What do Apple TV’s margins tell us?

We went through this earlier this year with the iPhone (see here and here): what do margins tell us about a product? iSuppli who analyse these things argue that a high margin means there won’t be sales and a low margin means you won’t make money. In fact, they tell us neither.

The low margin argument is being put forward about Apple TV. iSuppli have calculated that an Apple TV which retails at US$299 costs US$237 a unit. That means that the gross margin (price less cost divided by price) is 20.7% (recall that for the iPhone it is more like 50%).

This tells us less about whether Apple will make money than how sensitive consumers are to price in this market (compared with, say, the iPhone). That gross margin, if Apple is pricing to maximise profits, translates into an elasticity of 4.8. What does that mean? Well, if Apple were to raise price by $3 it would expect to lose 4.8% of its sales.

I many respects, this is hardly surprising. For one, Apple TV competes with all other ways of watching TV. For another, Apple TV is only truly valuable if you purchase TVs and movies from the iTunes music store (something not available for Australia). So there are other cost factors and revenue sources there for Apple. But when it comes to the money equation, this elasticity is probably similar to those facing DVR sellers and even cable TV companies. They are still in business and so why wouldn’t we expect a differentiated Apple product with low margins to be profitable?

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