Considering it is an entire iOS device under there, I understand the price difference.
That's because you've obviously never designed a coprocessor system. (I have, and even ported a realtime OS to one.)
Putting a cut-down OS on a coprocessor is old as the hills. Even chips like disk controllers can have cut down realtime OSes on them.
It's quick, and cheap, too, especially if you own the OS as Apple does. Apple used a tiny piece of iOS because it also had code already written for TouchId. This must've saved them a ton of time.
Heck, SIM cards and Chip&Pin cards have had ARM processors for decades, often running Java. South Korea Telecom even put Android on their SIMs back in 2010. And those cards and SIMs cost about $15.
So no sir, we're talking a comparatively cheap solution here. Throw in the display, and we're talking maybe $30-40 cost including R&D. Actually, if they sell millions of these, cut that in half.
It was the smart and relatively easy thing to do.
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