By Arik Hesseldahl
Thursday, June 07 2007 11:00 AM
URL: http://www.zdnetasia.com/news/hardware/0,39042972,62019312,00.htm

When Apple CEO Steve Jobs called Apple TV a "hobby", he wasn't kidding.

By typical Apple standards, the new set-top video box may as well be a hobby given how unprofitable it is in its current form. That's one conclusion you can draw from research firm iSuppli's analysis of the innards of the device, which connects a TV to videos stored on a Mac or Windows computer.

Having taken it apart, iSuppli estimates that the components and materials used to make Apple TV cost US$237. Since Apple sells it for US$299, that would leave a gross profit of US$62, or about 20 percent, before marketing costs.

Big departure
That would be a big change from Apple's penchant for gross margins in excess of 50 percent outside its computer lineup. That's been the usual case with the iPod music player family and appears to be the case with the iPhone, the release of which is now less than four weeks away.

Apple TV's slimmer-than-usual gross margin is also interesting when set against the fact that Apple plans to book the associated costs and revenue over a two-year period. So for every Apple TV sold, the company will split the revenue into chunks reported over eight quarters, at a rate of US$37.375 for each period. Dividing iSuppli's cost calculation similarly, US$7.75 of that total will be profit.

"This is certainly a departure for Apple, or at least it's approaching a departure," says Andrew Rassweiler, analyst with iSuppli. "We made some very aggressive assumptions with this device, and by that I mean we assumed low prices on the components." If the costs were much higher, "we'd be looking at a device that Apple was subsidizing," perhaps in hopes of making up the difference with video content deals, Rassweiler says.

Intel inside
Such a business model would contrast sharply with that of the iPod, for which device sales generate far more profit for Apple than music sold on the iTunes online music service. Notably, last week's announcement by Jobs that suggests that third-party partnerships might be part of the long-term strategy to boost its profitability.

Analyst Wendy Abramowitz, who covers Apple for Argus Research, says that a lower gross margin on Apple TV probably won't have much effect on Apple's financial picture. "I wouldn't even look for this product to be a substantial part of the revenue base initially," she says. Yet Abramowitz also points out that Apple has warned analysts that overall gross margins will drop somewhat in coming quarters, in part because of new products.

The most expensive component inside the Apple TV, Rassweiler says, is an Intel microprocessor iSuppli valued at US$40. The chip, he says, is a variant of Intel's mainstream Pentium M for personal computers, but runs at a slower clock speed than the regular M processor, thereby lowering the cost. "If it were one of the mainstream chips Intel is selling Apple now for the Mac, there would be no room left for a profit margin at the US$299 retail price," Rassweiler says.

Accompanying that Pentium is a US$28 Intel chipset, which connects the main processor to memory and other parts of the device. That brings Intel's material share of Apple TV's cost to US$68, or 28 percent of the total, the biggest of any supplier.

Cheap chips
The graphics chip is an Nvidia GeForce Go 7300 costing US$15. This card gives Apple TV the ability to deliver true high-definition video, suggesting that Apple may offer HD television shows or movies for download in the near future. At present, the video content for Apple TV that's available through iTunes plays at a lower-end flavor of HDTV.

Apple TV's 40-gigabyte hard drive from Fujitsu, Rassweiler says, costs US$37. But once Apple starts offering HD content, 40GB of storage capacity will quickly prove insufficient. Intriguingly, Apple appears to be seizing on this reality as an opportunity to boost its profit margin. Last week, the company unveiled a build-to-order option for Apple TV that includes a 160GB hard drive for US$399, or US$100 more than the basic model. The 160GB hard drive costs US$73, according to iSuppli. The relatively modest price difference between the two drives boosts Apple's profit margin on the higher-capacity model to more than 30 percent, Rassweiler says.

Other Apple TV suppliers include Broadcom, which supplies 802.11n Wi-Fi components costing US$19 per unit. Cypress Semiconductor supplies two chips worth a combined US$1.65, and Silicon Storage Technology supplies a US$1 microcontroller. The cheapest part? A US$0.75 audio chip from Taiwan's RealTek Semiconductor.