'Margin challenged' Apple TV costs $64 to build

iSuppli's estimate pegs second-gen device as more profitable, but may still be a loss leader

The new Apple TV costs less than $64 to manufacture and get out the factory door, an analyst with iSuppli said today, putting Apple's living room entry at the low end of the profit margin.

"To me, this is at the lowest end of the margin," said Andrew Rassweiler, the director of El Segundo, Calif.-based iSuppli's teardown services, after taking apart the Apple TV and estimating its likely bill of materials, or BOM. "Of the number of teardowns I've done, this is what I would call 'margin challenged,'" said Rassweiler.

Apple, which introduced the new Apple TV Sept 1, sells the device for $99.

According to Rassweiler's BOM estimate, the most expensive component in the Apple TV is the A4 application processor, which runs $16.55 each. The same Apple-designed A4 with 256MB of system memory powers both the iPad and the fourth-generation iPod Touch. The iPhone 4 also relies on the A4, but packages the processor with 512MB of system memory.

Apple's use of the A4 across multiple lines is a key reason the company can keep its costs low, Rassweiler argued. "It's part of the reason for the low cost of the Apple TV, but more importantly, it's key to the overall low cost for the Apple platforms that use it."

The Apple TV also illustrates Apple's ability to use similar components in a variety of devices, ranging from smartphones and tablets to the new media streaming device. "None of them have exactly the same layout [on the logic board], but Apple's building block approach is unique," said Rassweiler.

Like others who have digested earlier teardowns from the likes of iFixit.com, Rassweiler noticed that the Apple TV sports an empty slot that's a perfect fit for another flash memory chip. It would be easy for Apple to double the current 8GB of storage space in a future Apple TV, he said.

"They could at least double the capacity to 16GB, maybe even [increase it] to 32GB," Rassweiler said.

The reason Apple didn't do so off the bat was its desire to keep costs in line with the $99 price. "That's a magical price point," Rassweiler said.

Another 8GB flash memory chip from Toshiba, the supplier of the current chip in the Apple TV, would add $14 to the BOM, bringing it close to $80.

Rassweiler also agreed that the ability to bump up the Apple TV's storage space meant Apple will add App Store functionality to the device at some point, mimicking the application purchasing model of the iPhone, iPod Touch and iPad. "Whether they do that or not is, of course, a strategic decision by Apple, but I think it really has to be coming," he said.

Even with the tight margin of the second-generation Apple TV, Apple's done a "better job" at cutting costs than it did with the original, which launched in March 2007.

The first-generation was almost certainly a loss leader for Apple, said Rassweiler, who said that the BOM was "so close" to the retail price that "it was almost certainly subsidized."

That may have been the genesis of Apple CEO Steve Jobs' famous label of "a hobby" in 2007.

"It's hard to say whether the second-generation Apple TV is subsidized," said Rassweiler, noting that iSuppli's BOM doesn't account for software costs, licensing fees, research and development, marketing and other expenses. Nor do retailers -- including Amazon.com, which sells the Apple TV -- pay the full retail price when buying them from Apple.

"It's the battle versus the war thing," Rassweiler observed. "Ninety-nine dollars was a kind of magical price to get Apple in there with all the Blu-ray players that stream Netflix, not to mention Google TV."

Google TV is an Android-derived operating system designed for set-top boxes and televisions, that consumer electronics makers such as Sony and Logitech will be integrating into their wares starting later this year.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer or subscribe to Gregg's RSS feed . His e-mail address is gkeizer@computerworld.com.

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