Apple TV Design Stresses Volume over Profits

While the Apple TV is priced to sell at $299, it’s not priced for profit. According to iSuppli Corp.’s teardown analysis service, Apple is eschewing its high hardware margins with the new Apple TV in order to promote volume sales. The latest mutation of Apple’s iPod line generated a meager 20.7 percent gross margin, compared to 40 or 50 percent for previous members of the iPod family. Isuppli’s Apple TV Bill of Materials (BOM) estimate does not account for other costs, including cables, packaging and marketing expenses, so Apple’s actual margin is somewhat smaller. “This suggests that Apple is taking a market-penetration strategy for the Apple TV, rather than the simple profit-per-unit approach it has always used in the past,” said Andrew Rassweiler, teardown services manager and senior analyst for iSuppli. “The Apple TV itself is a very low-cost design, primarily due to its use of a trailing-edge microprocessor. At $299, some have called the Apple TV the ‘cheapest Mac.’ However, based on the minimal microprocessor performance and the application’s scaled needs, it might be better to call the Apple TV a ‘LobotoMac.’” With the Apple TV not expected to generate much profit for Apple, it’s clear the company’s real goal for the product is to migrate its highly-successful iTunes service from consumers’ home-office PCs to their living-room TVs. However, while Apple is the company most likely to succeed in this endeavor, iSuppli analysts believe, it is embarking on a quest to bring Internet content to television that many others have failed at in the past. Apple TV is Apple’s first real foray into the Set-Top Box (STB) space, and is, in essence, a home-bound iPod video with no display and an HDMI output for linking to a Digital Television (DTV) instead. It does not function as a Digital Video Recorder (DVR), cable/satellite STB or DVD player/ripping device, and therefore does not replace any of these products. Rather, the Apple TV is a media hub, designed to get content from the iTunes store or from computers on a wired or wireless LAN. The device is otherwise like a video iPod and can store up to 40Gbytes of media content. It can also network and access media content from other devices running iTunes. On the inside, Apple TV is a PC with older-generation components, based on a customized Intel Corp. microprocessor—a venerable 1GHz Pentium M that is made using trailing-edge 90nm process technology. The use of the old and slow Intel microprocessor is a major factor keeping down the BOM cost of the Apple TV, Rassweiler noted. ISuppli estimates the cost of the microprocessor at $40, far less than Intel is charging for its more cutting-edge chips. “If the Apple TV were based on a more current microprocessor, such as Intel’s CoreDuo or CoreSolo, then the product’s BOM cost would likely match or exceed the retail selling price,” Rassweiler said. “This would represent a major and unlikely strategy shift at Apple, which historically has not sold its hardware at subsidized rates.” With the microprocessor and associated core logic, Intel accounts for the largest single bundle of dollar value of any component supplier in the Apple TV, by far. The combined estimated value of the Intel microprocessor and the northbridge and southbridge core logic chips is about $68, which is very inexpensive compared to the costs for comparable chips in current PCs. In terms of semiconductor components, other major cost drivers include the Nvidia GeForce Go 7300 Graphics Processing Unit (GPU), which has an estimated cost of $15. Other chips are unremarkable and common to conventional PC designs. The table attached presents iSuppli's BOM estimate for the Apple TV. Apple’s successful track record with the iPod and iTunes makes it likely that the company will be able to sell a significant number of Apple TVs this year and next, iSuppli believes. However, Apple TV faces a slew of challenges. For example, it needs to rely on other products and services to make it work, including broadband Internet access, home wireless networking, a DTV and an iTunes account. And it can’t replace DVR, cable/satellite STB or DVD capabilities since it does not include these functions. Finally, its 40Gbyte hard drive has very modest storage capacity, especially for future High-Definition (HD) content. Perhaps the biggest challenge will be lining up compelling content, according to iSuppli analysts. “Apple has good access to content, but there will be lots of complications,” said Mark Kirstein, vice president, multimedia content and services for iSuppli. “Already Starz Entertainment has sued Disney, because it has exclusive television distribution rights for certain Disney properties. This wasn’t an issue when Disney licensed to iTunes for personal media players, but becomes one for TV-based distribution.” Despite that, iSuppli believes Apple TV shipments will kick off strongly, forecasting about 1 million units during 2007 and 1.4 million units in 2008. “Considering Apple’s successful track record with the iPod and iTunes, the acceleration of movie download efforts, and the potential for future price decline and/or additional features in future products, this forecast seems attainable,” said consumer electronics senior analyst Chris Crotty. ISuppli analysts expressed optimism that Apple could succeed where others have failed in this area. “There’s a slew of these Digital Media Adapter devices on the market today that offer similar capabilities to the Apple TV,” Kirstein said. “Yet nobody has found the secret sauce to get more than a few hundred thousand units shipped. However, if any company can find the right formula for success, it’s Apple.”