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The beloved hobbies of Google and Amazon

Tim Cook speaking about the Apple TV product:

For Q4 we sold 1.3 million. That is up over a 100% year-on-year. We sold more than 5 million Apple TVs during the fiscal year, which is almost double the previous year, when we sold 2.8 million. So the business continues to do very well, but if you look at the size of revenue of this business versus our other businesses, it’s quite small and so it still has the hobby label, however it’s a beloved hobby and we continue to focus on it and continue to believe there is something more there and continue to pull the string to see where it takes us.

Five million Apple TVs per year is a half-billion dollar hobby. As such it quintupled from the first year (calendar 2007).

The value for hardware is, of course, only a part of the story. It is accounted for as part of peripherals revenue and amounts to 18% of total peripherals revenues. Last May I estimated that the installed base of Apple TVs was 10 million. I’d estimate current total to be closer to 12 million. Assuming $10/month in content sales per Apple TV results in $1.4 billion of which 30% might be retained by Apple as revenue (agency fee).

The yearly revenue thus could be as high as $900 million. Therefore it seems plausible that Apple TV is on the verge of being a billion dollar business.

It may be a hobby to Apple but I’ve noted before on my podcast that Apple TV is a mirror image of the Kindle business model: Sell hardware at low margins and experiment with content sales as a profit model. The “hobby” moniker means that it’s not a big business but how big is Kindle or Nexus 7 for their respective owners?

Kindle may sell up to 10 million units at nearly break-even but is the average revenue per user much higher than Apple TV? What about the Nexus franchise? Is the loss on hardware leading to revenue to Google+OEMs above $10/month? I doubt it.

I can’t be precise or absolute about it since we don’t have data from Amazon or Google about units or from any of the platforms’ margins or attach rates for content, but I’m doubtful that they qualify for more than hobby status according to Apple’s definition. At least in terms of profitability, Apple TV could be bigger than either Kindle or Nexus tablets.

  • studuncan

    $10/month average seems high. I have 2 Apple TVs, current & previous model. I’ve spent about $10 total on content. It’s just that there’s so many ways to get content, that it doesn’t seem like buying through Apple is my first though. Netflix, NHL season pass, Youtube, DVDrip seem to meet most of my needs.

    • http://twitter.com/Yelmurc Brian W. Crumley

      The fact that you use DVDrip makes me thing your not a normal consumer.

      • studuncan

        Won’t argue that. But I think most consumers can understand making a copy of their movies for when the kids feel like playing frisbee. Or just want to watch their movies anywhere they want.

      • vincent_rice

        They can understand it but they don’t do it.

      • Tatil_S

        I suspect some parents feel relief when the kids finally break the disk for that favorite cartoon that they love to watch over and over again. :)

    • Walt French

      This also strikes me as the issue for Amazon’s monetization. Right now capital is nominally dirt cheap, so building a big, zero-profit business doesn’t seem to be a problem. Inevitably, however, businesses look for ROI to signal that they’re using their resources in a way that generates long-term profits.

      • studuncan

        Amazon has been looking for ROI for 15 years now. Not sure they’re ever going to get it. They’re in low margin businesses.

  • Dan

    Where making money on content means operating around break even because of the wholesale prices to studios?

    • FalKirk

      Good point. The problem with selling content as a money generator is that it’s not a monopoly, it’s not proprietary. Anyone can sell it and anyone can undercut your costs. You can’t build a subsidized hardware model on selling content if content is a commodity.

      • http://twitter.com/WalterMilliken Walter Milliken

        The studios currently have the monopoly position in content, and Amazon doesn’t really have much chance to monopolize the channel to the customer (as they are apparently trying to do with books). That leaves them with two options for a monopoly: try to substitute other, cheaper (e.g. indy) content for studio content, or produce the content themselves. They seem to be doing both approaches in the book market, and it seems probable that they’ll do it with everything. Google also seems to be going along this route.

  • http://www.facebook.com/people/Luis-Alejandro-Masanti/1074106344 Luis Alejandro Masanti

    “For Q4 we sold 1.3 million. That is up over a 100% year-on-year. We sold more than 5 million Apple TVs during the fiscal year, which is almost double the previous year, when we sold 2.8 million.”

    What a difference with Amazon telling the world that after the iPad mini introduction “they sold three time the previous day…”

    In Apple’s, we know what it means “doubling.”
    In Amazon, one day they sold two Kindles, the next six… They tripled!

  • rashomon_one

    We’ve had an Apple TV for about a year and a half. Apple gets 3 or 4 HD movie rentals a month from us, call it $17.50. We subscribe to Netflix and Hulu-plus through the app store, so Apple gets whatever cut it negotiated of those. And then there are seasons of TV shows we’ve bought — it starts to add up.

  • rj

    Hi Horace,

    Based on my annecdotal observations, I think your $10/month estimate may be high – perhaps very high. For example, I use my AppleTV for AirPlay and iTunes in the Cloud, but I very rarely buy movies and never TV (because the prices are high, the selection is poor, and I already have a PVR). My brother uses his for AirPlay (photos, music, etc), but I know he never purchases content. A friend of mine does rent content on occasion, but I doubt it is $10 per month per AppleTV (he owns two or three of the current black models and one of the older ones). I think lots of people use AppleTVs as Netflix devices, but given Netflix’s subscription prices Apple can’t possibly be making anywhere near $10/device/mon there.

    Fundamentally, it seems unlikely that the Apple TV (which only does movies and TV) is going to generate nearly as much revenue on a per-device basis as a Kindle Fire (which does movies, TV, books, apps, and to some extent drives sales of everything in the Amazon store).

    • xynta_man

      Well, Horace did use $10/month as average estimate – it’s a given that there will be people who spend less and people who spend more. I personally know few people who spend about $30-40/month on their Apple TV ($2.99 for an episode of a TV show x 4 episodes a month x 2 TV shows = $23.92 + a few movie rentals), aside from all of the other functionality that they provide.

      >Fundamentally, it seems unlikely that the Apple TV (which only does movies and TV) is going to generate nearly as much revenue on a per-device basis as a Kindle Fire (which does movies, TV, books, apps, and to some extent drives sales of everything in the Amazon store).

      Who knows? The most popular Kindles are the e-ink ones (they are also the cheapest), which are almost exclusively used for books, since books are the only thing they can really do good enough. I think it’s a safe assumption that, compared to e-ink Kindles, the Kindle Fires are a joke in terms of sales.

      • rj

        My guess is that a significant fraction of AppleTVs are bought as iOS / Mac peripherals, and are never used to buy content. I would guess this is especially true in international markets, where Apple’s content offerings are weaker.

        I also think the typical Kindle Fire purchaser is likely more predisposed towards purchasing online than the typical Apple TV purchaser is. Most (almost all?) Fires are sold via Amazon’s website, and ship with the purchaser’s Amazon id pre-installed. A Kindle Fire owner is very likely to be a current and future (online) customer of Amazon.

        In contrast, a lot of AppleTVs are presumably bought at retail outlets, in some cases by people who still may not be that comfortable with purchasing things online. Setting them up with an iTunes account isn’t difficult, but it is an extra step that isn’t always completed, and iirc it is not necessary to utilize AirPlay and some of the device’s other features.

        You may or may not be right about the Kindle e-readers, but I specifically mentioned the Fire and Horace referred to the “Kindle or Nexus tablets”. My claim was about per-device revenue and so far, unit sales of the Kindle Fire stack up pretty well against the Apple TV: the consensus estimate seems to be that the original “experimental” Kindle Fire sold close to 5 million units in less than a year as a US-only product (about the same as the AppleTV sold worldwide last fiscal year). The Kindle Fire HD (arguably the first “serious” model) is just starting to hit the market, and will likely sell in much larger volumes, and at higher price points. It seems likely that the Kindle Fire (not including the e-readers) will be a much larger revenue business than the AppleTV is next year. 10 million units at an ASP of $300 would make it a $3 billion business on hardware alone.

        Whether its a more profitable business is a different matter, and one that may take several years to completely resolve. But Horace flip flops between revenue and profit when describing the nature of Apple’s “hobby”, and so can I. ;)

      • xynta_man

        >My guess is that a significant fraction of AppleTVs are bought as iOS / Mac peripherals, and are never used to buy content.

        That’s certainly true, but that’s the exact reason that Apple doesn’t sell those Apple TVs as a loss or at cost. Even if people buy an Apple TV for non-content reasons, Apple still makes money form it, just a smaller amount.

        >I would guess this is especially true in international markets, where Apple’s content offerings are weaker.

        Also true, but I would also note that some people use Apple TV abroad with an US-based iTunes account to get US-content in other countries. I would also argue that It’s still a better business than Amazon selling Kindle’s abroad to countries that don’t have any books available to them, with people using those Kindle’s to consume pirated content: a Kindle makes a great cheap device for pirated content, while the Apple TV sucks at this role and such use isn’t popular for it.

        >I also think the typical Kindle Fire purchaser is likely more predisposed towards purchasing online than the typical Apple TV purchaser is. Most (almost all?) Fires are sold via Amazon’s website, and ship with the purchaser’s Amazon id pre-installed. A Kindle Fire owner is very likely to be a current and future (online) customer of Amazon.

        >In contrast, a lot of AppleTVs are presumably bought at retail outlets, in some cases by people who still may not be that comfortable with purchasing things online. Setting them up with an iTunes account isn’t difficult, but it is an extra step that isn’t always completed, and iirc it is not necessary to utilize AirPlay and some of the device’s other features.

        This may be true, but it’s also worth noting that Apple sells content (and get money from it) even without selling Apple TVs — the iTunes Store is available on PCs, Macs, iPhones, iPads, etc. Yet, I feel that an Apple TV box is acting like an amplifier for those content purchases. I know people that have owned an iPad for a whole year, making very little in terms of non-app content purchasing (probably something like $50 in a year), but that changed when they bought an Apple TV: while they purchased it exactly as an iPad accessory, not thinking about its content functionality, they later started buying way more content, since most of the time it’s just better to view video on a big screen TV. Those purchases are still made on an iPad, yet they are streamed to a HDTV via an Apple TV box. Technically, those are content purchases from an iPad, yet they wouldn’t be there, if there was no Apple TV. It’s hard to account this revenue, but Apple TV is still a factor in it.

        >You may or may not be right about the Kindle e-readers, but I specifically mentioned the Fire and Horace referred to the “Kindle or Nexus tablets”.

        My mistake, I thought you were talking about Kindles in general.

        >the original “experimental” Kindle Fire sold close to 5 million units in less than a year as a US-only product

        But did it? It’s hard to buy the number without Amazon confirming it. Sure, there are estimates, but their validity is doubtful. I remember that at some point Amazon said that they sell about a million Kindle Fires per week — a strong number, but was it true? Or better yet — did it last for more that a few days? What about returns? What about use? Are those Kindle Fire tablets even used? Tim Cook made a good point about web traffic — If devices are indeed in use than we would see indirect signs of their sales. If those Kindle Fires aren’t even used, that they certainly don’t rake in revenue and profits for Amazon.

        Don’t get me wrong, the Kindle Fire did indeed sold well for a non-iPad tablet, but it seems that most people extrapolate it sales way beyond the real numbers.

      • Le Timz

        Spot on.. Intl market via iTunes gift card + purchases because of enhanced tv is probably the closest to reality… I would also call the Apple TV an “amplifier”… Especially video content like tv shows movies and music videos ( big over seas).. It just works for movie nights or music videos during a gathering

  • http://www.isophist.com/ Emilio Orione

    The razor blades business model has been well illustrated in this article, commenting on the ipad mini price point http://techpinions.com/selling-the-amazon-kindle-fire-and-google-nexus-7-is-as-silly-as-selling-razor-blades-to-men-who-love-beards/11748#comment-693378622

    Gillette started this kind of business giving away razors and selling blades.

    For the model to succeed you must have a monopoly on the blades, to be allowed to fix a price that will pay the money you loose with the giveaway.

    Apple with apple tv has a kind of monopoly since apple tv is an entrance in the itunes store world.

    Even if the goods sold in iTunes are available in other stores, your itune’s purchases are available only on iOS devices or apple tv.

    Amazon does not have a monopoly since your purchases in amazon store are available in a variety of devices, ios included.

    Google gives away the nexus to sell commercials and acquire personal usage data, they to don’t have a monopoly too.

    So while apple con thrive with this kind of business and they are doing it just to be prepared to disrupt themselves if this kind of business start to dominate, google and amazon could have not a position strong enough to seriously exploit this market.

    If they get traction perhaps they will not be able to increase the price higher enough to pay for the giveaway.

    Secondary for this business to succeed you have to give away your razor to people without beards, so they will buy your blades.

    A customer of an apple tv is either already an ios user and so a content buyer, or is not and he will become a content buyer, because there nothing else useful to do with an apple tv.

    Google and amazon have a market of low price concerned customers that can or cannot be good customers for google and amazon’s blades. Chances are that this type of customer will not be a high spending one.

    For amazon and goole it is not an hobby, it is a bet to get traction in mobile, perhaps a last chance one.

    It seem like they are not competing for a market share but they are trying to disrupt a monopolist position with a dubious alternative strategy.

    • GeorgeS

      “Even if the goods sold in iTunes are available in other stores, your itune’s purchases are available only on iOS devices or apple tv.”

      They can also be viewed on a Mac or PC.

      • http://www.isophist.com/ Emilio Orione

        Not books or magazines, they are iOS only. You are right anyway, they are available only in apple’s world I should have said, thanks.

      • GeorgeS

        True, but the article and comments have been about movies and TV shows.

      • http://www.isophist.com/ Emilio Orione

        True but I was speaking of the business model that gives away the tablet at cost to sell movies, music, books, magazines, apps, user data and user usage data, commercials and in case of amazon almost anything else on their store.
        The point is that apple has more control on prices because there is less interoperability between the iOS world and the external world so external prices have less influence on apple’s prices.
        Not so for google or amazon.

    • http://www.theitvale.com/ Saad Fazil

      “your itune’s purchases are available only on iOS devices or apple tv”

      iTunes purchases are available on PC’s as well, so not restricted to Apple devices only.

      “since your purchases in amazon store are available in a variety of devices, ios included.”

      True, but on Kindle you can only buy Amazon content

    • virgil

      What are you talking about? The “monopoly” means that only Gillette blades work in the Gillette razors – that’s the strategy: you get the razor for free, but Gillette earns money from blades. The strategy fails if 3rd parties get to sell blades for your razor, *NOT* if your blades work in everbody’s razor (in fact, I’d argue you would be happy if people just buy your blades, and don’t bother about your free razor).

      Now, back to your analogy. Kindle is the razor, Amazon content is the blade. Does it matter that Amazon purchases work everywhere? No, it doesn’t. Good for Amazon that it does, they actually out-gillette-d Gillette, since some people buy Apple or Samsung or Microsoft hardware and still use Amazon content on it.

      But is it true the other way around? Can you use your iTunes purchases in your Kindle? Your Google Play purchases, maybe (since it’s also Android)?

      This is a textbook example of “gillette strategy”. How can you bring it up and still call it “dubious”? :O

      • http://www.isophist.com/ Emilio Orione

        The point of having a monopoly is the ability to fix a price at will.
        If only you sell blades for your razor, user will have to pay that price.
        But if you want to sell the same blades for other razors you will have to battle against competitors that sell blades for other razors too.

        Amazon does not want to be limited to sell to kindle customers, silly if they do since the market out of kindle is far more greater.
        So they have to compete on price, their monopoly on kindle is useless.

        Let’s make an example with books. Amazon sells books for every device. For the kindle they have a monopoly but for ios they don’t since for ios also apple and barnes and nobles sells books.
        So amazon is forced to maintain a competitive price on books without leveraging its monopoly on kindle.

        Apple is selling movies only for the iOS and mac world. They don’t have a monopoly on movies themselves because users can buy movies elsewhere, but they have a monopoly on service since the easy of purchase and the cloud integration of apple’s movies can not be matched by competitors. So apple have a sort of monopoly on movies, since apple could sell at a higher price than competitors leveraging its service monopoly.
        The same for other goods on their stores.
        User experience is what matters.

  • William Smithey Jr

    If $10 / unit / year is high ( and I think it’s a fair approximation based on my use) it’s in large part because the Apple TV is, and excuse the term, a hybrid device. Largly because of the Apple TV I no longer have cable. I purchase and watch movies – 2 to 4 / month and a couple of season passes for TV shows. That’s money to Apple and exceeds your hypothetical $10. I have Netflix. I also capture and stream over the air TV with an EyeTV, captured on my Mac so it’s part of a DVR / time shifting setup.

    It is often used to AirPlay content from my iPad and to listen to podcasts – no money to Apple for those uses.

  • RichL

    Aside from content I have seen the Apple TV’s being used as a means to facilitate Airplay.

    Something you mentioned on your podcast many people want to use iOS’s for presentations but dont know how, and the university I work at the solution is AppleTV. Over the summer they purchased approx 30 to outfit various classrooms solely for this purpose.

  • gprovida

    My simple research says nominally 36 million TVs sold per year in US and the number is expected to drop. So if Apple took 1/4 of that business or $1200 TV or $10B at low margin. So if Apple instead sells 10 million Apple TVs then it gets a lot of leverage at low cost and risk. Especially considering Google and Amazon will be lucky to do so well only on their tablets.

    There is a hint at strategy and perhaps not big flat screens. Apple doesn’t build printers either.

  • r.d

    AppleTV’s BOM was $60 with A4 chip in 2010.

    with A5 one of core is disabled so the chip
    should be half price at $8
    as well as 8G Flash at $6.
    DRAM is $6.
    Wifi is $5.
    Power Supply $3
    Box may be $4
    Remote may be $4.
    $8 for manufacturing
    So total = $44.

    So where is low margin.

    • vincent_rice

      Standard retail multiplier is around 3 times factory-door so the normal retail price should be around $130 (assuming your figures are correct). $99 is therefore low margin.

      Remember you have to account for shipping, marketing materials, retail margins etc.

      • r.d

        then how was Apple selling at $99 in 2010
        when BOM was $60+. so price should have been $190.

        That $44 number is actually inflated number
        just to account for externalities.
        It can be much lower with usual Apple discounts.

      • vincent_rice

        It was being sold with an even lower margin in 2010.

    • xynta_man

      BOM estimates are rarely in any way accurate, especially with products that feature high degrees of custom parts and build process (compared to random commodity products). You allocate $4 for the remote, yet how can anyone compare a regular shitty plastic remote with Apple’s solid, one-piece-build aluminium remote? Totally different materials, totally different build process, etc.

    • mieswall

      Have you ever wonder how they build the gorgeous remote control of appleTV? It is a one-piece aluminum device; with no space to put after the electronics inside. $4? I doubt it.
      I personally consider this insignificant element the main symbol of Apple excellence in design, taste, refinement, quality. Not seen even in hifi equipment costing 100x more.

  • pds

    With all the recent product announcements it’s not clear what could be unveiled at a spring keynote next year. iPhone started out as a early Spring unveiling, then moved to summer then fall. iPad took its place as an early Spring unveiling now became a fall product. Will there be something new on the horizon next Spring? Perhaps the hobby may finally be taken more seriously?

  • abhibeckert

    “Assuming $10/month in content sales per Apple TV results in $1.4 billion of which 30% might be retained by Apple as revenue (agency fee).”

    Some bad assumptions here.

    $10/month is too high. The vast majority of users probably spend $0/month.

    And I doubt Apple can get the same royalty from HBO and Dreamworks as they get from tiny software developers. It would be a lot lower than 30%.

    Finally delivering HD media is expensive and outside Apple’s wheelhouse, so their server costs are likely to be ridiculously high. This isn’t YouTube where you get highly compressed video… and yet Apple still manages to stream HD content in real time (unlike HD videos on YouTube, at least where I live).

    Frankly I would be impressed if they can even break even with TV/Video sales. It definitely isn’t a $400,000,000 per year revenue/profit center like you implied in the above statement.

    • http://twitter.com/WalterMilliken Walter Milliken

      There’s nothing particularly difficult about streaming HD video, other than the higher bandwidth it takes. It’s actually easier to serve than a lot of other kinds of Internet traffic — it has long-term, relatively predictable flows. And Apple has been in the rate-adaptive delivery protocol business for a long time now, they seem to understand it pretty well. The real problem is reliably shoving all those bits down the last mile bottleneck to the user, and Apple’s been doing that for a long time (with QuickTime and movie previews).

      The actual bandwidth costs aren’t entirely trivial, but from a quick search it looks like core-connected bandwidth costs are in the few cents per gigabyte ballpark. Apple states their average 2-hour HD movie is about 4 GB, so we’re probably looking at something in the $0.10-$0.25 range for transmission costs, per movie.

      It does take a lot of storage for all that HD content, but the high-use stuff should get cached in fast storage pretty easily, and the predictable nature of video makes it very easy to pre-schedule fetches anyway. The storage itself should be pretty cheap, and the demands on the server hardware should be pretty minimal.

      Ballpark storage costs (taken from Amazon S3 pricing, so I believe they include access server costs) look like they’re around $0.05-$0.10/GB/month, so I’d assume the average HD movie costs Apple around $0.25-$0.50/month to keep in storage. That’s going to get amortized across all downloaders of that movie that month, so I’d expect the data transmission costs will dominate Apple’s costs.

    • http://www.asymco.com Horace Dediu

      What matters is now what some users spend but what the overall average is. The product is designed, like the Kindle, to generate content sales. We can argue whether it’s x or y per month but to say that some users don’t use it for its intended purpose is to suggest that some users made purchasing mistakes. To suggest that the majority of users don’t use it would imply that a large, and increasingly larger group (2.5 million per year) made the same mistake.
      Regarding the agency fee, the feedback I’ve received over the years is that 30% is standard across all of Apple’s media types: music, books, video and apps. That agency fee covers customer acquisition, storage, traffic and payment processing. These overheads are consistent across all types of media with payment processing being the largest component. Media sold through other channels incurs higher fees (operator-biling typically costs 45% of sale.)
      Finally, I did not specify a profit figure. I only tried to estimate the revenue in order to compare it with other products with a similar business model. I would add that none of the business models cited (Kindle, Apple TV and Nexus 7) are profitable. They’re not even designed to be profitable.

      • http://www.noisetech-software.com/Home.html Steven Noyes

        Horace,

        I agree with adhibeckert, I think the $10/month is a very high figure. To me, you have to look at the additional content sales driven by the average user. At work, I know 4 other people with AppleTVs. I am the only one that actively buys content and I average about $15/month. The others watch content they already have or get from other … we call it sources. They average about $0/month.

        My sister uses hers as a NetFlix streamer and not an iTunes content portal.

        I would bet the actual revenue is closer to $20/year or so.

      • PikesPique

        Well, my own experience is apparently unique, then. I spend close to $50/month on purchases of TV series. I dropped Dish Network @ $85/month (approximately $1000/year) and began purchasing ala carte via AppleTV, saving me about $400/year. I get what I want and only what I want.

        For movies, I use my Netflix DVD-only plan, something I’ve done since shortly after Netflix began operating. I never purchase or rent movies from AppleTV.

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