I received an interesting email from a reader this morning who had recently read my post earlier this week on the apparent hunger for a new Apple (AAPL) TV - iTV - according to Katy Huberty.
Back of an Apple TV (Photo credit: Wikipedia)
He wanted to stay anonymous and identify himself (or herself) only as "a Canadian Apple bull who is fed up of reading about the imminent demise of Apple."
So, for your consideration....
I enjoyed reading your recent article about the possibilities of an Apple TV and it got me thinking about something....
The essence of what dawned on me is that Apple MUST create a TV, but not for the reasons everyone thinks. They have to do it to gain more leverage over the display supply chain, to allow Apple to deal with price pressures in the smartphone and tablet markets without sacrificing profit margins.
I started thinking that 13M TV (if you assume a 45” TV) must be a lot of surface area of display. Thanks to a nifty web site that calculates the surface area of any sized screen, I did a few quick calculations:
- iPhone 5 with its 4” display has a surface area of 7.66 sq inches
- iPad 4th gen with a 9.7” screen has a surface area of 45.18 sq inches
- A TV with a 45” screen has a surface area of 972.36 sq inches
- So one single 45” display is the equivalent of 126 iPhone displays or 21 iPads displays
Now if we assume the conservative number of 13M TVs that Apple can sell, the total display surface area that Apple would ship is equivalent to the display surface area of
- 1.638B (as in Billion) iPhones, or
- 273M iPads
So if Apple sells 13M TVs, that means they will have purchased from their supply chain the equivalent display surface area of over 11 times the number of iPhones they will have shipped in 2012, or almost 4 times the number of iPads they will have shipped in 2012!! That’s huge!
Common sense would dictate this kind of increased volume of sq inches purchased from their display supply chain should yield some substantial discounting on the per unit cost of the display for an iPhone and an iPad!
Let’s look at this in a different way. I did some more arithmetic based on some data I found from iSuppli.
- The display cost of the iPhone 5 is approx. $30, which is $3.92 per sq inch
- The display cost of the iPad is approx. $87, which is $1.93 per sq inch
- I’ve estimated the display cost of a 45” TV to be roughly $599, which is $0.62. I assumed an avg retail price of $950, COGS of $655 (30% GP). I assumed that 90% of COGS is the display, which gives me $599.
If we assume that Apple ships 13M TVs in 2013, they will have purchased $7.79B in displays just for the TVs. I calculated that in 2012 they will have spent $4.3B for iPhone displays and $6.1B for iPad displays, for a total of $10.4B. That’s a 75% increase in total volume of display purchases. With that kind of volume increase, I would expect some pretty hefty discounting for iPhone and iPad displays.
Also, remember I am assuming the conservative number of 13M TVs. What happens to this analysis if we start talking about Apple moving 40-50M TVs per year? The amount of sq inches they will purchase from the supply chain will make what they buy for iPhones and iPads seem like a drop in the bucket.
The point I am trying to make is that Apple has to sell a TV, obviously to grow the top and bottom line and increase the footprint of iOS devices, but also (and probably more importantly) to gain more leverage over the display supply chain to protect the competiveness of the iPhone and iPad franchise. Nobody is talking about this in the media, and I think it is a very real and a very positive observation to help dispel the notion that Apple will eventually get squeezed on profit margins. It’s about how the market under-estimates just how good Tim Cook is in managing the supply chain. Also, this could be the catalyst Apple is waiting for to release the much anticipated cheaper iPhone, which contrary to popular belief, IMHO Apple has plenty of time left to address the low end of the market.
[Long AAPL]
