Billion dollar hobby

Original author: Horace Dediu
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[Note trans.]: given the specifics of Telebreeze’s business, we found interesting one of the articles by Horace Dediu , an expert and analyst who focuses not only on the smartphone world, but also on smart-tv technologies, methods and approaches to distributing content.

At the last meeting of shareholders, Tim Cook unveiled data on sales of Apple TV for the past fiscal year (its end falls on September 2013). According to this information, Apple TV sales exceeded $ 1 billion, which, according to the company, includes revenue from both the devices themselves and the content sold. And here a problem arises. The fact is that in the company's previous reports, the number of units sold was highlighted, not the level of income from them. Judging by the information provided in them, by January 1, 2013, the total volume of Apple TV sold in the 3rd (current) generation amounted to 6 million units.

Above is a graph illustrating a quarterly estimate of the number of Apple TVs sold. Given the fact that Apple did not provide additional comments, the only thing we have for 2013 is the phrase "Billion Dollars." However, when trying to divide this amount into revenue from content and revenue from hardware, a number of difficulties arise:

  • When does selling content relate directly to Apple TV? What if, for example, I bought several TV shows in iTunes from a desktop computer or from an iPhone and wanted to watch them on Apple TV? Will such purchases count towards Apple TV? Is the full amount of the content cost taken into account, or is it just the percentage that Apple takes back?
  • How does Apple calculate revenue from cable channels whose services are featured on Apple TV? Do the channels pay for placing their buttons in a certain place on the interface (even though the user needs to subscribe to use this functionality)? Is this the main source of content revenue?
  • What about Netflix, YouTube, and others? On what terms do they grant a license to their channels? Is access to Netflix a reason to buy an Apple TV, or is the purchase of an Apple TV a reason to subscribe to Netflix?
  • If you do not take into account the content, then you might think that behind 1 billion profit lies about 10 million shipped devices for the 2013 financial year (at a price of $ 99 per unit). This assumption is not entirely correct, since a similar price is possible only in the case of direct sales of Apple TV through Apple retail stores (including online). When selling devices through other channels, Apple may give part of the profits to retailers. In this case, the average price of the device will be less than $ 99.
  • There is also a problem with a lack of information from financial statements. We only have data for the 4th quarter of 2012 (about 2 million devices sold), therefore, to determine the number of devices hiding behind the phrase “Billion Dollars”, we need information for the three calendar quarters of 2013.
  • And the last one. Using information from various sources over previous periods, I evaluated the entire video production market (see iTunes Business Report). According to the data, revenue from video content (directly related to iTunes) amounted to $ 1.8 billion for the fiscal quarter. If at least 50% of this amount is accounted for by Apple TV, then this is the first sign of a sharp decrease in revenue from sales of these devices in 2013. In other words, if you add revenue from the sale of video content for the same period to the revenue from Apple TV sales for 2012 (6 million devices, priced at $ 89 apiece), (I received this figure after market analysis), then the total amount will be 2.1 billion dollars. In this case, the phrase “Two Billion Dollars” would be suitable for the description of income from 2012.

All this adds certain difficulties. Based on current assumptions, the only thing I can say is that, for the most part (if not completely at all), revenue from selling content on Apple TV consists of revenue from distribution of channel content, and not from iTunes sales. This revenue will ultimately fall into the amount of royalties from the iTunes / Software / Services segment and will not include Apple TV revenue (which is classified as Accessories). Thus, in my opinion, the most plausible amount of Apple TV sold for the fiscal year 2013 is 7.6 million units (or more than 8 million per calendar year).

If I am right, then Apple TV sales dynamics will look like this:

By the standards of Apple, this result can not be called outstanding. We see intensive sales growth, the total volume of which has exceeded the mark of 25 million Apple TVs, but this amount can hardly be compared with 800 million other iOS devices.

However, the most important thing in the Million Dollar Business is the positioning of the Apple TV itself. As you can see above, Apple TV hardware sales revenue is not that high. I would even call the Apple TV “Apple's Kindle equivalent,” since this product is sold at the lowest price as an entry point into the more lucrative world of content (iTunes). The problem with this approach is that selling someone else’s content has never brought a lot of profit. If such a model were stable, Kindle, one way or another, would become the entry point to Amazon Prime.

In short, the profit from the distribution of Apple TV, according to its existing commercial model, is not so high. Anyway, by the standards of Apple. Actually, this explains the "status" of the hobby. However, what if this model becomes a platform for searching content or an equivalent, I’m not afraid of this word, a portal? Of course, the interface imposes certain restrictions on the search and consumption of information, but if there is a small amount of content, it looks pretty good. This approach does not involve active user interaction. Just think about how much time it took to change the process of interacting with the TV interface: for decades, people had to press the same button to switch the channel.

If my assumptions are true, then the Apple TV can act as an auction platform for posting content. Similarly, iTunes is now working, offering exclusive music content in its interface.

Many conclusions can be drawn from this material, but I would like to see your participation in this.

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