Apple taking a cut of movie rentals to subsidize Apple TV price cuts?

Apple TV “margins are already uncharacteristically low for Apple, how can they cut $70 more? Apple is subsidizing the cost of the Apple TV hardware with movie rentals,” Seth Weintraub explains for Computerworld.

“In this model, Apple is taking ‘a bit off the top’ – as Tony Soprano would say – and adding it to the Apple TV’s bottom line. This is similar to the iPhone, whose revenue is also derived from outside sources (the Mobile carriers – AT&T, Tmobile, Orange and O2),” Weintraub writes.

“To be fair, Apple isn’t just subsidizing Apple TV hardware. They also have to pay for the infrastructure to distribute content and the bandwidth from Akamai – in which I believe they are still part-owners. That isn’t cheap. They also take a cut from the iTunes music and TV shows for this purpose,” Weintraub writes.

“Until Apple made the Apple TV a stand-alone device earlier this month, the accounting would be blurry because the content would have had to be purchased through iTunes, on a computer. Now, Apple can see how much content is being purchased directly by the devices and can account for the difference,” Weintraub writes.

“For its part, Apple is offering the consumer a fantastic deal by cutting the price of the hardware on the assumption (but not obligation like the iPhone) that consumers will use the device in a way that brings Apple more revenue. The movie rentals and TV shows are such a compelling value that I think Apple will have no trouble breaking even on the price drop,” Weintraub writes.

Full article here.

27 Comments

  1. MKJJ,

    So why is the Apple TV still $378 (£199 for the 40gb) in the UK?

    You answered your own question. No movie rentals in the UK, yet. The presence of movie rentals in a market allows for reduced Apple TV hardware prices.

  2. Apple isn’t subsidizing AppleTV with movie rentals. The prices for movie rentals won’t change if Apple raises or lowers the price for AppleTV. Just like iTunes prices for music don’t change when iPod prices change.

    And what is he talking about AppleTV being a stand-alone device now? Sure, AppleTV can now access iTunes directly instead of needing a computer, and while that may allow Apple to better track whether AppleTV is generating downloads or a Mac/Windows PC, the end user still has to purchase through iTunes.

    In the end, Apple’s price drop for AppleTV will result in more AppleTV sales, which results in more revenue due to movie rentals/purchases. Just like with the iPhone, where a lower price means more units sold which means more monthly subscription revenue.

  3. “Apple changed their strategy with Apple TV because they had to. The thing was tanking… worse, it was dead in the water.”

    You have numbers to back up your statement?

    Yeah, I didn’t think so.
    What gets me is the underlying attitude that people somehow are just dying to see Apple screw something up. I just don’t get it.

  4. Of course Apple gets a cut of every movie rental. That’s how the iTunes Store works, Apple gets a cut for the services it renders, like cataloging, and bandwidth for delivery. You may consider accounting tricks that would add these revenues to the Apple TV project, but it doesn’t matter because it all goes to Apple’s bottom line eventually.

  5. The reason why the AppleTV price is dropping is because the AppleTV is going to be an important product for Apple moving forward. The movie download business is going to be huge.

    I’m in when downloads come to the UK. I am quite happy to pay for a download and watch in HD-ish rather than go to my local blockbuster and have _no_ HD movies to rent. I don’t have to bother with an over priced BRD player either until they drop in price and their image quality gets better.

  6. Hi I think the new interface and rentals for AppleTV are great. Also I love what Apple does. However =>I am really very discontented by the lack progress and support for AppleTV outside the US. No content (legally) accessible and still a 40 Gb AppleTV costs 299 euros in the Apple NL store (!!!), and the 160 Gb 399 euros. 1 euro is now 1.47 US$ and climbing, do the math! Do they WANT these things to stay on the self or what? Somebody in Apple Europe must have gone mental. Please Steve, send the this person to a clinic and fix this mess!

  7. “Apple changed their strategy with Apple TV because they had to. The thing was tanking… worse, it was dead in the water.”

    Hmmm. Me thinks this was the strategy all along. Why do you suppose it would be so easy to update the device on the fly if not for planning to do so all along?

    In the course of a year, Apple has generated the software to do rentals, and the rental agreements w/ 12 studios. I’d say that’s prettydamn good.

  8. “i want to give this rental thing a whirl and if we like it, we’ll drop another $229 for one for the bedroom”

    I just re watched the keynote, and the way I see it, AppleTV rentals and iTune rentals are 2 different animals? from iTunes you can watch and swap between computers, iPods iPhones. But rentals from AppleTV can only be watched on your AppleTV,

    The question will be if you rent on your appleTV id the living room, can you finish with the one in your bedroom?

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