Monday, January 28, 2008

Razors and razor blades

An anonymous commenter on last week’s iPhone posting mentioned Apple’s aggressive price cuts earlier this month on AppleTV, citing an article posted tonight on Gizmodo.

If you allow for distribution margin, Apple can’t be making anything on the 40gb AppleTV sold for $229, if iSuppli’s BOM estimate of $208 is accurate.

There’s nothing wrong with a razor- and razor blade cross subsidy. After all, that’s what videogame console makers have done for years — giving away consoles to make it up with royalties on the game. Once upon a time, you could get an actual razor blade handle free, too.

The problem, of course, is that Apple’s subsidy has historically gone the other way — iPods make money and the iTunes Store does not. So a subsidized AppleTV and break-even store is going to wipe out margins.

I’m guessing that this is a fight to the death for control of the living room: Xbox 360, Sony PS3, Amazon Unbox, the various TV network sites, plus substitution effects for short clips by GooTube. So, like a good Japanese company, Apple is buying long-term market share at the expense of short-term profits.

Nobody’s buying AppleTVs, so it’s not like the subsidy will have a material impact on the bottom line. On the other hand, the old AppleTV made a cheap OS X 10.4 server. Someday they’ll update the hacks so that they can turn the 2008 AppleTV into a cheap 10.5 box.

The new product allows movies, TV shows, YouTube, music and podcasts. I guess I’ll have to buy one to see if it supports the radio stations preloaded in iTunes — like my “hometown” favorite, KSBR. Or I could install the Streamer MP3 radio station hack.

Still, I don’t get the business model. The product still doesn’t do timeshifting, which is the number one usage of a digital settop box.

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