Andy Hargreaves, analyst for Pacific Crest questions whether Apple would want to dedicate any space in its own stores to an Apple TV, based on a key retail calculation: gross profit per cubic foot.
“An Apple television would be a terrible use of retail space relative to iPhone, iPad or the Apple TV set-top box. A 46″ Apple television would likely produce less than 1/200th the gross profit per cubic foot as an iPhone at retail, and less than 1/50th the gross profit per cubic foot of an iPad. We believe this is critical given the limited inventory space at many Apple and partner stores.” (via Fortune Tech)
Profit Problem? Maybe.
Hargreaves assumes that Apple’s margin percentage would be far lower on a TV set than on an iPhone, effectively the gross profit of selling one TV = selling one iPhone. This is in line with the small margins for other high-end TVs. A 50″ TV box I measured at Costco a few months back has about 200x the volume of an iPhone 4S box so the basic calculation is quite obvious. Mr. Hargreaves does not consider the lifetime value of the Apple TV, which could be much greater if there is a monthly service contract attached to the TV. (That’s how Microsoft can justify offering an XBox for $99 with a 2-year contract.)
Apple may feel a TV is so strategic that a lower GP/CF is acceptable, and I think the margins for Apple can be made to work over time. But there is a more basic problem – space.
Real Estate Problem? Definitely.
Apple stores currently sell lots of little boxes like the iPhone, a moderate number of medium size boxes, and a few of its largest boxed items like the iMac 27 inch, which has a box less than half the volume of a 50-inch TV. A successful TV set will sell in the hundreds every week per store. Apple doesn’t have stores big enough to store sufficient TVs for a week’s likely sales. And they aren’t building stores that big or remodeling to get that kind of storage space. Even setting aside space to demo an Apple TV set would be hard in many Apple stores, unless the TV area replaces an existing segment like the third-party product section, or they cut down other sections by 25% or more. And imagine the increased crowding in the stores.
So where would Apple sell an Apple TV set? In the US, Best Buy has that kind of space, as does Wal-Mart, which is rolling out Apple mini-stores now. Costco sells a few Apple items, and lots of TVs, so that’s another potential outlet. We may have to assume that an Apple TV set would sell through big-box stores.
In that case, sitting next to a bunch of other TVs without an Apple employee to show it off, how does an Apple TV set stand out?
What Does This Tell Us?
Does the lack of expansion space in its stores mean Apple doesn’t plan on building an Apple-branded TV set after all? It’s not definitive, but it’s a clue we’ll consider as we go. It could mean that Apple would sell a flagship TV in small volumes to promote its set-top boxes, or license the functionality to another TV set makers. Polling suggests that the market opportunity may be too big to resist.