Mark Bridge writes:

The UK mobile phone industry knows all about subsidised prices. Independent mobile dealers and high-street shops will happily offer a ‘free phone with free connection’ in order to tie a customer into a minimum-term contract.

Just looking at the monthly price difference between mobile phone deals and SIM-only pricing gives an idea of the subsidy involved. One major UK network will sell me an Apple iPhone 5 on a 12-month contract for £169 and will then charge me £52 per month for the tariff. Without a phone, I can get a very similar tariff from the same company for £25 per month. It suggests the ‘real’ price of the iPhone 5 is around £500… and indeed I can buy an unconnected version directly from Apple for £529.

Although ‘pay as you go’ deals don’t have a minimum term contract, there’s still the assumption - and statistical evidence - that most customers will buy a phone and use it for a certain amount of time. That’s why it’s usually worth a network subsidising these prices, too. You’ll tend to see ‘pay as you go’ phones priced slightly lower than unconnected SIM-free devices, even though the product is pretty much the same. Good news for ‘box breakers’ who often ship UK pre-pay phones abroad… but that’s another story.

So you may wonder where the subsidy is when you see a phone like the Nokia 105, which was announced earlier this year, selling without a contract for $20 (around €15 or £13). Indeed, you may wonder if anyone’s actually making any money.

Analysis and insight business IHS has found quite a few answers by dismantling a Nokia 105 and calculating the cost of each component. It reckons this basic mobile phone contains materials worth $13.50 and costs $0.70 to manufacture. That $5.80 difference is a hardware and manufacturing margin of 29%.

Okay, so their figure doesn’t include any software or licensing costs, but - given that Nokia is one of the mobile industry’s pioneers and this is a fairly conventional device - I wouldn’t expect those to be much of an issue.

Wing Lam, principal analyst for IHS, explained how Nokia had achieved this low price. “About eight years ago, the IHS Teardown Analysis Team dissected the iconic Nokia 1110 cellphone, a hugely popular device that defined the ULCH [ultra-low-cost handset] segment and had very similar features as the new 105. We determined that the 1110’s bill of materials was nearly three times larger than the 105’s - even when accounting for the black-and-white display used on the old model. Therein lies the 105’s secret: by keeping features the same for nearly a decade, the Nokia 105 can integrate nearly all system functions into a single chip, dramatically reducing the cost to produce a cellphone. The 105 allows Nokia to participate in the ULCH market targeting specific regions and consumers.”

In fact, there are just three chips in the Nokia 105: Intel’s PMB7900, which combines a baseband and RF transceiver, the Skyworks SKY77580 transmit module and a NOR flash memory device from Micron. The Nokia 1110, released in 2005 as a basic mobile phone, had six integrated circuits.

But although producing a profitable basic mobile phone was Nokia’s aim, that’s only the beginning of the story for mobile networks. They’ve still got to sell it to their customers - and then persuade those customers to use it.