Why an Apple Smart TV Doesn’t Make Sense

For a good long while, many have believed that the "next big thing" -- both figuratively and literally -- from Apple (NASDAQ: AAPL  ) would be a smart TV. Everybody from the typical retail investor to some of the sell-side analysts were promoting the idea that Apple would get into the TV business and revolutionize it in much the same manner that it did computers, phones, and tablets. However, a sober look at the sheer economics of an alleged Apple smart TV simply don't make sense.

TVs are a commodity
In TVs, the heavyweights are the likes of LG, Samsung (NASDAQOTH: SSNLF  ) , and Sharp. One commonality between all of these players is that they all manufacture their own displays, which is one of the largest -- if not the largest -- parts of the bill of materials for a TV. Apple, right off the bat, would be at an immediate cost disadvantage. Even with in-house component manufacturing, the margins in this space are just terrible, as shown here:

Source: Samsung

Indeed, operating margin in Samsung's consumer electronics division was a mere 4.6% in the most recent quarter -- a seasonally strong one, to boot -- and Samsung is the leading vendor in this space. Apple wouldn't really stand a chance at anywhere near the same price points as Samsung. It's also very unlikely that Apple could command a premium to Samsung's prices and achieve the kinds of volumes that it would need in order to call such a venture a success.

Apple likely can't replicate iPhone/iPad success with TVs
The key to Apple's success in phones and tablets is that it has been able to bring high-volume, relatively affordable products that are accessible to the vast majority of the middle/upper class. Further, Apple has relied on the fact that these items come at such an accessible price point that the upgrade cycles are relatively short, keeping sales robust. A TV is not the kind of product that Apple needs to drive revenue and profit growth in a manner similar to the way the iPhone and iPad did. It will take something different -- and that's what Apple's management and engineering teams need to figure out.

Just what could those items be? Well, the rumored iWatch seems like a good start, and if anybody could disrupt the watch market, Apple seems like a pretty solid contender. Some may point to the "failure" of the Galaxy Gear from Samsung as a reason to doubt the viability of the smart watch, but it's important to understand that there were "smartphones" before Apple's iPhone (think the LG Prada phone, for example), but none of them were done quite right.  If Apple does a "great" smart watch, then there's a chance that it could really take-off.

But what Apple needs to do is something that's accessible to the masses and something that can be improved/iterated upon quickly. A $299 watch makes a whole lot more sense than a $1000+ TV for this purpose, but only time will tell what Apple really has up its sleeve this year and beyond.

It's not the smart TV, but the next big trend in tech is here
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.


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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 February 16, 2014, at 2:48 PM, hocobo wrote:

    @VegasSmitty,

    That's a pretty clever comment, but it I think it would have come out better had you known the difference between the words "your" and "you're". You meant to use the word "you're," the contraction of "you are," not "your."

    Though, something I like about Apple products is that they code in objective C directly onto the hardware, rather than in Java, over virtual machine, running on a third party's processor (as Android is), which results in a much more stable and responsive device. In fact, studies have shown the screen responsiveness of the iPhone 5 to be something like 2.5 times as fast as the Galaxy S4. With the new chips they've designed using 64 bit architecture, the iPhone 5S runs most processes at about twice the rate of their closest competitors.

  • Report this Comment On February 16, 2014, at 9:18 PM, RoyalRoyal wrote:

    "The key to Apple's success in phones and tablets is that it has been able to bring high-volume, relatively affordable products that are accessible to the vast majority of the middle/upper class."

    With all due respect, I disagree. The key to Apple's success was to create an entirely new and compelling experience in an existing space.

    And the key to doing that was to create a *development platform* that let 100's of thousands of developers create things we couldn't/can't even imagine.

    There were portable players before the iPod.

    There were cell phones before the iPhone.

    There were tablets before the iPad.

    But none of these had the motto, "There's an app for that!"

    Indeed, *anything* you could think of, there was an app for that.

    *That's* what made the iPod/iPhone/iPad mega successful... oh, and by the way, each selling at a dramatic premium to existing products.

    I look forward to a TV set -- a.k.a. iOS development platform -- where a entire nation of programmers work feverishly to create TV apps that simply knock my socks off...

    ... and completely disrupt TV as we know it.

    Again, with all due respect, *that's* what you're missing.

  • Report this Comment On February 17, 2014, at 6:20 AM, pk22901 wrote:

    "The key to Apple's success in phones and tablets is that it has been able to bring high-volume, relatively affordable products that are accessible to the vast majority of the middle/upper class. Further, Apple has relied on the fact that these items come at such an accessible price point that the upgrade cycles are relatively short, keeping sales robust. A TV is not the kind of product that Apple needs to drive revenue and profit growth in a manner similar to the way the iPhone and iPad did. It will take something different -- and that's what Apple's management and engineering teams need to figure out."

    Nothing to argue with above, but it's missing the forest for the trees:

    If Apple ships a TV ('If' emphasized), Apple will launch the TV supported by some yet unforeseen innovative TV business model and UX (user experience). Some innovation that is patented (see Samsung bashing) and, whatever the courts do; some innovation that will take Samsung and Android at least two years to copy.

    This is Apple's simple (repetitively employed) meta business model: out innovate the other guys while disrupting hugely entrenched industries.

  • Report this Comment On February 17, 2014, at 8:02 AM, Thompr97 wrote:

    If Apple can redefine TV the way they have redefined several other industries and you can only get the NEW TV experience via Apple until Samsung copies it (albeit poorly) then it won't be a commodity for a long while.

    Your argument is so old, lame, and shortsighted that I'm surprised anyone allows you to post articles anymore.

    Thompson

  • Report this Comment On February 17, 2014, at 10:52 AM, twolf2919 wrote:

    Your article is all over the place. For one, and as others have already pointed out, Apple didn't succeed with ipod/iphone/ipad because it sold an affordable high-volume product to middle/upper class: it succeeded because it dramatically improved the experiences of existing products.

    You suggest that an Apple TV will not enjoy the contiguous upgrade cycle that iPhones enjoy and that an iWatch might be a better choice. While I agree that people won't be upgrading their TVs every two years as they do with phones, people do upgrade to bigger and better TVs - and if you make the TV experience revolutionary enough, there's enough of a new market to not even care about upgrades. And what makes you think an iWatch is better in this regard? People tend to keep their watches for years - why would an iWatch fare better? And at $199-$299, Apple's wiggle room with margins won't be as big.

    Finally, you say that Apple can't succeed in the highly competitive TV space because it doesn't own LCD manufacturing. Well, that didn't seem to prevent Apple from succeeding in the smartphone market! Apple overcomes this problem by charging more and by getting great prices from LCD manufacturers through economies of scale (what would an LCD factory rather do: output at 50% or output at 100% with thinner profit margins?)

    Having said all this, I agree with you that Apple probably won't come out with at TV. But I think it's because there really isn't a need: a $99 Apple TV set-top box can deliver an identical Apple user experience to a $2000 Apple TV. An Apple TV box with its low price point reaches a lot more people than a TV set ever could. With a revolutionarily new user experience, it could capture a huge new customer base contributing to the ever increasing Apple "ecosystem" (apps, music, movies, music-match, etc.) Forget about 30-40% margin - Apple ecosystem purchases are 100% profit for Apple!

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