According to Apple (NASDAQ:AAPL) CEO Tim Cook, the next-generation Apple TV will make its sales debut next week. When it does, it will become the second major new product from the iPhone-maker this year. Although technically just an iteration of the original Apple TV that went on sale back in 2007, the latest model includes a number of radical new features that set it far apart from its predecessors. But what effect could this version of Apple TV actually have on Apple's top and bottom lines?
215 million, 25 million, and 24 million
The Apple TV has a total addressable market that's smaller than that of Apple's other core products, though perhaps larger than you might expect. Almost every person on Earth is a potential iPhone, iPad, or Apple Watch buyer -- the Apple TV is limited by television sets and broadband connections.
In 2009, Nielsen found that there were more television sets in the U.S. than there were people: More than half of American households had at least three TVs. Of course, many of these sets were of the older, CRT variety -- the sort that don't support Apple TV's high-definition output. Its content is largely delivered over the Internet, and a speedy connection is required to take advantage of the device. The Census Bureau found that about 73% of U.S. households (around 85 million) had broadband Internet connections in 2013. (That was before the FCC raised its standards to 25Mbps. A household with a 4Mbps connection -- the old threshold -- can still use the Apple TV, though the experience may be less than ideal.)
But Apple is a global company, to which markets like China are of increasing importance. There are more broadband households in China than in the U.S. -- around 200 million -- but Chinese households own fewer TVs on average.
According to WitsView, 215 million LCD TVs shipped last year -- up slightly from 2014, but largely in line with previous years. And according to Parks Associates, the typical flat-panel TV gets replaced after six to eight years. The global demand for flat-screen TVs has hovered around 200 million since 2010. Ignoring broadband connections, if every owner of a compatible TV set on the planet bought an Apple TV, Apple could sell around 800 million units, plus an additional 200 million each year going forward.
Of course, that's a wildly optimistic assumption, and extremely unlikely -- not every TV owner will want a set-top box, and even if they do, it may not be Apple's. Last month, analysts at JP Morgan estimated that Apple would sell about 24 million fourth-generation Apple TVs in its fiscal 2016, which would roughly match the 25 million Apple TV's of all models the company had sold as of January. Apple's competitors in the space have seen similar numbers. Unfortunately, none disclose their sales figures regularly, but the Chromecast has sold at least 20 million and the Roku has sold more than 10 million.
The new Apple TV is more than a streaming set-top box: It also lets its users play video games. Successful video game consoles have historically seen lifetime sales of around 20 million to 100 million. The most successful console of all time, the PlayStation 2, sold more than 155 million units over 12 years. Consoles are commonly replaced every five to 10 years, though the Apple TV's replacement cycle could be considerably shorter. Starting at $149, it's cheaper than most game consoles, and future features like support for 4K streaming content and better voice control could give buyers a reason to upgrade more often.
The consumer electronics market has never seen anything quite like the Apple TV, which makes estimating its potential sales difficult. But Apple controls about 15% of the global smartphone market. If it manages to capture a similar percentage of television buyers, Apple TV sales could stabilize at around 30 million annually. The new devices will sell for $149 or $199, but sales will likely skew toward the lower-end -- at least initially. Until the device can offer a robust variety of games, the extra storage space provided by the upper-end model won't be necessary for most users. Therefore, with an average selling price of around $160, the Apple TV could boost Apple's annual revenue by about $5 billion -- 2.7% of its 2014 sales.
Estimating Apple TV's margins
The Apple TV has never been a large profit driver. Last year, Roku's CEO said Apple was losing money on the Apple TV, likely subsidizing it to drive sales of the iPad (Apple's tablet interfaces with the Apple TV using AirPlay). The new Apple TV carries a price tag that's 50% higher, but its parts are more expensive.
The Apple TV uses the same A8 processor as the iPhone 6, and other similar components. It lacks the LCD display, the camera, the wireless antenna, and battery (though the paired remote has a smaller battery along with several chips). Last year, Teardown.com estimated the cost of the iPhone 6's materials at around $227, but at least $71 came from components the new Apple TV lacks.
Even if Apple has priced the latest model of Apple TV to sell for a profit, it won't be substantial enough to move Apple's bottom line.
Boosting the app store, subscription services
Instead, the Apple TV is likely to lift Apple's earnings indirectly -- driving more software sales and subscriptions, and strengthening Apple's larger ecosystem.
Apple is widely rumored to be working on a subscription TV service, one that would serve as a replacement for traditional pay-TV providers. This service is expected to be priced at around $30 to $40 per month. Apple Music is also likely to get a boost, as Apple TV owners will be able to send their streaming music to their home theater setup.
Apple's App Store revenue has grown rapidly in recent quarters. Revenue in its services segment -- which includes the App Store -- rose 12% on an annual basis last quarter, breaking the $5 billion mark and hitting an all-time high. Apple's management cited growing demand for mobile apps as the key driver. Apple TV will give app developers a new way to reach consumers, and makes developing for Apple more attractive.
Most importantly, households that purchase an Apple TV will become more entrenched in Apple's ecosystem -- less likely to ditch their iPhones when it comes time to upgrade. The Apple TV certainly won't replace the iPhone as Apple's key profit driver, but it's an important complementary product.
Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.