June 7, 2007 4:19 PM PDT

Apple TV: Whence the profits?

Will digital content be to Apple TV what ink cartridges are to printers?

Analysts are projecting that 1 million Apple TV units will ship by the end of 2007. But a cost breakdown of the device's hardware and manufacturing indicates Apple may be looking to profit more from sales of music and video downloads than unit sales of the combination media hub and set-top box, which went on sale in March.

In an examination of the parts inside the Apple TV and their associated manufacturing costs, market research firm iSuppli estimates that Apple spends $237 to build each device. Apple did not respond to a request for confirmation of that number by press time.

"Is it really profitable for them from a hardware perspective?" asked Andrew Rassweiler, iSuppli senior analyst. "The question we have is, is this a case, like printers, where the business model isn't to make money on the printers, but the inkjet print cartridges?"

The profit margin on printers for many manufacturers can range from extremely low to almost nonexistent. Plus, printers are purchased far less frequently than ink cartridges, which always have to be replaced, thus ensuring repeat sales. In the case of Apple, the ink would be iTunes songs, TV shows and movie downloads. Though songs don't need to be replaced per se, artists and studios constantly produce new content.

iSuppli derived the $237 figure, released this week, by looking at the individual components and their prices, including probable volume discounts Apple would receive. The most expensive part is the microprocessor. The Intel 1GHz Pentium M uses 90-nanometer process technology, which iSuppli estimates would cost Apple $40 per unit. By using a slightly older technology for the CPU, Apple was able to keep costs for the Apple TV down.

While $237 is still $62 below the retail price of $299, the device's basic hardware represents a higher percentage of the retail price than other Apple products like the Mac Mini and the 17-inch Core Duo iMac.

"If you compare Apple TV to the (similar analyses of the Mac Mini and iMac) we did, this one definitely pushes the envelope--$237 is 80 percent of $299," Rassweiler said. "It doesn't leave a lot of room for margin, is our point."

In those previous analyses, iSuppli found that Apple's manufacturing and hardware costs amounted to between 60 percent and 70 percent of the retail price. The remaining 30 percent to 40 percent of the price is generally attributed to factors like software, intellectual property and licensing, not to mention profit.

Apple has historically been able to charge a bit extra for Mac products because of its loyal customer base and added value like a flair for design not found in other PCs. But according to iSuppli's take, the Apple TV is a bit of a departure for the company's other computer products and suggests a broader goal of market penetration rather than a profit on each individual device.

Thus, the printer analogy.

Apple doesn't break down its iTunes store revenue in a separate category, but the most recent earnings report shows the company made $653 million from iTunes Store downloads, iPod services and accessories in the second quarter of 2007, and $634 million in the quarter before that. Apple has said that its content-downloading business is profitable, but it does not release specific numbers.

See more CNET content tagged:
iSuppli Corp., Apple TV, Apple Computer, retail price, profit


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Cost for whom?
Is the price breakdown for what APPLE pays for the various parts
or what they cost others to buy. I'm sure Apple gets a very large
volume discount on whatever parts they but and they leverage
that power (as well as the vendors hope for future business) to
get a much better price than is normally available. Apple is not
running a charity and their margins seem to be in line with one
would expect. Just look at the stock. The market tanked the
last three days and Apple went up. They're not getting that type
of performance by giving stuff away.
Posted by hal Summers (80 comments )
Reply Link Flag
Did you actually read the article?
They explain in the article that they take into account the volume
discount that Apple would most likely receive. Even if the
technology isn't on the "bleeding" edge, it still costs money. iSuppli
is pretty good with their cost estimates (look at their breakdown of
the costs of the nexgen consoles). The point of this article is that
Apple typically has a larger "gap" in component cost to retail price
on hardware than other manufacturers, but not this time.
Posted by chinesejudge (6 comments )
Link Flag
Apple TV business model
The Apple TV is many things to many people, what it isn't is a loss-leader. The device is sold at a profit (how much is fodder for great speculation) but rest assured - with Apple's supply chain they're getting great deals on all these components.

Many people have argued that the Apple TV is comprised of yesterday's technology. If that's the case just think of the deals Apple is getting to help move "old" tech/inventory/whatever you want to call it.

As the article says though, content is king and Apple has been building and molding its business to include the high-volume sales of content for quite some time. The great media companies are scared of the digital future, Apple is creating and embracing it.

Stan Timek

Posted by Stan Timek (6 comments )
Reply Link Flag
At least it IS a profit
As opposed to loss leaders such as, say, the X Box 360...
Posted by MadKiwi (153 comments )
Reply Link Flag
Whoa! Easy there..
The article isn't _criticizing_ Apple -- it's just an analysis of what Apple is attempting to do with AppleTV.

No need to start yet another Apple-vs-MS pissing contest. Pffffff..
Posted by dhavleak (1030 comments )
Link Flag
A Stealth Trojan?
While many continue to focus on the iPhone and the next version
of Mac OS X, Apple TV is slowly creeping into people's homes.
Apple TV seems to have dropped into the shadows, but it's
future may surprise you. Some columnist have even lambasted
the device declaring it delivers poor video quality and nothing
too exciting. Time will tell... think about these things:

- It runs OS X
- HDMI output
- Supports 1080i/720p
- Apple can add/upgrade features at any time via the internet
- YouTube is coming to Apple TV (who may follow?)
- h264 quickly becoming a standard and it's on iPod/iPhone
- Gaming device?? Download games via iTunes; Bluetooth
- An HD DVD player costs double the price
- An HD DVD player will not get new features after purchase
- HD DVDs cost $40-$60 each
- No declared winner for HD DVD format yet
- Apple will eventually sell HD content via iTunes
Posted by edgedesign (290 comments )
Reply Link Flag
Apple in the living room
Edgedesign you're absolutely correct in stating that the Apple TV is a stealth device. As it stands it does a great job at being an "iPod for your TV" or an "Internet DVD player." I use mine to play videos (SD and HD), music, slide shows, podcasts and the whole family gets a kick out of it.

The video quality I think is great even for SD since most of the material is master quality and hasn't gone through the process of being broadcast or compressed fifty times by the cable company.

Is the HD quality good? Heck yes! As you mentioned a few people are saying that it's not real HD because its compressed heavily - what do they think they're getting from their digital cable feeds if not heavily compressed pictures that have gone through multiple generations of compression!

I work in video production so I can be a terror when it comes to quality - but I learned long ago that it isn't the best quality signal that gets the best ratings - it's the best story.

Stan Timek

Posted by Stan Timek (6 comments )
Link Flag
aTV is XBMC for the masses...
Just hit google and look for directions on modding an Xbox to
work as a Media Center (original flavor, though the 360
directions aren't much better), a fairly intense procedure even
now, years after the device's initial relase and hacking, and then
go to a site like AwkwardTV (<a class="jive-link-external" href="http://wiki.awkwardtv.org/wiki/" target="_newWindow">http://wiki.awkwardtv.org/wiki/</a>
index.php?title=Main_Page#How_To) and look at what has
already been done to the aTV in less than 3 months in terms of
hacking and how (relatively) easy it is. You can even send your
box off to get the HD upgrade if you like, though of course the
best stuff is what you can do once you've put sshd on it. Already
people have developed an automated plug-in system to manage
software plug-ins on the box (rather than on your own machine)
and a fully functional USB patchstick to enable hacking the
machine without opening it at all is being worked on.

aTV, with the addition of new content from iTunes, has enabled
me to replace my cable box almost completely for a relatively
competitive price per month. If they ever get live sports on it the
much promised "internet killing traditional TV" idea might finally
come true.

Once HD content is in the iTunes Store then we'll see it catch on
even more, I keep hearing negative comments about it based on
the crappy trailers shown on units at Apple retail locations, they
should download one of the higher quality iTunes encodes (like
Heroes or Battlestar) to show the system off.
Posted by DaiMac (62 comments )
Reply Link Flag
Media Center for the Masses

You're right about the Apple Stores not showing the best demo videos - they do have HD material available but I imagine that it has to do with copyrights and clearances. Everything they're showing on the iTunes store has been cleared for public exposition.

When it comes to HD material in the store I'm sure it'll get there - it's just a matter of time before Apple negotiates those contracts and makes Hollywood feel safe with Apple's DRM solution.

Personally I'm hoping to get the indie players on board with my little project (that's taken far to long to get up and running) to get more HD stuff for everyone to enjoy.

Stan Timek

Posted by Stan Timek (6 comments )
Link Flag
FROM whence?
Whence means: from what place or source. From whence is
therefore a pleonasm. Nice article though.
Posted by deblink (4 comments )
Reply Link Flag
great new word
right on re: whence. Thanks for teaching me "pleonasm". Always good to learn new stuff on Saturday.
Posted by jeroethel (17 comments )
Link Flag
Apple TV != TV watching
Anything with "TV" in it should imply the ability to watch TV, i.e., I should be able to watch my local NBC's over-the-air feed of Scrubs or E.R. This product should have really been called "Apple we-stream-media-from-the-internet-to-your-TV". If that's the case, I'd rather watch that media on my computer's LCD. Glorified Youtube grainy video on my nice 50" plasma doesn't sound so appealing.
Posted by spacydog (380 comments )
Reply Link Flag

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