The Case Against an Apple TV

As its sales continue to expand and new growth becomes harder to achieve, many believe Apple (NASDAQ: AAPL  ) 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.

Device

Gross Margin

iPhone 5s

69% 

iPhone 5c

68% 

iPad 4

37% 

iPad Mini

40% 

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.

Company

TV Market Share 

TV Segment Operating Margin

Samsung

26%

2.1% 

LG

16%

2.4% 

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.

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Read/Post Comments (7) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 29, 2013, at 10:51 PM, larryw101 wrote:

    Andrew Toner, and the a good portion of the other Motley Fool bunch, have been on an Apple bashing crusade for months now. What sickens me is that this is the same Andrew Toner who at the beginning of the year and through Spring praised Apple. I have noticed with Motley, and particularly with Toner, is that you can never count on what they are recommending. I've seen Toner write a positive article one week and the very next week bash the same company. He flip flops as much as the stock price.

    Don't get me wrong, I'm not against someone who is bearish and can present a good argument on any security. But please, have some consistency. After all, don't most people read these articles to help inform them on their investments decisions? So if you have a guy like Toner literally telling one month to BUY and then the next time he writes an article, or gets on a camera, he bashes the very stock he previously recommended you to buy, wouldn't you shake your head in total confusion?

    These guys at Motley truly are fools. If you read any message boards such as Yahoo finance you will read nothing but sarcasm and criticism regarding Motley's articles and particularly Toner's. I really don't think Tom Gardner, the CEO of Motley, even cares how these so called amateur writers are embarrassing Motley. Shame on him for that.

    Motley use to be, and I repeat, use to be a good source of financial advice for making investment decisions. But not anymore..........!

  • Report this Comment On October 29, 2013, at 11:32 PM, JAVKO wrote:

    Nobody cares what a bunch of third rate bashers say.

    Get a real job instead of writing so much nonsense.

    You have lost all respect, if you ever had any with all your one-sided articles.

  • Report this Comment On October 30, 2013, at 2:45 AM, GaryDMN wrote:

    There are TV manufactures that Apple could easily buy with their cash, for that matter they could buy multiple. Sony's cap value wouldn't even dent Apple's cash for instance. They could also get manufactures to embed one of their near range technologies, so they could fully control the TV from an AppleTV like device. It's anyone's guess what Apple will do with TV, but they will do something and soon.

  • Report this Comment On October 30, 2013, at 9:53 AM, larryw101 wrote:

    Motley Fool is dead.

    Articles such as this only go to point out the lack of inexperience and insightfulness of Motley's authors.

    Even the most bearish critics agree that Apple TV, if it ever were to come, would more than likely be a true game changer. This author, Toner, is clueless about Apple and it is quite obvious based on his numerous monthly flip-flop sentiments regarding the company.

    As for Motley's CEO, Tom Gardner, he is also clueless how much articles like this and how other Apple bashing articles by his other so-called contributors are steadily discrediting Motley.

    Motley is only concerned about advertising revenues they get they get when someone clicks on one of their stories. And, the authors get their few pennies a click too when we click on to a story.

    Come on Motley, wake up and get some real talented and experienced writers to write for you.

    Not these bunch of clowns.

  • Report this Comment On October 30, 2013, at 11:10 AM, TMFTheDude wrote:

    @larryw101:

    I'm sorry you disliked my article so much, but I think you also might be misconstruing the overall purpose of the article as well.

    As has always been the case at the Fool, we believe in taking a holistic approach to investing. By that I mean that we're willing to examine both the positive and negative stories that drive the companies we cover. In the case of this article, I simply wanted to highlight an aspect of the "Apple TV" thesis that hasn't received broad coverage, namely that the global TV market as a whole operates at razor thin margins that could possibly impact Apple.

    I believe this coverage is constructive for anyone trying to fully understand the Apple investment thesis and a far cry from the "bashing" you accuse me of in your comment. Also if you look at our mandatory disclosure policy at the bottom of the article, you'll see that I'm an Apple shareholder.

    I'm sorry we don't see eye to eye on this matter. Either way I thank you for reading us.

    Fool on!

    Andrew Tonner

  • Report this Comment On October 30, 2013, at 3:06 PM, novatom wrote:

    Thank you, thank you, thank you, Fool for telling it like it is. All these pundits have been WRONG WRONG WRONG every time they've predicted an Apple TV set. It ain't going to happen for many of the very reasons you state. All these Apple fanboys (note, I have an iphone and an ipad so I'm not an Apple hater by any means), are wishing for an Apple HDTV but wishing doesn't make it so.

    These Apple TV rumor stories have become nothing but clickbait for the past couple years. Apple will never release an HDTV set. Ever.

  • Report this Comment On November 01, 2013, at 4:42 PM, TMFTheDude wrote:

    @novatom:

    Thanks for your comment.

    I'm not so sure about that. I'd say its more likely than not that Apple will eventually release a full-sized TV, it just might take a while for the price of components to come down enough to the point where the economics make sense.

    Remember Steve Jobs had dreamed about the iPad decades before the technology, market, and pricing could all properly align to the point where it actually made sense to launch the actual product. This is of course a guess, but I'd say it's a similar storyline with a fully sized Apple TV. But as we also learned with the iPad example, Apple always keeps an eye to these kinds of "revolutionary" opportunities. It simply takes time for all the stars to align, but I'd bet Apple will be there whenever that moment arrives.

    Thanks for your comment!

    Andrew Tonner

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