Revenue Density, Supply Chain, Retail Stores and ?cracking? the TV

  • Posted: 07 May 2012 03:53 AM

    I?ve seen many topics discussed, but haven?t seen any devoted to the revenue density of Apple?s products and the role this plays in the management of the supply chain and the success of Apple?s retail stores.

    In short, selling small and expensive products plays a key role in controlling costs in all aspects of Apple?s business.  Manufacturing, shipping, warehousing and retail store costs all benefit from selling physically small products.

    Take awhile to appreciate the relative efficiency of the retail packaging of Apple?s products to those of their competitors.  Think about how many iPhones, iPads, MacBook Airs, etc can fit on the shelves or in the display cases at your local Apple store.  Think about how easy it is for the consumer to carry these items home from the store in a small bag or in the retail box with a handle.

    Here is a rough breakdown of the revenue density ($/Cubic Meter (CM)) of a few of Apple?s current products using retail packaging dimensions:

    Device   Retail Price*  Length   Width   Height   Volume(CM)  QTY/CM   Rev/CM($)
    iphone 4/4s   $649   75         130           62   0.000605       1654       $1,073,446
    iPad             $499         254         195           44   0.002205         454         $226,546
    11? Air       $999         337         234           57   0.004495         222         $221,778
    ATV 2         $99     108     108           65   0.000758       1318         $130,482
    *Non-contract price used for iPhone.

    As you can see, the iPhone is far and away the leader in revenue density at nearly $1.1M / CM, but all of the other products are quite respectable with the ATV2 bringing up the rear at just over $130,000/ CM.

    For comparison purposes here is the revenue density for an arbitrary 42? TV:

    Device   Retail Price*  Length   Width   Height   Volume(CM)  QTY/CM   Rev/CM($)
    42? TV   $999         1050         125         680   0.089250           11           $10,989

    The difference is startling, approximately 1% of the iPhone.  It is really difficult to manipulate a 42? TV to get it into the same ballpark as the other products that Apple sells.  Double the price and somehow manage to package it in a box that is only 50mm thick (think iPad and MB Air packaging) and you?ve got ~$50,000 /CM.  That?s still quite a bit less than the other products.

    This bothers me.  For a TV (in roughly current form) to make up a significant percentage of an Apple retail store?s revenue, it would require a significantly larger volume of storage space than the other products.  How would the store staff handle this?  A 42? TV box is bit awkward for an individual to handle.  How would you like to have to carry this box through a shopping mall to your car or home on the train from the Grand Central store.  Apple stores aren?t set up with shopping carts and loading docks in mind and I don?t see this changing.

    This leads me to believe that ?cracking? the TV may go a lot further than a adding a built in iSight camera, a slick Siri interface and some great content choices to a large piece of glass.

    What if the ?new ATV? remained a hobby and a box much like it is now, but with the added feature of a pico projector?  Have a bare wall in your great room?  How about a 100? display?  Maybe 27? is better for working in your cubicle?  32? might work best on the wall in a small apartment.  Just bought an HD TV that you love?  No problem, the ?new ATV? is ready for you too with an HDMI output.

    I?m not a TV connoisseur by any means and I?m sure that I?m overlooking quite a few things with this analysis, but I?d like to put it out there for discussion. 

    Any thoughts?

         
  • Posted: 07 May 2012 05:35 AM #1

    Nathan Stevens - 07 May 2012 06:53 AM

    I?ve seen many topics discussed, but haven?t seen any devoted to the revenue density of Apple?s products and the role this plays in the management of the supply chain and the success of Apple?s retail stores.

    In short, selling small and expensive products plays a key role in controlling costs in all aspects of Apple?s business.  Manufacturing, shipping, warehousing and retail store costs all benefit from selling physically small products.

    Take awhile to appreciate the relative efficiency of the retail packaging of Apple?s products to those of their competitors.  Think about how many iPhones, iPads, MacBook Airs, etc can fit on the shelves or in the display cases at your local Apple store.  Think about how easy it is for the consumer to carry these items home from the store in a small bag or in the retail box with a handle.

    Here is a rough breakdown of the revenue density ($/Cubic Meter (CM)) of a few of Apple?s current products using retail packaging dimensions:

    Device   Retail Price*  Length   Width   Height   Volume(CM)  QTY/CM   Rev/CM($)
    iphone 4/4s   $649   75         130           62   0.000605       1654       $1,073,446
    iPad             $499         254         195           44   0.002205         454         $226,546
    11? Air       $999         337         234           57   0.004495         222         $221,778
    ATV 2         $99     108     108           65   0.000758       1318         $130,482
    *Non-contract price used for iPhone.

    As you can see, the iPhone is far and away the leader in revenue density at nearly $1.1M / CM, but all of the other products are quite respectable with the ATV2 bringing up the rear at just over $130,000/ CM.

    For comparison purposes here is the revenue density for an arbitrary 42? TV:

    Device   Retail Price*  Length   Width   Height   Volume(CM)  QTY/CM   Rev/CM($)
    42? TV   $999         1050         125         680   0.089250           11           $10,989

    The difference is startling, approximately 1% of the iPhone.  It is really difficult to manipulate a 42? TV to get it into the same ballpark as the other products that Apple sells.  Double the price and somehow manage to package it in a box that is only 50mm thick (think iPad and MB Air packaging) and you?ve got ~$50,000 /CM.  That?s still quite a bit less than the other products.

    This bothers me.  For a TV (in roughly current form) to make up a significant percentage of an Apple retail store?s revenue, it would require a significantly larger volume of storage space than the other products.  How would the store staff handle this?  A 42? TV box is bit awkward for an individual to handle.  How would you like to have to carry this box through a shopping mall to your car or home on the train from the Grand Central store.  Apple stores aren?t set up with shopping carts and loading docks in mind and I don?t see this changing.

    This leads me to believe that ?cracking? the TV may go a lot further than a adding a built in iSight camera, a slick Siri interface and some great content choices to a large piece of glass.

    What if the ?new ATV? remained a hobby and a box much like it is now, but with the added feature of a pico projector?  Have a bare wall in your great room?  How about a 100? display?  Maybe 27? is better for working in your cubicle?  32? might work best on the wall in a small apartment.  Just bought an HD TV that you love?  No problem, the ?new ATV? is ready for you too with an HDMI output.

    I?m not a TV connoisseur by any means and I?m sure that I?m overlooking quite a few things with this analysis, but I?d like to put it out there for discussion. 

    Any thoughts?

    Interesting analysis of revenue. Well done

    Personally I don’t think Apple is going into the TV/projection hardware business. There really isn’t anything wrong with present TV hardware. The problem, as I see it, is the way content is delivered.  If content were delivered ala carte, the producers would make more, by spending more, on quality, and not having to support losers with bundled winners.  Look at Apple’s share of profits in relation to its respective product market shares.  But, like the music business before them, TV content producers think in terms of the bundle (aka albums) to generate revenue.  This is where the medium is broken. Add cable operators clunky interface and you’ve got a train wreck.

    Further, content takes up no more space than the iTunes music/book/app/movie “Store”, and satisfies impulse wants immediately to whatever Apple device you are using, whenever and wherever you are.

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  • Posted: 07 May 2012 08:31 AM #2

    Device      PriceLength Width Height Volume(CMQTY/CM   Rev/CM($)
    iphone 4/4s $649     75     130   62    0.000605    1654   $1,073,446
    iPad        
    $499    254     195   44    0.002205     454     $226,546
    11
    Air     $999    337     234   57    0.004495     222     $221,778
    ATV 2        
    $99    108     108   65    0.000758    1318     $130,482
    *Non-contract price used for iPhone

    (using the code tag gives a monospaced font, so you can lay out a table)

    I’ve thought this same thought for a long time. Nevertheless, the current TV UI is completely hopeless and awful, and needs to be eliminated, so that Apple controls the primary UI. Obviously the TV needs to be demonstrated in store, but it can be direct shipped to the customer, or even delivered by a specialist with free installation.

    I do see it being a relatively low volume item, with the existing Apple TV brick being the more popular compromise that continues to be available for use with an existing TV. What I imagine Apple offering is a satellite/cable service with no “channels” apart from News and Weather. Content is selected directly and buffered on the device. Real time events (primarily sports) are also subscribed directly. If you like tennis, or sailing, that’s what you’ll subscribe to, not an expensive all-in package.

    And how does advertising fit? I think the IOS App store is beginning to find a solution to this.

    The problem Apple has is that the existing broken broadcast business model would be more or less destroyed, and although the content creators would eventually benefit enormously, they feel they cannot afford to lose the broadcasters meantime. So what is the solution SJ believed he had found? The only answer I can think of is something like the complete takeover of an existing cable type broadcaster, replacing existing set top boxes with cable internet plus Apple TV box, and replacing the old business model entirely, subsidising any lost earnings until the consumers learn to exercise their new empowerment. A big problem with this is that it’s not global, or even national. TV would still be balkanised in a way Apple doesn’t want, leaving a prolonged business war before all consumers have the choice and control that Apple would want for them.

    Whatever it is, it’s got to be done as a sequence of small steps. The main source of hints is the evolving user interface of the existing Apple TV. Every change is a step towards wherever it is Apple plans to be.

         
  • Posted: 07 May 2012 12:31 PM #3

    Nathan Stevens - 07 May 2012 06:53 AM

    I?m not a TV connoisseur by any means…

    FYI, last time I looked into it (2 years?), the highest-quality large-screen home theatre equipment was projectors.

         
  • Posted: 07 May 2012 05:21 PM #4

    greedyn00b - 07 May 2012 03:31 PM
    Nathan Stevens - 07 May 2012 06:53 AM

    I?m not a TV connoisseur by any means…

    FYI, last time I looked into it (2 years?), the highest-quality large-screen home theatre equipment was projectors.

    Not pico projectors though.  Their image is so dim, that they are essentially a gimmick today.  Not something that would ever find its way into a credible Apple product.

         
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    Posted: 07 May 2012 07:44 PM #5

    Nathan Stevens - 07 May 2012 06:53 AM

    I?ve seen many topics discussed, but haven?t seen any devoted to the revenue density of Apple?s products and the role this plays in the management of the supply chain and the success of Apple?s retail stores.

    In short, selling small and expensive products plays a key role in controlling costs in all aspects of Apple?s business.  Manufacturing, shipping, warehousing and retail store costs all benefit from selling physically small products.

    Take awhile to appreciate the relative efficiency of the retail packaging of Apple?s products to those of their competitors.  Think about how many iPhones, iPads, MacBook Airs, etc can fit on the shelves or in the display cases at your local Apple store.  Think about how easy it is for the consumer to carry these items home from the store in a small bag or in the retail box with a handle.

    Here is a rough breakdown of the revenue density ($/Cubic Meter (CM)) of a few of Apple?s current products using retail packaging dimensions:

    Device   Retail Price*  Length   Width   Height   Volume(CM)  QTY/CM   Rev/CM($)
    iphone 4/4s   $649   75         130           62   0.000605       1654       $1,073,446
    iPad             $499         254         195           44   0.002205         454         $226,546
    11? Air       $999         337         234           57   0.004495         222         $221,778
    ATV 2         $99     108     108           65   0.000758       1318         $130,482
    *Non-contract price used for iPhone.

    As you can see, the iPhone is far and away the leader in revenue density at nearly $1.1M / CM, but all of the other products are quite respectable with the ATV2 bringing up the rear at just over $130,000/ CM.

    For comparison purposes here is the revenue density for an arbitrary 42? TV:

    Device   Retail Price*  Length   Width   Height   Volume(CM)  QTY/CM   Rev/CM($)
    42? TV   $999         1050         125         680   0.089250           11           $10,989

    The difference is startling, approximately 1% of the iPhone.  It is really difficult to manipulate a 42? TV to get it into the same ballpark as the other products that Apple sells.  Double the price and somehow manage to package it in a box that is only 50mm thick (think iPad and MB Air packaging) and you?ve got ~$50,000 /CM.  That?s still quite a bit less than the other products.

    This bothers me.  For a TV (in roughly current form) to make up a significant percentage of an Apple retail store?s revenue, it would require a significantly larger volume of storage space than the other products.  How would the store staff handle this?  A 42? TV box is bit awkward for an individual to handle.  How would you like to have to carry this box through a shopping mall to your car or home on the train from the Grand Central store.  Apple stores aren?t set up with shopping carts and loading docks in mind and I don?t see this changing.

    This leads me to believe that ?cracking? the TV may go a lot further than a adding a built in iSight camera, a slick Siri interface and some great content choices to a large piece of glass.

    What if the ?new ATV? remained a hobby and a box much like it is now, but with the added feature of a pico projector?  Have a bare wall in your great room?  How about a 100? display?  Maybe 27? is better for working in your cubicle?  32? might work best on the wall in a small apartment.  Just bought an HD TV that you love?  No problem, the ?new ATV? is ready for you too with an HDMI output.

    I?m not a TV connoisseur by any means and I?m sure that I?m overlooking quite a few things with this analysis, but I?d like to put it out there for discussion. 

    Any thoughts?

    interesting thread.

    Apples sells a million+ large, heavy iMacs per quarter - and I can confidently say that any 42” HDTV apple makes would be at least half the thickness of my 27” iMac - meaning a HDTV box should take up approximately the same amount of physical space (taller/wider, but half as deep).

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  • Posted: 07 May 2012 07:45 PM #6

    Nathan, this is an interesting perspective. This got me thinking, and writing it down here is helping me think it through.

    So I agree with you that Apple is unlikely to have a high-volume large screen TV business. I agree that the lack of physical space for stock in Apple stores is a consideration. Direct-to-customers shipping might also be tough given the TV size. But I don’t think these are the main issues. Physical space for inventory would not be an issue for most of Apple’s other distribution, e.g., Walmart and Best Buy. More importantly, it seem unlikely that customers will upgrade to new TVs every couple of years (TVs are not like phones, that people scrap every two years), so ATV volume will be lower and hence less inventory is necessary.

    I had thought about the possibility of a projector, as you suggest. But this would be strange given Apple’s expertise and supply chain in physical screens. They already sell large monitors, and they source from Samsung, which is among the largest TV manufacturer (Samsung has in the past manufactured TVs with/for Sony, and simply branded them as Samsung or Sony). So a non-projector full ATV could simply use Samsung’s existing TVs at its core but with an Apple badge, adding in the tiny hardware components of the current ATV. This seems natural from a hardware perspective.

    But really, for ATV to make sense, it has to move the needle for Apple in terms of profits. There are a couple of ways to do this: One is to have high margins, wide adoption, and frequent consumer upgrade cycle. High margins and wide adoption seem plausible, but, as mentioned, frequent upgrade cycle does not.

    Another possibility I’ve seen suggested is to make money with ATVs via content sales and subscriptions. But this seems inconsistent with Apple’s business model, which is to break even on content (approximately) but use the content to sell hardware. More importantly, there may not be enough profit in content to move the needle for Apple (how large are the profits of the entire media industry??), and why would content providers agree to any deals that give Apple huge profits on content? Seems unlikely.

    So the only sensible scenario I can think of is that ATV will cleverly integrate iPads, iPhones, Macs, and iCloud into its functionality. E.g., controlling ATV via a well-designed iPad UI. In this view, the main purpose of the ATV would help sell other devices and lock customers into the Apple ecosystem. This could make the ATV very profitable for Apple (from a company-wide perspective, increasing sales of other devices), even if people bought ATVs only once.

    Of course, ATV would have innovative functionality, e.g., like what AT&T and others are starting to consider (http://gigaom.com/cleantech/att-launching-smart-home-pilot-in-atlanta-and-dallas/). Reporting and controlling household energy use, always-on indoor and outdoor weather display, a clock, wall art on command, thermostats, multi-user large-screen video chatting, video gaming, music, and all kinds of other cool things. An app store for ATV apps might result in very cool applications. Plus TV and movie content of course, even if the TV part occurs via traditional cable company contracts and channel bundling. This is all really exciting. But really the money would be made because people would buy and upgrade the ancillary devices (iPad, iPhone) frequently.

    I haven’t thought about any of this carefully (which maybe is obvious). Am very interested in readers? thoughts.

         
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    Posted: 07 May 2012 08:07 PM #7

    I’m not quite sure why people think apple wouldn’t make good margins on a HDTV.

    people will pay more for an apple produced set becuase:

    a) it will integrate seemlessly with their iOS devices
    b) it will integrate seemlessly with their itunes content
    c) great industrial desgin (and it has the apple logo on it)
    d) it will have exclusive apple only features (Siri? LTE radio? who knows what else).

    Even though apple is likely spend a little more than others on the build quality, there is no reason people wont pay $999 for a apple HDTV that costs $600 to manufacture, giving apple a juicy 40% margin.

    Remember, Apple will not be targeting the entire TV market of several hundred million units shipped per year, it will be targeting:

    a) the 5-10% that currently pay for premium TVs
    b) the much larger percentage of buyers who currently buy down market products, but will spend more than they used to for the Apple HDTV as its simply an appreciably better, unrivalled product.

    Apple will not be trying to attract people who by the cheapest TVs, in the same way they dotn go out of there way to attract people who currently buy $200 netbooks and dell boxes.

    [ Edited: 07 May 2012 08:09 PM by Burgess ]

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  • Posted: 08 May 2012 01:28 AM #8

    Burgess, it’s clear Apple would make nice margins with ATV. But I don’t think that’s the issue. Fifty percent margins don’t move the needle for Apple if they only sell 10 million ATVs per year (ATV could not reach anywhere near the volumes of iPhones and iPads). So basically, there’s no reason for Apple to introduce the full ATV (or at least for shareholders to care) unless Apple can make money from ATV in some indirect way. Am I missing something?

         
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    Posted: 08 May 2012 01:30 AM #9

    Sometimes, Apple just makes a good product and they give it away.  Safari for Windows.

    Why not make the Apple TV.  If it turns out to be lower margin, so be it.  It might make me pretty darn happy.  Voila, credit card.

         
  • Posted: 08 May 2012 01:36 AM #10

    Tetrachloride, as a consumer, I agree. But from Apple management or shareholders’ points of view, it’s a mistake to focus resources on unprofitable (or low profit) endeavors. This would come at the expense of other activities.

         
  • Posted: 08 May 2012 02:17 AM #11

    Burgess - 07 May 2012 10:44 PM

    interesting thread.

    Apples sells a million+ large, heavy iMacs per quarter - and I can confidently say that any 42” HDTV apple makes would be at least half the thickness of my 27” iMac - meaning a HDTV box should take up approximately the same amount of physical space (taller/wider, but half as deep).

    Burgess,
    I agree with you that the volumes of the two boxes would be similar, but it is the required aspect ratio for a 42” TV box that doesn’t lend itself to easy carrying.  I know that the MacBook boxes have a briefcase type handle and I assume that the 27” iMac may as well, but don’t know for sure.  However, this method wouldn’t work very well with the TV because it would be difficult to carry with a straight arm without dragging the box on the ground or knocking it on steps or curbs.  I suppose you could carry it under arm if it was a thin enough box (< 50mm), but that would put the panel thickness in the neighborhood of the iPad and wouldn’t account for a stand.  I guess Apple could always leave the stand out and make that an accessory.

         
  • Posted: 08 May 2012 02:20 AM #12

    Lstream - 07 May 2012 08:21 PM
    greedyn00b - 07 May 2012 03:31 PM
    Nathan Stevens - 07 May 2012 06:53 AM

    I?m not a TV connoisseur by any means…

    FYI, last time I looked into it (2 years?), the highest-quality large-screen home theatre equipment was projectors.

    Not pico projectors though.  Their image is so dim, that they are essentially a gimmick today.  Not something that would ever find its way into a credible Apple product.

    Good point.  I’ve just read some reviews of the pico projectors, but haven’t seen any first hand.

         
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    Posted: 08 May 2012 02:34 AM #13

    gliderplane - 08 May 2012 04:28 AM

    Burgess, it’s clear Apple would make nice margins with ATV. But I don’t think that’s the issue. Fifty percent margins don’t move the needle for Apple if they only sell 10 million ATVs per year (ATV could not reach anywhere near the volumes of iPhones and iPads). So basically, there’s no reason for Apple to introduce the full ATV (or at least for shareholders to care) unless Apple can make money from ATV in some indirect way. Am I missing something?

    10 million units in year one x $1250 ASP = $12.5 billion in revenue. assuming your (admittedly generous) 50% Margin, it would be 6.25 billion in gross profit, good for about $5 EPS. That would be a far larger market than the ipod currently is, and would continue to grow in future.

    I can’t think of too many other markets apple could enter and gain $10 billion+ in high margin revenue in such a quick time, which is why I think its a lock in for a release soon.

    Ancilliary revenue will be like that of other apple devices, with apple taking a cut of apps/content like it already does for little to no profit. perhaps there is a chance apple could also sell some high margin bluetooth game controllers, but it seems unlikely (then again it sells very high margin iPad smart covers, & iphone bumpers with success).

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  • Posted: 08 May 2012 03:10 AM #14

    I see Apple willing to accept 20-30% margin on the new TV coming.  It’s a great Trojan Horse into Apple’s ecosystem, especially for the luddites still futzing with 15 remotes and vertical hold on their boob tube.

         
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    Posted: 08 May 2012 03:45 AM #15

    I see Apple getting much better margins than anyone would expect, especially if they only have to deal with pedestrian 1080p panels. 

    The revenue density is an interesting angle but iMacs have gotten bigger over time so I think the overarching goal is more efficient packaging over making a product so thin as to no longer be robust, to borrow a term from Jony Ive.

    Apple will set more modest expectations if an Apple television ever gets made.  But there is no question that if it both innovates and plays well enough with key newer peripherals, it will be a resounding success.

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