Apple TV take 2: 100 hd titles today

[NA9D]

Re: Apple TV take 2: 100 hd titles today

...you'll have to buy a new iPod/phone - that $1 in in rental profit just turned into $34-100...and refreshed your "loyalty" to Apple!!

Ah, but not quite yet for the iPhone. I'm waiting until a SlingPlayer client is released.

What really torques me though is that I have a Phillips portable DVD player/iPod dock that is really slick. Problem is Apple changed the dock port in the new generation classics. So, if I bought a new iPod, I still wouldn't be able to use my nice portable 8" viewer with it!

This is truly one of the most irritating things about Apple.

[Limey]

Re: Apple TV take 2: 100 hd titles today

...you'll have to buy a new iPod/phone - that $1 in in rental profit just turned into $34-100...and refreshed your "loyalty" to Apple!!

[NA9D]

Re: Apple TV take 2: 100 hd titles today

2.) Rented movies can only be played on current generation iPods (5th Gen iPods don't make the cut - I am downloading a rental now and will verify this).

I can confirm this. I have a 5.5 Gen iPod. It doesn't support the rentals.

[Limey]

Re: Apple TV take 2: 100 hd titles today

actually - losing money, or making only the slimmest of margins on a single piece of HW makes a lot of sense if you are, at the same, building brand loyalty to a broader services while (at the same) introducing your newly found user to higher profit devices and services.

ATV + iPhone + iPod + MacBook + Apple Device XYZ all served by iTunes - it's like an avalanche that just keeps building an ecosystem for revenue and profit....very compelling.

Doing this also drastically lowers user acquisition costs and churn for each service addition...not just an Apple phenomenon. Comcast is now the 4th largest telco in the US (I believe) why? Two words - "Triple Play." It is also experiencing the lowest churn in years...how much easier is it to retain a customer and attract new ones when your users are already hooked on one or more services/bundles....

To be clear, I'm no Apple zealot, but I inadvertently became a prototype customer - started with Nano>bought my wife a MacBook>added another iPod x2> Got an iPhone because it works well with the aforementioned>ended up picking an AV receiver based (in part) on it's iPod options>optioned my car with an iPod jack>>>>and so on....they just made it so easy..no particular loyalty on part just easy integration & convenience...

[NA9D]

Re: Apple TV take 2: 100 hd titles today

Some little facts now coming to light on iTunes rentals and the updates:

1.) HD content is RENTAL ONLY and only available from the AppleTV.
2.) Rented movies can only be played on current generation iPods (5th Gen iPods don't make the cut - I am downloading a rental now and will verify this).

There are movies purchasable on Vudu that are rent only on iTunes...

[rstone]

Re: Apple TV take 2: 100 hd titles today

First of all, those "iSupply" cost estimates are just that - ESTIMATES. Much of the costs are based on list prices or publicly attainable prices. Major customers like Apple buying components in the millions have prices that are not published but rather negotiated on a customer by customer basis.

Sure it is an estimate, but that estimate DID INCLUDE probable volume discounts Apple would receive, but then again those estimates do not include shipping costs, marketing, research, support, further development, list goes on. So it was generous if you ask me. Lets not also forget that even a 20% margin in manufacturing is basically breaking even.

In previous analyses, iSuppli found that Apple's manufacturing and hardware costs amounted to between 60 percent and 70 percent of the retail price. The remaining 30 percent to 40 percent of the price is generally attributed to factors like software, intellectual property and licensing, not to mention profit.

[rstone]

Re: Apple TV take 2: 100 hd titles today

Apple could be trying the Razor Blade or Printer Ink cartridge pricing model. Sell the hardware at cost and make it up in supplies. In their case the actual content. I can't even guess what Apple's share of a 2.99 rental is.

I'm not sure what Apple profits are on rentals, but I do know that with places like Blockbuster that the video store pays the studio a one-time fee of $2-$4 per video and then pays 40% of rental revenues. If we assume that they use the same model for the online business, we could assume that Apple makes about $1.79 per movie rental.

[NA9D]

Re: Apple TV take 2: 100 hd titles today

Guys,

I work in sales in the electronic component industry.

First of all, those "iSupply" cost estimates are just that - ESTIMATES. Much of the costs are based on list prices or publicly attainable prices. Major customers like Apple buying components in the millions have prices that are not published but rather negotiated on a customer by customer basis. All of that sort of discussion is highly confidential and major manufacturers like Apple or Motorola or Lucent guard their prices aggressively. I deal every day with one of those 3 companies and no one outside the agreed on parties know the pricing.

I can guarantee you that Apple is not losing money on the AppleTV. I doubt the cost is $237. Maybe Apple is not making much money here (do they need to?) but costs of 40 Gig mobile drives have come down a lot in the last year for one. Other costs have risen but yet on the average, the costs came down. I can guarantee you that they probably got some cost concessions from their suppliers in order to lower the price. I don't think Apple makes a lot from movie/music sales so losing money on a piece of hardware doesn't make a lot of sense.

[RonV]

Re: Apple TV take 2: 100 hd titles today

Having just lowered the price recently, this would reduce that profit margin to a loss of -$8 per 40GB unit, and $19 per 160GB unit.

Apple could be trying the Razor Blade or Printer Ink cartridge pricing model. Sell the hardware at cost and make it up in supplies. In their case the actual content. I can't even guess what Apple's share of a 2.99 rental is.

[rstone]

Re: Apple TV take 2: 100 hd titles today

sorry for the double post, but I forgot to add:

Apple is projected to have a ~40% GM on on the iPhone et al and "razor thin" margins on iTunes (music) sales...let's just say it's 10%.

If vudu were on par with Apple, Vudus net (remedial net&math here)
$8m and $1.3m for HW/Service @ 50k users; and
$16m and $2.6m for HW/Service @ 100k users

Based on relative scale, however, I would guess Vudu's margins are running greater less than 50% of Apple. At 50k users we're talking ~$4.5m net....absolute best case and assume no discounting on boxes over current.

While I dont know what kinda profit VUDU is making, I do know that with Apple TV you can make some conclusions from research analysis of the innards of the device, which connects a TV to videos stored on a Mac or Windows computer.

Having been taken apart, it is estimated that the components and materials used to make Apple TV cost $237. Since Apple sells the 40GB unit for $299, that would leave a gross profit of $62, or about 20%, before marketing costs. With Apple TV's 160GB, which sold for $399, or $100 more than the basic model, the 160GB hard drive costs $73, so the relatively modest price difference between the two drives boosts Apple's profit margin on the higher-capacity model to more than 30%.

Having just lowered the price recently, this would reduce that profit margin to a loss of -$8 per 40GB unit, and $19 per 160GB unit.

[Limey]

Re: Apple TV take 2: 100 hd titles today

I was actually trying to be quite careful not to criticize here, just killing some time whilst on a concall by attaching some numbers to the user count you mentioned as well as point out some (obvious) barriers.

[NA9D]

Re: Apple TV take 2: 100 hd titles today

Based on relative scale, however, I would guess Vudu's margins are running greater less than 50% of Apple. At 50k users we're talking ~$4.5m net....absolute best case and assume no discounting on boxes over current.

But it's all relative and as a startup with VC funding, all you really have to do is show your investors that you are ahead of or are on your business plan.

People seem to think that Vudu is going to stand still when that isn't the case. The box might not be extensible right now, but give it a rest - the thing has been shipping for what - 4 months? Who is to say that a year from now, the capabilities won't be completely different?

It's also very possible that Vudu will at some point license their technology to other companies. Or maybe some larger company will buy them.

The point is that you don't have to sell 500,000 of something to be successful.

[StevenRushing]

Re: Apple TV take 2: 100 hd titles today

Ach! NA9D threw the name out there and I have to embrace it.

My name is Steven and I am an Apple Koolaid drinker.

Not to say I don't like my Vudu. =)

[Limey]

Re: Apple TV take 2: 100 hd titles today

....The breakout would be:
At 50k users that would be $20m for box sales and $13m in service revenue.
At 100k users that would be $40m for box sales and $27m in service revenue.

sorry for the double post, but I forgot to add:

Apple is projected to have a ~40% GM on on the iPhone et al and "razor thin" margins on iTunes (music) sales...let's just say it's 10%.

If vudu were on par with Apple, Vudus net (remedial net&math here)
$8m and $1.3m for HW/Service @ 50k users; and
$16m and $2.6m for HW/Service @ 100k users

Based on relative scale, however, I would guess Vudu's margins are running greater less than 50% of Apple. At 50k users we're talking ~$4.5m net....absolute best case and assume no discounting on boxes over current.

[Limey]

Re: Apple TV take 2: 100 hd titles today

...I think if a no-name company like Vudu manages to sell between 50,000 and 100,000 units in year one, it will be considered a HUGE success considering they started from nowhere. I have no idea what Vudu's numbers are.

NA9D - not sure the numbers support this; it may be a successful proof of concept, but the underlying numbers would less than stellar. At 50k and 100k users and with hugely favorable assumptions regarding average revenue per user;zero discounting on HW/Service; very low customer acquisition costs; zero churn and so on...vudu would likely generate somewhere in the range of $33-67m for 50 & 100k users respectively.

The breakout would be:
At 50k users that would be $20m for box sales and $13m in service revenue.
At 100k users that would be $40m for box sales and $27m in service revenue.

HW revenue will decrease as a % of total revenue over time while average service revenue remain the same. I.e. your average rentals per user remain stable.

Given that, and given the lack of extensibility (a la iTunes/iPhone/iPod/Laptop) I would argue that the metric for success would be multiples of 100k....as in 500k-1m users where economies of scale increase gross revenue revenue and net-margins for the service to levels where they have scale. I.e. fixed costs remain the same to serve 250k users as 500k as 1m. I.e. Operations, Licensing (codec) and Royalty costs are stable relative to revenue and and the production cost per box/unit decreases in line with the prices; or at least simply decreases.

It's going to be tough for Vudu to achieve those numbers organically...as a stand-alone, they're going to burn through marketing cash to establish presence and keep the growth rates going...