The term ‘audio codec’ will be unfamiliar to many, and the device to which it refers will never enjoy the same iconic status as a set of white earphones. But to the millions of listeners who tune into their iPod each day, the tiny audio chip – which costs about $1 – is just as indispensable: it lets them hear the sound.

To Wolfson, the British manufacturer which makes the component for Apple, it’s also a big deal. With shipments of the music player rising to more than 21 million in the last quarter alone, supplying the part exclusively to Apple represents an enormous source of revenue.

Wolfson and several other micro-electronics manufacturers, mostly from Taiwan, are now desperately wooing Apple for the right to have their components included in its next sure-to-be hit: the iPhone, which was launched in San Fransisco last month and begins shipping in June.

With iPhone aiming to capture 1 per cent of the world’s mobile phone market – about 10 to 12 million phones – by 2010, securing a contract to make one of its more than 20 parts means not only guaranteed sales, but the kudos of being associated with one of the most desirable consumer goods on the market.

“iPhone is a high-quality, high-value product, and for those companies whose parts are inside it, there’s obviously something to gain – not least great publicity,” Jagdish Rebello, principal analyst at isuppli, the research company, said.

Apple is famously secretive about its suppliers, but among those in the front-running to win contracts, analysts said, was Hon Hai, the Taipei-based group, which already assembles the iPod nano and whose revenues will, by some predictions, nearly double in the next two years.

Another Taiwanese company, Catcher Technology, is expected to make the casing, while the main processor is likely to be supplied either by Intel, the Californian giant, or Renesas, which is based in Tokyo, analysts at iSuppli, which looks at the electronics supply chain, said.

Two British companies, CSR, which makes chips for Bluetooth applications, and Wolfson, whose revenues rose by 44 per cent in the nine months to September, are also all in the running, as are Samsung (NAND flash memory cards), Micron (camera modules), and Marvell (wi-fi functionality).

Negotiations are expected to be tough, though. According to a report by iSuppli which looked the cost of making an iPhone based on the specifications Apple has given, Apple’s profit margin on a retail price of $599 will be about 50 per cent.

The figure, if correct, was “exceptionally high” for a consumer electronics product, according to Carl Gressum, a senior analyst at Ovum, and reflected Apple’s dominant position in the media player market, which meant it could exert significant price pressure on its suppliers.

“If you look at the other players like Creative and iRiver, they’re really struggling. Because of its huge market share, though, Apple is vacuuming up the market for certain parts, like memory cards, and when you buy those kinds of volumes, your margins are better,” Mr Gressum said.

In recent months, other phone manufacturers such as Nokia and Samsung have had to lower profit forecasts in the wake of heavy price competition, and last week Motorola reported that its operating margin sank from 11.6 to 4.4 per cent in the fourth quarter.

The most expensive component in the 8GB iPhone, according to iSuppli, is the memory card, at $70, followed by the 3.5-inch display ($33.50), the main processor ($18.50), and the wi-fi chipset ($15.35). In total the 8GB version, which is to retail for $599, should cost about $280, although that will not be confirmed until the device is released and a ‘teardown analysis’ is possible, the company said.

“Apple is very secretive about its suppliers – even the chip companies won’t say. At this stage, they’re tantalising all of us,” Mr Rebello said.

iPhone calling?

Potential suppliers:

ASSEMBLY

Hon Hai, Taiwan
Leading manufacturer of connectors, cables, and enclosures for PCs
Founded in 1974 by chairman Terry Gou, and started making tuning knobs for TVs
Already assembles iPod nano

Quanta, Taiwan
Makes more than 80 per cent of PCs sold worldwide, including for Dell, HP and Apple

Inventec, Taiwan
Manufacturer of PDAs, smart phones, MP3 Players, and GPS navigation devices
Already assembles iPod video (ML)

Asustek, Taiwan
Last year announced joint venture with Gigabyte Technology to create world’s no. 1 motherboard maker, with estimated combined sales of motherboards to reach 78 million units this year
Already assembles the iPod shuffle

MAIN PROCESSOR

Intel, California
Leading manufacturer of processors for desktop and laptop computers, and other devices
Reported fourth quarter revenues of $9.7 billion last year

BLUETOOTH CHIPSET

CSR, Cambridge
Recently signalled its intention to enter the global positioning systme (GPS) market, buying up the Swedish software group Nordnav for $40 million

CASING

Catcher Technology, Taiwan
Founded in 1984 and now has $4.14 billion US in paid capital
Supplies aluminum housing for PDAs, phones, and video cameras

VIDEO PROCESSOR

Broadcom, California
Makes chips for a range of consumer devices, including mobile phones, as well as dual-mode HD DVD/Blu-ray players
Already makes the video processor for the video iPod

WI-FI CHIPSET
Marvell, California
Manufacturer wireless routers for the home, as well as DVD players and games consoles

AUDIO CODEC

Wolfson Microelectronics, Edinburgh
Revenues increased by 44 per cent to $151.5m in nine months to September 2006
Already makes audio components for the iPod

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