Apple subsidizing Apple TV with movie rentals revenue?

A few weeks ago, at the Macworld keynote, Apple CEO Steve Jobs introduced online movie rentals from all the major studios. At the same time, he rolled out a significant upgrade to the Apple TV, transforming it from an underwhelming side project into something consumers might actually purchase. Online movie rentals, in high definition no less, are what the Apple TV has been begging for since it was introduced. I suspect that Steve Jobs wanted to roll out movie rentals when the Apple TV was released, but couldn't get the deals done — a testament to the reluctance of the movie studios to make this deal and to the coup that Jobs has pulled off. Now though, we're wondering about the price drop on the Apple TV that was announced as the same time, from $299 to $229. Just how can Apple afford that?

Computerworld thinks that Apple is subsidizing the Apple TV with movie rental revenue. With movie rentals, like other iTunes Store content, Apple makes a set percentage — maybe 35-40 percent — as gross profit, after paying off the movie studios. The Apple TV has never been a significant profit maker for Apple. This price drop, combined with direct purchase of movie rentals and tv shows from your couch, makes the Apple TV significantly more attractive as a set-top box.

With possible revenue of each high-definition rental at $2, it is very possible that Apple is forgoing its usual high hardware margins on the Apple TV in favor of back-end profits from movie rentals — and to gain a stronger presence in the living room, where competitors Microsoft (Xbox 360) and Sony (PlayStation 3) have started to roll out their own Internet video strategies. And tellingly, Apple accounts for Apple TV revenues on a subscription basis. The accounting change allows Apple to deliver software updates for Apple TV users without charging separately for them, but it also suggests Apple might expect a steady stream of recurring revenues from each sale of an Apple TV.

In November, I wrote about Apple's "tripod" of revenue streams: the Mac, the iPod and the iPhone. Movie rentals and a resurgent Apple TV should strongly help the iPod leg — if not create a separate, fourth revenue stream altogether. With every new product introduction — the iPod, the iPhone and now with Apple TV 2.0 — it's increasingly clear why Apple, Inc. dropped "computer" from its name.