The Case Against an Apple TV


As its sales continue to expand and new growth becomes harder to achieve, many believe Apple needs to find its next great growth driver in order to keep delivering returns to shareholders.

Source: Apple.

Apple still certainly has plenty of opportunity to grow sales its core smartphone and tablet businesses today. But many consumers and investors expect Apple to also have at least one new, category-redefining product in the works as well, which many believe will either be an advanced TV or a smart watch.

Both markets appear ripe for Apple's particular brand of disruption. And while these two markets each come with their own unique economics, the television market specifically could prove particularly challenging for Apple and its shareholders.

Big business, small profits
Apple is legendary for making a significant profit off each iDevice it sells. Steve Jobs was particularly infamous for his belief that Apple's premium products should also command premium prices. That's why the estimated gross margin profile on its products ranges from impressive to downright insane.


Gross Margin

iPhone 5s


iPhone 5c


iPad 4


iPad Mini


Source: iSuppli Apple iPhone and iPad teardowns.

This kind of profitability is simply amazing. But this blessing almost becomes a curse of sorts for Apple in the sense that it could be very hard to replicate if or when Apple shifts into new markets.

Although it's much harder to track down exact per-device margin information for the global TV market, we can at least get a general sense of the profitability common to the TV market by looking at the operating segments responsible for making TVs for some of the world's largest TV makers. The top two players in the global TV arena are Samsung and LG, and the margins for the TV division are a far cry from Apple's margins on its devices.


TV Market Share

TV Segment Operating Margin







Source: S&P Capital IQ.

Generally, making and selling televisions is a historically a very low-margin endeavor.

Could Apple be different?
Apple's philosophy, history of strong margins, and ability to brand each of its products as unique suggests Apple would try to buck the typical pricing behavior in the TV market. But it's still very unclear exactly how that would work in reality.

Last week, the Apple TV thesis got another shot in the arm when a report from a Japanese research firm stated that Apple is planning to launch a smart TV in time for the holiday season next year. According to the report, the device will feature an ultra-high definition LCD display and be between 55 and 65 inches. The report also asserted that Apple will price its smart TV somewhere between $1,500 and $2,500.

Even if this is report is totally accurate, it's still hard to get a sense of how the profitability of the device would work. There are simply too many variables to account for. For instance, Apple could be waiting for the prices of key components like displays, which are a significant portion of smartphone and tablet input costs, to come down a bit.

Foolish bottom line
Apple TV, while interesting from a strategic standpoint, could potentially prove less attractive to investors if it would prove a drag on Apple's profit machine.

The Apple TV storyline is far from set in stone, and Apple certainly could completely upend the pricing characteristics if or when it enters this market. But it's certainly worth noting for investors that Apple entering the TV market might not be as simple as its made out to be.

More important than even an Apple TV
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Fool contributor Andrew Tonner owns shares of Apple. Follow Andrew and all his writing on Twitter at @AndrewTonner. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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