Price cuts are never an accident, they’re usually a desperate attempt to accomplish something (such as Toshiba’s HD-DVD price cuts). So what’s Steve Jobs trying to pull by cutting Apple TV’s price by $70?
Gizmodo sacrificed an Apple TV unit to iSuppli to get a rundown on how much Apple’s really making off Apple TV. Unlike most of their hardware, they’re not profiting much. Any Mac buyer will tell you that Apple hardware prices usually are somewhere near armed robbery, but on Apple TV they’re now squeaking by with only a 10% profit margin on the 40GB model. With their $70 price cut not being made up for much in shrinking component costs, Apple is exhibiting a very deliberate move.
While Apple isn’t making much money off Apple TV itself, digital media is largely moving out of the computer room and straight into the living room, a trend Apple needs to address. At the moment however, the iTunes content Apple is selling for Apple TV is making up for the slim profit margins. Even though iTunes makes Apple surprisingly little money due to record companies stuffing their pockets long before Apple sees a dime, the content is still outselling Apple TV. With Apple’s typical 50% profit margins, this is the first time their content has beat out a piece of hardware as a cash cow.
Although they’re substantially cutting profits, Apple is ensuring their longevity. Consumers don’t want to be tied to their computers anymore; they want to veg on the sofa, surf around with the remote and relax, and right now Apple TV is the only thing Apple has that can offer the consumer that experience. With a hefty price cut, Apple is ensuring more people get Apple TV and ensuring that their products will be established in many living rooms. With fierce competition over online video delivery, Apple’s profit cutting move was a good one for staying in the game.
Filed in: Streaming Media Devices