Report: Apple TV Not Meant to Rake In Profits

At US$299, Apple (Nasdaq: AAPL) TV may be priced to sell, but it's not priced for profit, according to a report announced Thursday.

Apple reaps a gross profit margin of just 20.7 percent on the Apple TV, compared with 40 to 50 percent on most of the iPod family, iSuppli's Teardown Analysis Service found. In fact, the actual profit margin is probably even smaller than that, iSuppli estimates, since Apple's bill of materials doesn't include cables, packaging or marketing expenses.

"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.

'LobotoMac'

Apple TV is the company's first venture into the set-top box (STB) arena. The device serves as a media hub, much like an iPod video, and is designed to get content from the iTunes store or computers on a wired or wireless LAN.

Yet while the Apple TV is similar to an iPod video, "on the inside it's a PC with older-generation components," the iSuppli report says, including a relatively inexpensive 1 GHz Pentium M made using 90 nm process technology.

With that "trailing-edge microprocessor," Rassweiler said, "it might be better to call the Apple TV a 'LobotoMac.'"

iTunes in the Living Room

Apple's real goal for Apple TV is to migrate iTunes into the living room, iSuppli said. However, "while Apple is the company most likely to succeed in this endeavor, it is embarking on a quest to bring Internet content to television that many others have failed at in the past," the report added.

The company is likely to sell 1 million units of the device this year, followed by 1.4 million next year, iSuppli predicted.

Challenges Apple will have to overcome, however, include the need for compatible products and services to make it work, an undefined product identity, and the product's 40-gigabyte hard drive, which iSuppli calls "virtually inaccessible to users."

Challenges Ahead

"There is not a shadow of a doubt that Apple TV is targeted at making the multimedia Internet get into the television," Phil Leigh, senior analyst for Inside Digital Media, told MacNewsWorld. "They want to get people to purchase movies from iTunes."

Indeed, the fact that the iTunes moniker is already outdated underscores how quickly the Internet is evolving, Leigh added, because video sales will very likely end up bigger on iTunes than music sales are. Of course, that will only happen if iTunes gets into the television in a significant way, he added.

One stumbling block for Apple may be that "they want to sell you the movies, when most people would rather rent them," Leigh said. That problem has its root in the Hollywood studios, he added, but with both Netflix (Nasdaq: NFLX) and Amazon (Nasdaq: AMZN) announcing their plans to rent content over the Internet, iTunes will have to follow eventually.

Less Is More

The lack of compelling content has kept Apple TV sales back, along with those of the rest of the segment, Rob Enderle, president and principal analyst for Enderle Group, added. Also problematic is the perception that Apple TV doesn't really replace the set-top box or other equipment consumers already have.

A more attractive option from that perspective may be a new set-top box product due from Cisco (Nasdaq: CSCO) this fall that is expected to meld many existing products into one, he told MacNewsWorld.

"That's what the segment needs to set it on fire," Enderle explained. "If Apple TV can't do that, I'm not convinced it will sell well."