Is Apple TV Ready For A Face To Face Battle With Google's TV Terminator?

Oct. 9.13 | About: Apple Inc. (AAPL)

Apple Tv's Margin Hunt

Apple (NASDAQ:AAPL) as you know has surpassed 13 million sales in a segment which they apparently did not think of as a plain ride to cash heaven. The Apple TV is a great lock in product, just as most other Apple other product and the increasing sales of its latest phone might indeed spur growth for its cousin Apple TV.

But is the idea worth developing further? I mean, if you sell these for some 1.3 B$ (perhaps even more as some countries seem to charge a premium) which is less than a percent of its total revenue, who cares? But it is not the revenue growth/potential that I would regard as the prime driver to develop its product, but rather its margin. iSuppli's estimate in 2010 revealed a $64 cost of its product for its second generation Apple Tv which entails 0.46 B$ OP profit in 2010, not too bad but not too impressive either for a company like Apple. However, I would argue the story was and will be quite different regarding the Apple TV margins in the years following its release and in the future, due to the following;

A) Apple is now selling larger quantities due to a growth in its customer base,

B) Old tech stays, relieving the cost of materials, for example A4 was still used a year after the release of its successor A5. Not surprising, the same story is repeated with A5-A6,

C) Rather than improving its performance substantially, Apple does what it does best; optimization of software, but one can ask; how much optimization is really needed of its current software anyway?

D) Greater customer lock in enables Apple to unleash its pricing power upon the consumer.

Point C) is certainly up for debate, but essentially; I do not think Apple would be able to leverage its profitability today if it was not for the mostly effective and essential applications. Also, Point D) is especially troublesome from my point of view, as changes in the industry take place quicker than the ability to react appropriately (Nokia (NYSE:NOK) might be a extreme example but an example nonetheless). I would assume that Apple would however increase its influence over the market but at a slower pace as the mobile market and PC market is becoming more and more saturated.

Chromecast, A Serious Challenger

Competition from my viewpoint seems to become a real challenge for the Apple TV. While competing products such as Google's (NASDAQ:GOOG) Chromecast are likely to outperform the Apple TV in terms of sales, it will not be able to compete on margins.

I have a hard time thinking Apple would allow a price war on its own turf, they would rather let it stand out as a premium product, but with the possibility of declining sales. The decision to leave other devices out of Apple TV might be also another reason why growth wouldn't be what it could be in the coming years, but that is really what Apple wants you to believe is required, why would consumers have a windows laptop with Apple Tv when you could watch Tv smoother with any iOS device? But that's not a compelling argument at all for consumers, because who would buy an Apple TV with a windows device in the first place? Chromecast delivers its product for a fraction of its cost and it seems rather rational for recreational TV watchers to not spend too much on a device that lets you watch TV through other devices, they would rather spend it on a new computer, lawnmower, and other necessities etc. So at 35 dollars for a Chromecast, why would a consumer buy the Apple TV if it weren't for its current products? I am not even sure that Apple would be able to keep its momentum in mobile phone sales for a couple of years. However its estimated growth in the market is not rather impressive as seen in the table below

Smartphone OS

2013 Market Share

2017 Market Share







Windows Phone



BlackBerry OS









Click to enlarge

Top Smartphone Operating Systems, Forecast Market Share and CAGR, 2013-2017

Source: IDC Worldwide Mobile Phone Tracker, September 4, 2013

Although it is not all about the market share per se, the growth in volume is equally as important and it is expected to grow at a decent rate. New smartphone shipments are to grow by 70 % to 2017 from today's estimated shipment of 1 billion. It is also important to remember that Apple TV binds all the other iOS devices and comps which also are expected to grow in sold volumes and after all Apple TV might do better on the optimizations of its own different platforms than other competitors which should lead to capitalization of the platforms growth.

Is Apple TV Worth Pursuing For Apple?

The question however, considering Apple TV's harsh prospects with competitors but also its ability in keeping its margin sky high how would these figure translate into Apple TV's sales and what would margins possibly look like? Well I'd guess that we'd see at least 26 million Apple TV's sold on a yearly basis in 2017 considering that Apple at that point has not only increased its market share, but the overall sales of smartphones will also have increased. I do believe that margins will remain cyclical, albeit higher than industry average considering the cost of new processors. I'd guess they kept its headway with inflation and would sell its product for 109.99 and that as previously estimated would sell for 26 million and a 50% margin (higher then the 2010 level and being a year off its new processor) would equal some 1.43 B$. Not bad? Well, it depends on who you ask, for shareholders it seems meaningless if you compare to last year's net income of almost 42 B$, not what Apple shareholders would want to see. Rather an investment in Berkshire Hathaway with its huge cash pile seems more shareholder friendly. But yet again, Apple's ability to create profits for this niche segment would be entirely dependent on the level of its binding of not only its new smartphones but also its tablets and computers and through only offering of a superior product that would have to stand trial directly with the Chromecast product. The story seems promising for Chromecast's price, performance and broads device support which indicate that Chromecast should in the absolute worst case scenario do as good as Apple on its sales front, but with the prospects of margins for Chromecast being worse than Apple. But yet again history has shown us that Apple seems to be inclined to surprise us.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.