Is Apple subsidizing the $70 Apple TV price reduction by taking a cut of movie rentals?

At Macworld, Steve Jobs announced that, along with all of the new features of Apple TV, Apple was reducing the price of the device significantly. The world rejoiced. The problem is that only the US and Canada got price reductions. In the UK, Apple TVs saw no price drop - they still cost the equivalent of $400. France is only slightly less expensive and still at their pre-Macworld prices. Why did the US version price drop from $299-$399 to $229-$329 while the rest of the world still has to pay the same price for Apple TVs? The margins are already uncharacteristically low for Apple, how can they cut $70 more?

Apple is subsidizing the cost of the Apple TV hardware with movie rentals.

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In this model, Apple is taking "a bit off the top" - as Tony Soprano would say - and adding it to the Apple TV's bottom line. This is similar to the iPhone, whose revenue is also derived from outside sources (the Mobile carriers - AT&T, Tmobile, Orange and O2).

To be fair, Apple isn't just subsidizing Apple TV hardware. They also have to pay for the infrastructure to distribute content and the bandwidth from Akamai - in which I believe they used to be part-owners. That isn't cheap. They also take a cut from the iTunes music and TV shows for this purpose.

Cost of Apple TV from June 2007- Jan 2008 from Gizmodo

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Of course, the exact amount that Apple pulls from the studios is a secret. I would guess that it is about $1 - $2 per movie. At that rate, it would only take Apple 35 - 70 movie rentals per device on average over the course of the two years to recoup the cost of the Apple TV price reduction. Not to mention that Apple also sells and profits from TV shows which can also be enjoyed on the Apple TV.

The aggressive margins on TV content could very well be why NBC Universal dropped its iTunes relationship last year (talks are resuming to get them back on Apple TV) and why it took so long to get all of the studios signed up for movie rentals.

Until Apple made the Apple TV a stand-alone device earlier this month, the accounting would be blurry because the content would have had to be purchased through iTunes, on a computer. Now, Apple can see how much content is being purchased directly by the devices and can account for the difference.

For its part, Apple is offering the consumer a fantastic deal by cutting the price of the hardware on the assumption (but not obligation like the iPhone) that consumers will use the device in a way that brings Apple more revenue. The movie rentals and TV shows are such a compelling value that I think Apple will have no trouble breaking even on the price drop.

And if the experiment works, our friends in Europe and around the world should also see similar price drops on the Apple TV.

Update: If you are joining us from John Gruber's Daring Fireball, I see that he's skimmed the article and called it the "dumbest question of the week". I've respected his work for years but I think he just doesn't have this one right. The point is the SUBSIDIZING Apple TV... Of course Apple deserves a cut of the products they sell. Also Valleywag, Gizmodo, Macrumors, and Mac Daily News among others have picked up this story and may have made it easier to understand for Mr. Gruber and his readers...

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