You’ve read the reports. It costs an estimated $265.83 to buy the raw materials and build the $599 iPhone. So Apple is, therefore, making 55% profit on every unit sold.

Does that mean that Apple is cheating you?

I’ve seen estimates of that sort before on iPods and other Apple hardware, and I’ll accept, for the sake of argument, that the figures are correct. However, there is one critical element that the analysts who have jumped on Apple for making too much money have forgotten: The software.

We all know that Apple worked for several years to create the iPhone user experience? Was it all done free of charge? Did the employees on the iPhone project receive nothing more than nightly pizzas and tofu burgers for their efforts? Obviously not. I don’t have the figures — and Apple will probably not break them out from other R&D expenses — but I wouldn’t be surprised to discover that several hundred million dollars were spent to design and perfect the iPhone’s software.

While the quality of software may not mean much to the wireless industry, simply because it’s almost universally lousy, it lies at the very heart of the iPhone difference, and why it has become such an early, runaway success.

So just how much is the iPhone’s software worth, when you spread it out over, say, 700,000 units sold so far, at least according to the most generous estimates?

That’s a really good question, and I wouldn’t hazard a guess. But I do want to remind those ill-informed financial analysts that iPhone development didn’t stop dead in its tracks when the first units shipped. Apple has, in fact, decided to book its income from the iPhone over a 24-month period, and it’s no secret they plan on ongoing software updates. So there will be continued expenses enhancing the applications and operating system that powers the iPhone, and that has to be reflected in its selling price.

Consider a corollary: How much are the raw materials of a $129 Tiger upgrade kit worth? Take a look at the box, the DVD and the ultra-thin instruction booklet. All told, the costs of manufacturing each unit barely comes to $5, probably a lot less. So is Apple somehow gouging you on each sale? What about the $2,499 you pay for the Adobe Creative Suite CS3 Master Collection, which includes virtually the entire product line, from InDesign to Premiere?

How is Wall Street going to account for what Adobe spends to create products that ship in installation kits that cost only a few dollars, each, to produce?

Of course that takes us all to the heart of the matter, which is that Apple’s software is an integral part of its product line and its main advantage over the competition.

The iPhone may have basic components that it shares with other products, but the vertically-integrated design will pretty much always set it apart.

In fact, I’d be very curious to see how other wireless carriers address their shortcomings? Will they — as they’re doing now — simply provide a laundry list of bullet points designed to demonstrate the iPhone’s missing features, and how they are better equipped to meet those needs?

All that will do is put them in Microsoft’s position, which is to design products based on the number of features rather than consider how well they are integrated and the overall user experience.

Indeed, it’s clear to me that Apple is not overcharging you for the iPhone if you account for that missing factor — R&D.

The other question is, of course, why Apple choose AT&T when there are carriers in the U.S. that have superior customer service and, supposedly at least, more reliable networks. Well, it’s clear that Apple demanded virtually complete control over the iPhone’s user experience, a hard-to-quantify emotional sense of empowerment, which is something no other phone manufacturer has ever understood. Apple clearly didn’t want to be handicapped by the sometimes arbitrary restrictions placed upon the likes of Nokia, Motorola and all the rest.

This doesn’t mean that AT&T has no control over the system. It may even be that some of the missing features, such as the inability to sync your iPhone or download iTunes content wirelessly was, in part, a compromise of some sort. Or it may be that the systems to handle that traffic aren’t in place yet.

As you’ve seen already, AT&T’s network has not been able to fully cope with the initial iPhone demand, particularly for folks switching service from other carriers or changing one of their AT&T plans.

Over time, I expect AT&T’s worst problems in handling the iPhone will lessen. I would also hope that Apple carefully considered the possible handicaps of a poorly-performing infrastructure when they inked that deal with AT&T. Even if the iPhone were otherwise perfect, that could seriously handicap Apple’s long-term success as it strives to gain a big foothold in the wireless phone industry.

When Apple released its 10.4.10 update a while back, most of the initial comments were quite positive. But there were the usual spate of problem reports, such as inconsistent wireless networking, mysterious crashes; the usual stuff that accompanies such releases.

But perhaps the most unusual symptom of all was a popping sound reportedly heard on some of the MacIntels, particularly when using external speakers. Well, that problem was addressed with a downloadable fix, known as the Apple Audio Update — 2007-001, which began to appear in the Software Update screens on the affected machines Monday afternoon.

Did the fix work? I don’t know personally. I never encountered the problem on my first-generation 17-inch MacBook Pro, but I’ll grant that the issue was serious enough to require that update. One hopes other problems won’t accompany its installation. As far as I’m concerned, I installed it and nothing changed, either before or after.

To continue…

Over the weekend, during the first phase of the iPhone buying frenzy, some of you confronted network glitches in activating your new service. Most of the problems were centered on transferring phone numbers from another wireless carrier, or changing an existing AT&T plan, such as business to personal. Some of you waited a day or more for your phones to do something beyond dial 911, but I gather the issues have been mostly resolved.

Now none of these troubles should strike any of you as unique. New software and new products are almost always accompanied by bugs or configuration difficulties. That’s how it goes, and it’s one of the arguments that are often voiced against buying version 1.0 of anything. However, when it came to that Tiger update, we’re talking about the tenth version update, not the first.

As far as new products go, it appears the iPhone has come through its introduction relatively unscathed. With anywhere from 500,000 to 700,000 units moving within just three days, you’d expect a lot more teething panes. So far, it seems most iPhone users simply love them, even the reviewers who tend to be jaded about new technology.

Of course, if you were lucky enough to buy an iPhone at an Apple Store when it was first introduced, you might have been one of the people who received a round of applause and cheers from Apple’s employees as they welcomed you inside the store after it reopened.

If you’ve ever been an the grand opening of an Apple Store, you’ll notice that the approach was identical.

No doubt there will be an iPhone software update in the next few weeks to address any early release difficulties. Any hardware defects, such as units that fail to operate or that shipped without the SIM card, can be addressed pretty quickly by either Apple or AT&T stores.

Right now, however, it appears it’s actually iTunes 7.3 itself — the release designed to support iPhone setup and syncing — that might be the worst offender. There are reports, for example, of a -50 error when the application attempts to update your playlist. There are also said to be some issues involving display of Podcasts and and music libraries. Time will tell whether they are specific to a few people, or problems that are more widespread.

In the end, it doesn’t matter. You expect things to go wrong with your software and your gadgets from time to time. The prime issue is how the manufacturer is going to address those defects, and how much pain you’re going to endure waiting for the fix to come, or installing it.

For the most part, Apple seems to get these things right. Despite the perception on the part of some people — and that includes tech writers — that Apple never listens to its customers, this just isn’t so. The reason Apple has become so successful, particularly in recent years, is because they are indeed anticipating the needs of their customers, not with focus groups or slide presentations, but with an intuitive awareness of how things ought to work.

Some say that’s the biggest talent Steve Jobs possesses, to place himself in a so-called “everyman” posture, which allows him to understand what’s wrong with existing tech gear and persuade, intimidate (or a combination of both) his staff to distill everything to the raw essentials. Jobs has often been quoted as saying that the most difficult part of designing a new product is to figure out what to leave out. That’s the lesson other companies with their bullet point spec sheets have never learned.

In the end, it’s just as important to promptly fix the things that go wrong as to make them right in the first place. In that regard, Apple has gotten it mostly correct. That’s why they rate so high in customer support.

After all the heightened anticipation, and this past weekend’s excitement, it’s clear that, despite a few blips along the way from AT&T in handling online provisioning, the vast majority of new iPhone owners absolutely love their new gadget. When was the last time you saw that level of excitement focused on a mobile phone — smart or otherwise?

It’s clear that this feeding frenzy isn’t going to end any time soon. With estimates of initial sales ranging from 200,000 to over 700,000, I suppose you might wonder if the initial demand for the iPhone is akin to that of a summer movie. The first week, box office is spectacular, but there’s a rapid fall-off in the weeks to come.

However, the iPhone resides in a totally different universe. Not only is it expensive to acquire one, but you must sign a two-year contract with AT&T’s wireless service, or add the iPhone to an existing plan. So it’s definitely not a casual purchase, and unless something changes in the public’s attitude, it’s on the road to remaining a smashing success.

But I’m here to talk, however briefly, about a different Apple product line, one that has been forgotten in recent months. Yes, Macs, of course.

After suggesting that Apple needed to add a mid-priced expandable Mac, I see that others have entered the game with similar ideas. Take a recent column from Macworld’s Dan Frakes, where he refers to this suggested product as the “Mythical Midrange Mac Minitower—MMMM for short.” Nice appellation, so I, too, will also call my pet product the MMMM.

Dan suggests a price between $1,499 and $1,599, but I think that brings it far too close to the cheapest Mac Pro. The product I envision contains the guts of an iMac without the display, so I would expect the selling price to come in around $999 for the entry-level version. Otherwise, I agree with Dan that there should be two expansion slots, one for the standard graphics card, the other for a second graphics card or another type of expansion, such as an additional network port. There would also be a second hard drive slot.

As with the Mac Pro, you should be able to add memory, select a different graphics card, and the size of the first and optional second hard drive. That should cover what most of you will need.

I suppose Apple might fear that the MMMM’s marketing positioning and features will somehow cannibalize sales of the Mac Pro, and they might be right, in part. It might also steal sales from the iMac, from folks who already have a display, or choose to buy a different screen from a third-party manufacturer.

However, I consider a sale is a sale, and there is a wide gulf between the Mac mini and Mac Pro that could serve a large number of customers, particularly those switching from the Windows platform. What’s more, Apple could serve the display market better by cutting prices on the existing line and adding a smaller version, perhaps a 17 inches widescreen, for those on a tight budget, or perhaps for people who don’t really need expansive screen real estate.

Now I understand why Apple prefers a simplified model line. No doubt they learned from the Performa debacle that having far too many similar models only confuses customers, who might just give up in disgust and buy nothing at all. Or choose a PC box. No, not that, because Dell and HP and the rest of the pack suffer from the very same severe bout of that insidious model proliferation disease.

I’m also sure Apple picks and chooses its product lines with special care. They don’t want to have unsold boxes sitting in warehouses, just to tout a wider product selection and a higher number of units shipped. If they can’t make a good case for designing and marketing a product, it doesn’t get produced, period.

However, I do see where the MMMM has great market potential. I know a few people who’d buy one from the get-go, rather than, say, a used G5 in order to save some money. Remember, Apple gains nothing from the sale of used Macs, other than the occasional refurbished model that occasionally shows up in their stores or online.

I can also see, based on the initial reaction from you readers, that most of you agree with me — and of course Dan Frakes — about this. Does that mean you’re ready to vote with your dollars if the MMMM actually appears?

That’s the biggest question of all, and Apple will have to believe that you will say yes if it does decide to offer such a model. Otherwise, the MMMM will remain first and foremost an unfulfilled fantasy.

As I write this, both Apple and AT&T stores are rapidly running out of their initial stocks of the iPhone, with initial reports claiming some 525,000 were sold over the first weekend. Those of you who expected instant gratification may have to redefine “instant” to encompass days or weeks until new supplies arrive.

At the same time, the initial reactions, both reviews and user experiences, have been mostly positive. The iPhone appears to do precisely what Apple promised, which is to provide a smooth, well-integrated interface that successfully merges the functions of a wireless phone, portable Internet device and a music player.

But it also puts the iPhone’s perceived shortcomings into sharper focus.

Take the complaints about using the allegedly poorer-performing EDGE network instead of 3G. Steve Jobs says that decision was made, in part, because the chips for the faster networking standard use more power and, further, that it’s not supported by all of AT&T’s network.

One review I read, from CNET, said they just didn’t care, meaning that they’d prefer shorter battery life in exchange for support for the speedier network. Of course, then they could go back and complain about the battery life too. One thing I learned while working at CNET is that they insist you complain about something in your article, even if it’s exceedingly minor.

Story continued in this week’s Tech Night Owl Newsletter.