Earlier this year, Apple introduced the most affordable Mac ever. The Mac mini broke all previous Apple price barriers with a base price of $499.

When the mini entered the market, the appeal of Apple products was at an all-time high, thanks largely to the success of Apple's iPod and iTunes platforms. Additionally, Apple offered an alternative to the systems of traditional desktop manufacturers, which bundle a keyboard, mouse and display and traditionally use the Microsoft Windows operating system.

We examined the Mac mini with an eye on its manufacturing cost, component by component. And we looked at its production cost in terms of assembly, components and labor.

The Apple Mac mini G4 weighs only 2.9 pounds. It houses a 1.42-GHz G4 processor, an 80-Gbyte hard drive, a slot-loading CD-R/DVD-ROM optical drive, 256 Mbytes of DDR SDRAM and an ATI Technologies Radeon 9200 graphics chip with 32 Mbytes of dedicated DDR SDRAM. There's even space for an Apple AirPort Extreme wireless-networking card and an internal Bluetooth module, giving the consumer the option to compute cable-free.

At just 6.5 inches square and 2 inches tall, the Mac mini fits anywhere. Its sleek anodized aluminum styling hints at the refined edges and rounded corners of its big brother, the iMac G5. Best of all, the Mac mini purrs along at a whisper, so there's no reason to hide it under a desk like an old PC. Although it does not include a mouse, keyboard or monitor, it will accept any USB keyboard and mouse as well as any VGA or DVI monitor.

The Mac mini comes with iLife, which includes iTunes, iPhoto, iMovie, iDVD and GarageBand. With iLife, users can manage music for an iPod, organize and share digital pictures with ease, connect a digital camcorder and start editing video, or even plug in an electric guitar or keyboard and make music.

The Mac mini comes with its own e-mail, chat software and a Web browser that blocks pop-up ads. Users also get a DVD player, calendar software, an address book, fax, a way to download contacts to a cell phone or iPod, Quicken 2005 and the 3-D games Nanosaur 2 and Marble Blast Gold.

Digital devices such as a camera, printer, camcorder or keyboard can be connected to the Mac mini over USB 2.0 or FireWire. Built-in 10/100 Base-T Ethernet and a 56-kbit/second v.92 fax modem allow access to broadband or dial-up connections to the Internet, while a headphone/audio line-out jack lets users listen to stereo sound.

The package contains the Mac mini, DVI-to-VGA adapter, power adapter, power cord, install CD and user's guide. It is backed by a one-year parts and labor warranty.

Production cost
Many people are aware of the lower manufacturing costs that result when IT and consumer electronics products are outsourced, but how much does it cost manufacturers to stay competitive in today's desktop market?

To answer that question, we examined the Mac mini desktop at a product volume of 500,000 units and assumed that the model was produced in China. We used proven methodologies to estimate the purchase costs of commodity components, the manufacturing costs of fabricated components and the local labor rates.

The result was a $258.34 minimal cost of production. The cost of electronics components accounted for the bulk of that cost, at $229.09, or 88 percent of the total cost for product manufacturing.

At present, the manufacturer's suggested price begins at $499, so Apple's estimated profit for each unit would be low, at $240.66, even before tariffs and other taxes.

Market points
In addition to the atypically low $499 entry point, the Mac mini offers a pioneering, futuristic-looking chassis that is the size of two paperback books placed side by side. The sleek, 2.9-pound design packs a slot-loading combo drive with 32-Mbyte ATI graphics, Apple's Panther operating system and iLife '05.

The Mac mini's "bring your own display, keyboard and mouse" system demonstrates Apple's intention to leverage the fact that many buyers already own compatible displays, keyboards and mice. Nonetheless, it doesn't hurt that Apple's displays carry some of the highest premiums in the industry and that a keyboard and mouse upgrade will cost consumers $58 for the wired offering and $99 for the wireless version.

To the company's credit, by keeping the aesthetic appeal of Apple alive, the Mac mini stands to attract current iPod groupies and switchers previously dissuaded by Apple's premium price tags. The Mac mini also poses an attractive solution as a digital media hub, satisfying consumers' growing interest in centralizing myriad digital media in the household.

But there is a downside. Although the Mac mini packs quite a punch for such a small chassis, the small form factor has never been able to gain traction with consumers, who have traditionally assumed that bigger is better. And despite the fact that the lion's share of Mac users are not motivated by price, the Mac mini's reasonable $499 and $599 price points may pose a threat to Apple's higher-end products.

In direct price/performance comparisons, Wintel machines sell for a $369 base with enhanced processor clock speeds. For example, the eMachines T3882 with a 2.8-GHz Celeron, which happened to be the second-best-selling retail desktop for the week ending April 9, sells for $369.

Additionally, while Apple's new mini breaks the company's own entry-level price barrier, there are several competitors that offer equally equipped machines with keyboard and mouse for as little as $369. A bundled PC and monitor solution can even be obtained for the same low price with the assistance of a promotion.

Nonetheless, the Mac mini will benefit from the iPod halo effect. And its affordability will attract a number of consumers itching to try a Mac, enabling the company to capture a greater share of the PC market.

Toni Duboise (tduboise@currentanalysis.com), senior analyst of desktop PCs at Current Analysis Inc. (Sterling, Va.)