According to research firm iSuppli, Apple’s 3G iPhone costs $173 including materials and manufacturing. The research firm reportedly performed a preliminary “virtual teardown” of the next-gen iPhone to estimate the cost of the soon-to-be-released handset. The firm said it plans to dissect the actual device once it’s available and release another cost analysis then, but due to “strong popular demand” for info about the handset, iSuppli decided to  release the results its virtual analysis.

“At a hardware [bill of materials] and manufacturing cost of $173, the new iPhone is significantly less expensive to produce than the first-generation product, despite major improvements in the product’s functionality,” said Jagdish Rebello, director and principal analyst for iSuppli, in a statement. “The original 8 GB iPhone carried a cost of $226 after component price reductions, giving the new product a 23% hardware cost reduction due to component price declines.”

iSuppli’s figures don’t include other costs, including software development, shipping and distribution, packaging and accessories included with each phone.

Along with updating the networking speed of the device, Apple also revamped its distribution model, in many markets foregoing exclusive arrangement with carriers. Apple also agreed to go the more traditional handset route and allow carriers to subsidize the price of the iPhone. iSuppli estimates that if a carrier, such as AT&T, retails the 8 GB iPhone for $199, it is actually paying Apple as much as $499.

“Hardware is vital to Apple profits, valuation and revenue in the consumer-electronics and wireless communications realms,” Rebello’s statement continued. “In fact, two-thirds of Apple’s revenue from the iPod still is derived from hardware, while only one third is from the iTunes service and accessories. The second-generation iPhone is no exception.”