Apple TV: Whence the profits?

Analysts' price breakdown of device indicates Apple may be focused more on iTunes profits than unit sales of the set-top box.

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 . 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.

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