Pachter: Apple 2013 Console

[Barbarian]

... It is no secret that television in the broader sense is an interesting market for Apple, but a "gaming console" in the traditional sense would seem a pointless endeavor for them - those devices simply have far too small a market penetration to be a viable line of attack if you want to address television viewing a whole.

Excellent post. I agree 100%.
I don't think Apple will make a "traditional" gaming console. It's just not their style.
Just like when they entered the phone market, they made something that was so much more than the "traditional" cell phone.
I expect the rumored iTV to do just that to TVs, STBs, DVRs and gaming consoles.

 

[Silent_Buddha]

Dude your logic is all over the place, you said Apple doesn't compete in the lower end smartphone range...I proved you wrong -> iPhone 3GS. Heck even the iPhone 4 is $99 with contract. Any person with a brain can deduce that they have the lowend iPhone 3GS $0, midrange iPhone 4 $99 and highend iPhone 4S $199 covered. The competiton does exactly the same thing.

If you believe that Apple receives only 99 USD for each sale of an iPhone 4, you are highly delusional and there's no debating with you.

Regards,
SB

 

[RudeCurve]

If you believe that Apple receives only 99 USD for each sale of an iPhone 4, you are highly delusional and there's no debating with you.

Regards,
SB

Any moron knows they make similar profits to what other smartphone brands make, that's the whole point which you refuse to accept because you're too hung up on the adage that "Apple products will always have huge profit margins over similar products from competitors"...

 

[AlphaWolf]

You might want to look at their statements and compare them to the other phone suppliers. Apple most definitely commands a premium. It's not obvious to the consumer because it's on the deal negotiated with the carriers.

 

[Silent_Buddha]

Any moron knows they make similar profits to what other smartphone brands make, that's the whole point which you refuse to accept because you're too hung up on the adage that "Apple products will always have huge profit margins over similar products from competitors"...

Really I'm not sure what's hard to understand. Do you actually believe that Apple is willing to live with potentially 0-5% gross margins on their hardware?

Unlike Microsoft they aren't predominantly a software company. Apple makes the vast majority of their revenue off of hardware sales. If hardware isn't profitable they don't make money.

All you have to do is a simple lookup of each companies financial reports.

For FY2011 (year ending 10/26/11) software revenue represented ~2.7% of Apple's revenue. Hardware profits and hence hardware margins make or break the company. Apple cannot afford to have low margins on hardware.

Now pull up just about any MS financial report and you'll see that software sales and services dominate their revenue.

Now look closer at the EDD division which is where almost all the hardware that Microsoft makes is located. Further make note of how small the profits are for that division in comparison to the revenue generated by that division.

Now keep in mind that you have extremely high margin software and services (MS tends to average around 70-75% margins for software although it may be lower than that in EDD, but I doubt it) in EDD helping to bolster the average margin for that division. How large could the margins possibly be for their console hardware?

Compare that to the revenue versus profit generated by Apple. And realize that high software margins cannot bolster low hardware margins. So, if Apple were to theoretically sell something for 10% margins it would by necessity have to have something to make up for that. Meaning elsewhere products would have to be significantly higher than 40% margins and in enough quantities to bring the average back to ~40% (though generally a few points higher).

This isn't about relying on myth or heresay or urban rumors. This is a fact of doing business. Your emotions don't change those facts.

Just for shits and giggles compare Apples financial filing to someone like Dell. 3.4 billion USD GAAP operating income on 61.5 billion USD revenue for Dell. I'll leave it up to you to look up Apple's numbers. Hint: the ratio is orders of magnitude higher. BTW - when looking up recently Apple filings be aware that Apple has recently started deferring reporting of some of the income earned by each product, meaning that a portion of income earned won't be reported until a later later SEC filing of indeterminate time frame.

The X360/PS3 divisions would have a similar or worse ratio to that if it weren't for the licensing and software sales. And even with those licensing and software sales, they don't come even remotely close to how much operating income Apple generates from its revenue stream.

So again, how is Apple going to enter the console market and maintain Apple levels of margins.

BTW - for shits and giggles look up how much an iPhone 4 costs without a 2 year phone service contract. Hint - nowhere near 99 USD.

Regards,
SB

 

[doob]

How about the console design? Is it going to be sleek and have round corners with lawsuits attached?

 

[RudeCurve]

Really I'm not sure what's hard to understand. Do you actually believe that Apple is willing to live with potentially 0-5% gross margins on their hardware?

Unlike Microsoft they aren't predominantly a software company. Apple makes the vast majority of their revenue off of hardware sales. If hardware isn't profitable they don't make money.

All you have to do is a simple lookup of each companies financial reports.

For FY2011 (year ending 10/26/11) software revenue represented ~2.7% of Apple's revenue. Hardware profits and hence hardware margins make or break the company. Apple cannot afford to have low margins on hardware.

Now pull up just about any MS financial report and you'll see that software sales and services dominate their revenue.

Now look closer at the EDD division which is where almost all the hardware that Microsoft makes is located. Further make note of how small the profits are for that division in comparison to the revenue generated by that division.

Now keep in mind that you have extremely high margin software and services (MS tends to average around 70-75% margins for software although it may be lower than that in EDD, but I doubt it) in EDD helping to bolster the average margin for that division. How large could the margins possibly be for their console hardware?

Compare that to the revenue versus profit generated by Apple. And realize that high software margins cannot bolster low hardware margins. So, if Apple were to theoretically sell something for 10% margins it would by necessity have to have something to make up for that. Meaning elsewhere products would have to be significantly higher than 40% margins and in enough quantities to bring the average back to ~40% (though generally a few points higher).

This isn't about relying on myth or heresay or urban rumors. This is a fact of doing business. Your emotions don't change those facts.

Just for shits and giggles compare Apples financial filing to someone like Dell. 3.4 billion USD GAAP operating income on 61.5 billion USD revenue for Dell. I'll leave it up to you to look up Apple's numbers. Hint: the ratio is orders of magnitude higher. BTW - when looking up recently Apple filings be aware that Apple has recently started deferring reporting of some of the income earned by each product, meaning that a portion of income earned won't be reported until a later later SEC filing of indeterminate time frame.

The X360/PS3 divisions would have a similar or worse ratio to that if it weren't for the licensing and software sales. And even with those licensing and software sales, they don't come even remotely close to how much operating income Apple generates from its revenue stream.

So again, how is Apple going to enter the console market and maintain Apple levels of margins.

Regards,
SB

MS doesn't even make hardware other than the Xbox and mice, keyboards, webcams....so the comparison is flawed. Of course MS makes most of their profits from software...duh. MS doesn't even make Windows phones. Apple on the other hand makes and sells LOTS of hardware, heck even if they didn't overprice some of their products their sheer hardware numbers sold would still dominate their profit numbers. Simple analogy...sell one piece of hardware for $400 which costs $200 to make = $200 profit or sell 5 pieces at $250 and make $250 profit. Either way it'll still show up as profit from hardware not software...duh.

BTW - for shits and giggles look up how much an iPhone 4 costs without a 2 year phone service contract. Hint - nowhere near 99 USD.

How much does a Motorola Atrix 2 cost without contract? Nowhere near $99...more like $450....use your brain man. You go ahead and keep banging on that "Apple levels of margin" propaganda drum hoping it eventually becomes fact...

 

[AlphaWolf]

How much does a Motorola Atrix 2 cost without contract? Nowhere near $99...more like $450....use your brain man. You go ahead and keep banging on that "Apple levels of margin" propaganda drum hoping it eventually becomes fact...

unlocked iphone 4s' retail for $649 for the 16GB, $749 for the 32GB and $849 for the 64GB.

And I've seen the atrix for $325 unlocked.

 

[TheChefO]

Excellent post. I agree 100%.
I don't think Apple will make a "traditional" gaming console. It's just not their style.
Just like when they entered the phone market, they made something that was so much more than the "traditional" cell phone.
I expect the rumored iTV to do just that to TVs, STBs, DVRs and gaming consoles.

The idea of a pure game console has been dead since ps2 (Movies).

Especially true of the multimedia boxes ps3 and xb360.

But the CORE experience which will compel consumers to spend real money (>$100) to have a device connected to their TV is pretty much limited to gaming.

Nothing else has shown any real marketshare for connecting the livingroom.

Not Appletv
Not GoogleTV
Not whatever Sony is doing with TV google hybrid
Not Mediacenter PCs
Not Gateway PCs
Not Mac Minis
Not Phillips CDi

So ...

If Apple has their sights set on the livingroom they need a games console to have a chance to gain marketshare beyond the paltry AppleTV endeavors.

If Apple intends to compete in the console market, they need to understand the rules to have a chance at success.

It will require a different business model than other industries, but so did the iphone. They weren't use to selling computers or ipods directly to a middleman (AT&T) to produce sales. They also weren't use to the concept of years later, selling a "value brand" iphone to help combat android which would require lower margins ... but they did.

It's all a matter of priority for Apple.

If their intent is to become a distribution powerhouse for multiple forms of media, then the hardware may be used as a sacrifice to get there. Similar to the losses Sony endured with PS3 to get BR established.

This isn't to say they should/could plan to have negative/neutral hardware margins forever on hardware, but that the importance of this may become a lower priority to getting markethare for the purpose of greater exposure to their media offerings which may be a more important goal than hefty hardware margins for a new gadget.


I think they realize the gadget wars have a limited time before buyers start to cool off and the difference between this years model and last years becomes a moot point and as a result, hardware sales will inevitably slow.

However, media distribution is there year round.

THAT is the goal.

How to get there? They have a good selection of media consumption devices, but the biggest of all is still untapped in their current endeavors... The TV.

 

[TheChefO]

...This is a fact of doing business....

Indeed.

Another fact of doing business (especially lately): Investors/stock holders will continue to press for maintaining or increasing levels of growth.

Of course, this is unsustainable as the end result of this is the entire world being served by one company providing every service and product needed/wanted by every human across the globe.

Nonetheless, it is expected.

So where does Apple get their next logical marketshare gain from?


They can go at it foolishly and expect the market to bend to their ways, or they can understand the market and attempt to persuade the market within the constructs of the rules of success in the sector.

 

[wco81]

iPad isn't connected with the TV but it's used a lot in conjunction with a TV. There was some survey, showing a high percentage of tablet users were using with the TV on. (also, spikes in usage in the evenings and early in the morning, suggesting people check it when they wake up).

iPad with AirPlay and the HDMI dongle does support connecting to TV. However, obviously an always-connected device is an opportunity. As more and more content is targeted towards tablets in general and iPad in particular, maybe more people will look at using AirPlay or viewing this iPad-targeted content on their big screen.

 

[TheChefO]

iPad isn't connected with the TV but it's used a lot in conjunction with a TV. There was some survey, showing a high percentage of tablet users were using with the TV on. (also, spikes in usage in the evenings and early in the morning, suggesting people check it when they wake up).

iPad with AirPlay and the HDMI dongle does support connecting to TV. However, obviously an always-connected device is an opportunity. As more and more content is targeted towards tablets in general and iPad in particular, maybe more people will look at using AirPlay or viewing this iPad-targeted content on their big screen.

I've honestly never used or seen an Ipad in conjunction with a TV via Airplay.
How does 1080p streaming video look?

 

[Entropy]

So where does Apple get their next logical marketshare gain from?

Not from console buyers. There's just too few of them.

They can go at it foolishly and expect the market to bend to their ways, or they can understand the market and attempt to persuade the market within the constructs of the rules of success in the sector.

Lets go through the numbers again. Last year just under 2 billion cell phones were sold, or fifty times the number of stationary consoles. If Apple targeted the console market, and somehow managed to capture half of it, it still wouldn't be more than a single percent of the market where they are already competing successfully, and would barely affect their ability to distribute content.
The gaming console market is pointless for Apple to pursue. If they introduce a product, it will cast a much wider net. It might still affect the console market of course.

 

[wco81]

I've honestly never used or seen an Ipad in conjunction with a TV via Airplay.
How does 1080p streaming video look?

I don't own an AppleTV or an iPad (yet).

iPad1 wasn't the best with 1080p video. Presumably iPad2 is better.

Not sure how well 802.11n handles it either.

When their TV product comes out, presumably it will integrate with iOS devices via AirPlay and other means.

 

[TheChefO]

Not from console buyers. There's just too few of them.

Over 200million of them ... so far.

That's more than ipad.

That's more than iphone.

FYI

Lets go through the numbers again. Last year just under 2 billion cell phones were sold, or fifty times the number of stationary consoles. If Apple targeted the console market, and somehow managed to capture half of it, it still wouldn't be more than a single percent of the market where they are already competing successfully, and would barely affect their ability to distribute content.
The gaming console market is pointless for Apple to pursue. If they introduce a product, it will cast a much wider net. It might still affect the console market of course.

Again, the "TV market" is not tapped ... at all right now in their current offerings.

I'm assuming they are looking to expand beyond the markets they are currently in ...

And as has been said countless times in this thread, they will for all intents and purposes, be producing a console+ experience... just like MS and Sony have been doing for the past 5+ years ...

 

[wco81]

I think there may be more than 200 million iPhones. At least 200 million iPhones, iPod Touches and iPads.

They're selling over 20 million iPhones and about 15 million iPads a quarter.

Consoles don't come close to these numbers.

 

[TheChefO]

I think there may be more than 200 million iPhones. At least 200 million iPhones, iPod Touches and iPads.

They're selling over 20 million iPhones and about 15 million iPads a quarter.

Consoles don't come close to these numbers.

There are more combined ios devices, yes, but how many of those singular device (iphone/ipad/ipod) are repurchased/upgrade purchases? (Plus if we're talking generational sales, I'd say consoles through the generations have sold more than IOS devices too (though not at the clip that IOS devices are now! )

The same upgrade/repurchase biz model could be applied to the console industry, but again, this is hardware centric thinking.

 

[Shifty Geezer]

If I were Apple or Samsung and I wanted to own the living room, I'd add HDMI out to my mobile & tablet range, a fancy remote, and sufficient apps (which exist already). That'll provide all media functions using the company's prefered media outlet. A Galaxy or iPhone would knock spots of PS3 as a browser, meaning better YouTube and TV services, and a music service that matches what people prefer on their portable music playing devices. A handheld I can put movies on, watch movies on, then take round a friend's house and watch there, then browse the web, then listen to music on the way home, then plug into the home audio system - that's easily the best experience for media consumption. I've been considering getting a cheap tablet just to have a conventient browser as PS3 is crap and PC isn't on hand in the living room. Add some blue-tooth controller support for simple games and you're laughing.

I don't think the console gaming market is worth chasing. It's sunk plenty of companies, and made huge holes in plenty of other company's balances. Even Sony's two-generation landslide victory has resulted in little profitabililty over the past 15 years. It was important for Sony and MS to establish media services, which neither has done great other than getting some tens of millions of network users. As Netflix and iTunes and now Music and Video Unlimited are available on other devices, the console isn't necessary for anything other than gaming. Why spend billions securing AAA titles and competing against the big names when the they'd be lucky if the returns if they were successful covered the cost of entry?

 

[Scott_Arm]

Would entering this market really be as huge an expenditure as it was for Sony, MS? Apple already has the content distribution and a lot of the software (iOS + Apps) and services (GameCenter, iTunes, AppStore etc) ready. They aren't jumping in from scratch. There's the cost of new hardware. I'm with Shifty in believing this won't happen, but I don't think Apple has the same hurdles as MS and Sony had at the start of last gen. MS and Sony had to invent huge online networks for content distribution that Apple already has in place, for the most part.

The only reason I can see them jumping in, would be if they see Live and PSN capturing part of their content business. What impact is 100+ million games consoles between MS and Sony having on Apple's iTunes business? Maybe they'd figure they could turn that market into a 3 way split next-gen, and take back a quarter to a third of those content sales. I have no idea how much money that would be worth vs how much it would cost them to get in there. Maybe the success of Live and PSN are not significant relative to the sales of iTunes movies, music.

 

[wco81]

iTunes movies isn't a big business but apps and music are.

Remember seeing some survey about the biggest Netflix clients. PS3 and 360 were way ahead of AppleTV but not sure about iPad.

But this may have been before Netflix shot itself on the foot.