About Apple TV margins, and lessons learned | iLounge Backstage

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About Apple TV margins, and lessons learned

Over the past week, another teardown of the Apple TV took place, revealing the presumed costs of both the 40GB and 160GB models’ parts, and implicitly Apple’s profit margins for both devices. The conclusion reached by analysts: Apple is aggressively pricing Apple TV given what’s inside, and the 160GB version yields more profit than the 40GB version, even when Apple is buying the 160GB drives and installing them at the factory.

Once a teardown takes place, there’s little room for argument with knowledgeable analysts about the value of the components: Apple may be (and probably is) doing better on its bulk purchases than some analysts would assume, but it’s probably not doing so much better right now that the numbers matter all that much. Once you’ve added on the costs of packaging, direct and indirect marketing expenses, and some small fraction of the company’s R&D, PR, and executive expenses against the device, it’s obvious that Apple’s not making tons of money on Apple TV, which CEO Steve Jobs more or less confirmed by referring to it as a “hobby” rather than a core business for the company.

Having said all of that, it’s worth taking a step back and asking a couple of questions. First, did Apple make the right choice by pricing Apple TV at $299 and building it with features that made such a price tag appropriate? And second, since it’s obvious that the device hasn’t taken off quite yet, are there lessons to be learned from the experience?

My personal answers to those questions are “sort of” and “yes.” A $299 price tag for a device with Apple TV’s capabilities isn’t totally crazy; Apple’s only mistakes were announcing the price before fully revealing those capabilities, and releasing the device before fully taking advantage of them with software and content. From my perspective, those moves had a double impact on potential buyers: they were told that they’d be asked to pay around $100 more than they might have imagined was necessary without knowing why, then, when Apple TV was released, most people didn’t have immediate reasons to want or need it.

Based on what we now know about Apple TV’s components and capabilities, there’s an argument to be made that the device was over-engineered for what it currently does, and what consumers currently want. If a battery-powered iPod can play back H.264 and MPEG-4 videos—the best ones Apple currently sells—on most peoples’ TV sets, it’s arguably unnecessary to have the equivalent of a low-grade Macintosh computer stuffed into Apple TV’s chassis. Under this philosophy, Apple would have been smarter to just add on-TV navigation to the video-ready iPod family, sell a SDTV (and/or HDTV)-ready dock, and make that its “living room” solution rather than trying to popularize a separate device. Many people, including us, would have cheered Apple for doing this: having tested the available on-TV menuing iPod docks, I think Apple is a far better interface developer than any third-party company producing iPod accessories, and really needs to offer such a feature in future iPods. Note that Microsoft’s doing this already, though not especially well, with its first-generation Zune.

But, and this is a big but, if you assume that people currently or will soon want high-definition (better than DVD-quality) videos, Apple TV and/or a much more powerful sixth-generation iPod become necessary. You don’t need something better than an iPod for current iTunes Store downloads, but if Apple wants to offer video downloads that are better than Netflix or Blockbuster rentals, Apple TV is ready for them. Mostly. They’ll require a lot of storage space, and may need a few extra minutes to cache, but the device can handle the playback. Unfortunately, since there’s nothing yet that actually takes advantage of Apple TV in this way, save for self-encoded home videos (and transcoded, uh, “other videos” or more-hidden-cost HDTV transfers), this justification for Apple TV is ahead of its time for most people.

(An easy fix for this would be to add the sort of open-format video support any Mac with QuickTime can handle; suddenly, a wealth of downloadable content would become available to Apple TV owners, stimulating hardware sales and removing the need to painfully transcode everything just for this device. If the wisdom of this was debatable months ago, which it really wasn’t outside of Apple, it seems all the more prudent today.)

The other “but” is also future-focused. Apple has said that it plans to update Apple TV over the next two years to include new features, such as a YouTube browser. This is really great news for those of us who currently have Apple TVs, but until the new features start to become compelling, they’re not going to grow the device’s userbase. While the YouTube deal seems like a great strategic move for Apple as a company overall, and could well benefit iPod and iPhone users in the future, the value of free access to more low-res videos through Apple TV is questionable at best. It took Walt Mossberg mere moments to raise that issue when the announcement was made. I’ve been saying on Backstage for months that Nintendo was wise to add weather, news, web browsing and other widget-like features to its Wii console. They’d require little work on Apple’s part, and go a long way towards making Apple TV worth keeping on all the time.

In my view, the major lesson to be learned from Apple TV’s current situation is one Apple probably already knows: content is the selling point for new hardware, and the more you charge for the hardware (or require as hidden costs), the more people will expect from the content. Apple TV all but required a high-definition TV set. Yet it launched without any major content that properly took advantage of high-definition TV sets; in fact, one of the things we keep hearing from readers is that even the Apple Store Sony HDTV demo stations for Apple TV don’t make content look good. Video podcasts aren’t enough to sell such a device, and without either HD-quality TV shows (yes, they exist now in great numbers) or movies, an HDTV-based video player isn’t going to excite people.

What do you guys think? Is Apple TV just right as-is? Is there something Apple could or should be doing to make it better? Or should a docked iPod be the real Apple-to-TV solution? We’re interested in hearing your thoughts.

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Comments

1

A 19.99.mo netflix type movie subscription service would be the best use of the Apple Tv, imo.

Also a 4.99/mo tv show subscription service would also be pretty cool.  If they could add enough shows, I could see getting rid of the DVR (Well maybe not) but it would have me looking hard at an Apple TV

Posted by cgar on June 8, 2007 at 2:21 PM (CDT)

2

I own two AppleTVs (40 GB and a new 160GB), for the two HDTVs I have in my house. I agree with all your points. And I understand why many do not find it a compelling device at this time. I rarely buy video content from the iTunes Store (only a couple old Star Trek episodes and the original War of the Worlds, all of which look great on the Apple TV). But I use my Apple TVs daily. I enjoy watching video podcasts on it (never liked doing so on my Mac). And I’ve encoded a number of my favorite movies—the ones I tend to watch fairly often (and that I own on DVD)—to it. I love not having to pull the DVD out when I want to watch it (yes… I AM lazy). On my 160GB Apple TV in the living room, I have all my music. I really like using it as a music server (I used an Airport Express previously… worked great, but I like the Apple TV UI, and not having to have my Mac on).

As for more video content, I think a movie subscription service would be great (the higher quality, the better). I would go for that. And frankly, YouTube content on the AppleTV doesn’t excite me that much.

The Apple TV fits into my viewing and listening lifestyle. I like the device. It also works flawlessly. I’m looking forward (and hoping for) more video content that doesn’t require an ITMS purchase. Keeping my fingers crossed.

Posted by Brian on June 8, 2007 at 2:43 PM (CDT)

3

I think Apple TV is a great new product in both form and function.  For me it fills the need for a way to get my music to my hi fi system without the need for a constant streaming connection to my computer.

I would like to see more HD content on iTunes, more higher quality music and a little more in software functionality.  160 GB is great, but how about 250GB for those of us with emourmous music, or photo/video content?

I think Apple needs to provide more free software updates/upgrades ASAP.

Thanks!

Posted by michael on June 8, 2007 at 5:15 PM (CDT)

4

“Once a teardown takes place, there’s little room for argument with knowledgeable analysts about the value of the components”

Wrong. Having sold and bought electronic components, I know that there is no fact basis for the conclusion reached here by iSuppli.

Roughly 70% of the value of electronic components in most new products are proprietary priced (that is the price is unique to the customer). The remaining 30% are commodities and analysts can get close to the pricing on these.

For proprietary parts, the cost are covered by non disclosure between customer and supplier. Unless iSuppli gets data from customers, and are allowed to use this data, they cannot even get close to what the real price charged to apple would be. Further, few proprietary components are used in approximate volume by multiple customers, thus almost impossible for analysts without customer specific data to provide a credible analysis of high end technology costs (where the primary value is in electronic components). Clearly they can get close to other costs such as enclosure, plastic, etc., but those costs are a marginal portion of the value.

The real story here is that iSuppli continues to do tear downs and provide cost estimates based on guesses at best. All the news reporters run with the analysis as if the source is credible.

Ask a simple question, how does the analyst know how to estimate the price of those components.

Posted by ElectronicsGuy on June 8, 2007 at 6:31 PM (CDT)

5

“Unless iSuppli gets data from customers, and are allowed to use this data, they cannot even get close… Ask a simple question, how does the analyst know how to estimate the price of those components.”

The analyst is making well-informed estimates, which shouldn’t be taken for absolute fact, but rather as “more or less” accurate. If you’re looking for scientific truth on this issue, it is unobtainable inasmuch as Apple and its suppliers do not disclose numbers. You have to go off of best possible information.

Thankfully, estimating component costs isn’t black magic, especially when an analyst can make certain reasonable volume assumptions and comparisons against existing, non-proprietary parts. While it’s true that Apple uses certain custom chips, the pricing difference between their custom parts and non-custom ones supplied by the same manufacturers is not so massive as to discredit the analysis.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 8, 2007 at 8:51 PM (CDT)

6

I’m not interested in video on this thing, but I’d love to have it for my music. Browsing my collection on the TV, playing albums and setting playlists with the remote, all with a big hard drive—bigger than that of any iPod—that would be awesome.

But it’s too expensive just for that, precisely because it’s got all the overengineering you’ve mentioned.

So unless it’s wildly unsuccessful and I can get one cheap, I’ll have to pass until the video side gets compelling, I guess.

Posted by Dan on June 12, 2007 at 5:27 PM (CDT)

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