Why Apple Inc. (AAPL)’s Small Device Might Be a Big Deal

Apple Inc. (NASDAQ:AAPL) has recently upgraded its little desktop box, the AppleTV. But since the changes were all internal, there was little fanfare. At $99, the 5 million units AppleTV sold last year provided just a drop in company’s $165 billion (TTM) revenue bucket. Yet I think the AppleTV plays an important part in Apple’s overall strategy — and may point to a new, upcoming product.

What is the Apple TV?

This little set-top box connects to your HDTV or home theater, and to your internet connection (via Ethernet or Wifi) to stream videos, music, and more. Content sources include:

Your iTunes music delivered to your stereo,

Your iTunes stored videos (i.e. personal or purchased),

Videos rented in iTunes,

Your photos shared from iPhoto

For additional subscription fees, you can also display content from:

Streaming video services Netflix Inc., Hulu +, YouTube, Vimeo, Flickr

Live sports from the MLB, NBA, and NHL

News videos from the Wall Street Journal

Finally, with the AirPlay feature, you can display anything at all from your iOS device or Mountain Lion OS Mac on the screen. You can surf the web, browse photos, show a presentation, or even edit word processing documents right on your TV.

AppleTVs seem to be popular, with a 4 ½ star rating on Amazon (about as high as you can get in electronics). While Tim Cook’s assessment of the device might be taken with a grain of salt, blog commenter Fkung writes:

We have two Apple TV box in our homes and we love the device. Using these devices, we can access bbc news, CCTV and many other program.

We can now see our photos, videos on the big screen HD TV at home. In fact all our friends and visitors love them when I demonstrate the capability of Apple ecosystem. many have been converted and are now proud and satisfied owners of iPhone, iPad, Mac and Apple TV!

And TimProtech adds:

Best $100 bucks we ever spent. It easily allowed me to cut the cable, saving me $100 every month! I’d say that’s a pretty good ROI.

The device competes with Microsoft (NASDAQ:MSFT)’s XBox 360 which provides smilar media functionality in addition to its game playing functions. The console has sold over 76 million units over the years. It also competes with Roku.

Why does it matter?

Only Apple Inc. (NASDAQ:AAPL) can shrug off a half-billion dollar business as a self-described “hobby,” but the AppleTV has an importance aside from its income.

Remember, Apple considers itself a service company, not a hardware maker. Its products are not the physical devices, but the user experience that these products provide. This, indeed, is what has driven people to flock to Apple’s offerings.

So the Apple TV plays this very important role in making sure that the content available via iTunes and on one’s Mac or iOS device can be reliably sent to a home entertainment system. Additionally, it does so with Apple’s uniquely simple and elegant interface.

What changed in the new model?

The folks at AnandTech have done a great techie review of the device, and they noted two changes:

1. Circuit board layout changes (including new auxiliary chips), and

2. A new version of the A5 chip.

Both changes seem to be helping to reduce costs, but No. 2 is more significant.

The A5 System-on-a-Chip (SoC) chips used in the iPad 2 and iPhone 4S include dual-core CPUs, (Essentially, they are almost like having two central processing units.) The Apple TV does not need all this power, so it ran the original A5 with one core disabled. This would help reduce fabrication production loss, since frequently, a wafer has a certain number of flaws, and these flawed processors could still be used. But once you need a quantity higher than the natural error rate, you begin using “good” dual-core processors for your restricted needs. Wasteful. Let’s face it, 5,000,000 is a pretty large number of units!

So Apple Inc. (NASDAQ:AAPL) went out and made a new version of the A5 especially for the Apple TV, designed with a single core. The chip is therefore smaller, which means you get more chips per wafer off the fab line, yielding lower costs and slightly higher margins.

But there is another significant change here. The incredible folks at AnandTech went on to explore the possibility that the chip’s power consumption had improved. Their analysis showed significant power savings in the new chip – 40%-50% in the various operating scenarios.

Source: AnandTech

Are there other implications?

Perhaps the new chip is for the Apple TV only, or perhaps it has another purpose: a new iPhone Mini.

The production of the new, single-core A5 makes financial sense just for the Apple TV. We can only look forward to more of these units being sold as more and more people join the Apple ecosystem. The savings here justify the cost of development.

However, it also makes sense that the scaled-back A5 could be used in a new, smaller iPhone. While overall performance of this phone might be compromised, that shouldn’t be a major factor for a low-end model. It would still have the capacity to stream full HD video.

With the recent news blitz surrounding Samsung (NASDAQOTH: SSNLF) and their new Galaxy S4, a lot of attention is focused on Apple. The S4 of course runs Google (NASDAQ:GOOG)’s Android operating system which is taking market share away from Apple’s iOS. Android, with its myriad of OEMs, has been able to hit a wide range of price points, particularly lower ones that Apple Inc. (NASDAQ:AAPL) has traditionally eschewed. But just as the iPods slowly expanded downwards to the Shuffle model, it may be inevitable that the iPhone does the same. Apple would not be looking for profits here, but rather to catch younger and other less affluent customers and bring them into the Apple ecosystem.

Conclusion

The changes to the Apple TV appear to be minor tweaks to lower cost. While investors certainly would applaud such a move, it hardly merits much attention.

If, however, this signals a whole new product, one that would open up a new, low-priced category, then this would be important news for Apple Inc. (NASDAQ:AAPL) as an investment. A move into that space would very likely increase the overall market share of iOS phones, something with which investors seem to be obsessed. That would have a positive effect on Apple’s flagging share price.

The article Why Apple’s Small Device Might Be a Big Deal originally appeared on Fool.com and is written by Malcolm Manness.

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