some product changes, and it's probably a year-ish away," he said in an April interview with the BBC .

By the time Glass makes it into the mass market, the price is expected to drop.

But Google has yet to provide any hints about the price tag for Glass. In 2012, Google employees were quoted as saying that Glass would be sold at roughly the price of a contemporary smartphone. However, the company did not respond to Minyanville's multiple requests for comment.

How do tech firms set a product price? Aside from taking into account the most obvious factors, like components used and margins imposed, the price of the product usually reflects the scale of production, special discounts (or lack of thereof), shipping, and customs fees as well.

And let's not forget about contractors' margins, too.

Google is reportedly outsourcing Glass production to Taiwan-based Foxconn Technology (TPE:2354), although speculation could not be confirmed. A Foxconn representative said in an email that Foxconn was not commenting on any existing or potential customers and their products.

Another possible production partner for Google is Shenzen, China-based PCH International , a third-party supplier of product development and production services, which also has offices in Ireland, South Korea, Japan, and Hong Kong. Last October, PCH International opened a new US location in San Francisco, just 35 miles away from the Google Campus in Mountain View. PCH International declined to comment on any possible relationship with Google, quoting internal policies that ban discussion of any individual companies or clients.

Then again, Google might look no further than its new hardware subsidiary, Motorola Mobility, to handle Glass manufacturing -- but perhaps not anytime soon. Motorola Mobility CEO Dennis Woodside told the Wall Street Journal that "it could someday be an opportunity."

Electronic manufacturing services (EMS) -- the companies that design, manufacture, and deliver devices to big brands like Apple ( AAPL ) -- are known to operate on relatively thin margins , reportedly around 1.5%, or $8 per iPhone 5 (1.2%).

Kevin Keller, a senior principal analyst for IHS iSuppli , told Minyanville that the EMS margins generally don't exceed 5%, but may be significantly lower in some cases.

"I'd say that 1.5% is very low. Maybe someone like Apple may be able to negotiate for something like that with Foxconn, but on average, it's usually around 3% to 5%," he said.

Tearing Down Google Glass

Let's go down to the component level and try to estimate the production costs of Google Glass. A teardown of the device by some techies at Catwig uncovered all of its guts, making it relatively easy to explore all the components used in detail.

Minyanville asked some experts to help us estimate the production costs for Google, based on openly available information. Sergey Kovalev, head of production support at electronics design house Promwad , said that according to his engineering team's estimations, the cost of Google Glass materials should not exceed $194 per unit when produced in 10,000-unit batches.

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That estimate matches at least two other expert valuations. Keller told Minyanville that he expected the bill of materials (BOM) for Google Glass to be "well under $200," and Scoble said the same thing .

Build Quality

A cut-and-dried list of components is one thing, but to estimate a device's worth, it's also necessary to consider how well the parts come together.

Looking at Glass, Star Simpson and Scott Torborg of Catwig.com write , "The build quality is what you'd expect from a device that costs as much as a high-end laptop. Everything fits together precisely, and has a solid feel and great surface finish."

Kovalev agrees. "I cannot say that the device design is simple, and that is based solely on commonplace components," he tells us. "It took a lot of work to design it."

Keller adds that none of the Glass building blocks can truly be called "off-the-shelf" parts: "Everything is customized to some degree, even if it's a semi-customized variation of what might be considered a standard product."

At the core of Google Glass is Texas Instruments' ( TXN ) OMAP 4430 processor. It was released in 2011 to power a wide range of tablets and smartphones, including the Samsung (OTCMKTS:SSNLF) Galaxy Tab 2, the Motorola Droid RAZR, and Amazon's ( AMZN ) Kindle Fire.

However, at about $15 per piece, it's not nearly the most expensive component. SanDisk's (SNDK) 16 GB Flash module and Elpida's (TYO:6665) 1 GB RAM module together sell for about $29, while other smaller elements might total up to $35.

Compared to smartphones -- where the screen might be the most expensive component, representing roughly 20% to 25% of total cost of materials -- the advanced optical system in Glass is not a massively expensive product; it is about $25 (13% of total costs), according to Karl Guttag , a technology consultant and inventor, who has been closely following the development of display technology in the Glass project.

"The Himax FSC LCOS [Field Sequential Color, Liquid Crystal on Silicon] requires both a display device and normally a 1-chip ASIC controller.... Figure the controller costs about $2 to $3, but this would go to near zero if the functionality was integrated into other chips in the system," he tells Minyanville.

"The LEDs for illumination are about $2, and then the films for homogenizing/spreading the LED light and polarizing with packaging are another $2 to $3. I would guess the optics, including the beam splitter in front of the eye, are on the order of $5. When you total up the display plus controller, illumination LEDs and films, and the optics, the total cost is probably about $25, plus or minus $5."

The figure might be even lower for Google. In July, the company bought a 6.3% stake in Himax Display, a subsidiary of Himax Technologies, Inc. (HIMX). Google might exercise the option to increase its stake to a total of 14.8% within the next year.

Checking off other items on the list, we'd estimate that the bone conduction speaker and the whole audio subsystem combined are under $12, which is roughly the same price as the camera module ($11), the printed circuit board ($12.3), the wireless module ($12.05), or the case with frame ($11).

google glass tear down prices
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Add a bunch of sensors ($23.38), a small and cheap battery ($0.7), and box contents ($7), and you'll get to a bottom line of $193.59 for parts. Throw in $15 more for assembly, testing, packaging, and other related costs to make it $208.59 in total.

Clout and Scale

Of course, these numbers in reality are likely to be lower than the estimates above, thanks to Google's clout and its enormous purchasing power.

As in the Foxconn-Apple situation described above, suppliers and partners might go the extra mile to offer bigger discounts and drop a number of one-time manufacturing costs (like molding and tooling, or setting up printed circuit board production), hoping to amortize the costs on the future volume.

"With mechanicals, the biggest cost element that is volume- or quantity-dependent is the tooling costs -- for example, the injection-mold tools, or whatnot. For all the different plastic components in any given electronic device, [the price] could be on the order of the several million dollars, so that's amortized across the production volume," says Keller.

He doesn't expect drastic drops in manufacturing costs when the device goes into mass production. He tells Minyanville, "[Google has] already negotiated fairly favorable pricing to begin with," but as the components grow more and more mature, the price of raw materials might be reduced. "For some of the components -- like apps processors, memory, [and] optical sensors -- over the next couple of years, there might be on the order of 20% to 30% takedown on that."

Matter of Strategy

The price tag in a store does not necessarily have to reflect production costs; companies the size of Amazon, Google, or Microsoft (MSFT) can afford to sell devices at prices that are lower than production costs to quickly grow the installed base, and then the companies make money on exploiting the whole ecosystem.

Smartphone makers usually go for a 60% to 70% margin in their top-tier devices. The Samsung Galaxy 4's price tag includes an estimated 62% margin, and the Apple iPhone 5 is sold with a 68% margin.

Google is known to operate on fairly thin margins , and the price of its recent blockbuster release, the Chromecast , at $35, suggests that Google tends to stick to reasonable price points. (The $1,299 Pixel is the exception to the rule).

But even if Google decides to reap a smartphone-class reward on each Glass sold, the device should still cost no more than $599, and it'll likely be much less than that; $299 (for a 30% margin) or $399 (a 47% margin) might be the sweet spots for the company.

No matter the price, however, analysts are skeptical about the financial impact of the project in the near term.

"I don't know if it will even move the needle," Ivan Feinseth, chief investment officer at Tigress Financial Partners LLC, tells Minyanville.

That makes sense: According to IHS iSuppli's most optimistic scenario , there'll be just 2 million pairs of smart glasses sold in 2015. Even if we consider that 100% of the market will be dominated by Google and the company opts for a relatively high 60% margin, 2 million sales would bring Google roughly around $600 million in gross profit. For a company that recognizes $29.7 billion in gross profit and $10.7 billion net income per year, a mere $600 million is not going to cause any serious impact.

"It's more of a kind of buzz-related item than actually a business needle-moving item," said Feinseth.

Want to Get "Glass" Now? You Can Get Pretty Close!

While the forthcoming sales of Glass might not mean much to Google's bottom line, it will mean a lot to the companies that are already producing Glass-like devices, including GoPro rugged cameras that start from $199.99.

Several other manufacturers also have products similar to Google Glass readily available or coming soon.

While the most advanced smart glasses from Vuzix M100 (CVE:VZX) are still not in stores, you can opt in for a Wrap 1200 video eyewear for a mere $499.99 .

The other option is a pair of Moverio BT-100 wearable glasses from Seiko Epson (TYO:6724), priced at $699.99 , and running an Android-based OS.

How about smart devices in active wear? Check out Recon Jet , priced at $599 and due to hit the market in February 2014. Or you might choose a less advanced "live HUD" right now , for just $299. It stealthily integrates into Recon Ready alpine goggles.

If you're ok with having smart glasses without a screen, check out Epiphany Eyewear glasses , equipped with a high-quality camera and onboard storage, starting with $299 for an 8 GB model and arriving in late summer 2013, according to the company.

Indie products, such as GlassUp or PairAsight are options, too.

Whatever alternative you choose, keep in mind that competitors will have a hard time fighting Google Glass for market attention when the company switches on its marketing machine and begins promoting Glass, despite its cost or availability -- and even despite its flaws.

Also read:

Living in a Post-Google Glass World: What the 'Explorer' Reviews Have Taught Us So Far

Despite New Porn Ban, These Four Google Glass Apps Will Strain Moral Fibers

With Glass, Google Steals 'Control Freak' Label From Apple

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Technology
Referenced Symbols: AAPL , AMZN , GOOG , TXN

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