By Slash Lane

Published: 06:55 PM EST

With a suggested retail price of $300, you'd expect iPod maker Apple Inc. to pocket some hefty change from the sale of each new Apple TV set-top media box.

Not so, according to a recent product tear-down by market research firm iSuppli, which notes that the Cupertino-based company is moving the streaming media devices at just above break-even once miscellaneous charges are thrown into the mix.

After tearing-down an Apple TV and itemizing the cost of each internal component, iSuppli arrived at an approximate BOM -- or Bill of Materials -- of $237. That amounts to a meager 20.7 percent gross margin, the firm said, well below the 40 to 50 percent margins Apple has been generating through sales of its iPod digital music players. The BOM estimate also does not account for other costs, including cables, packaging and marketing expenses, meaning that Apple’s actual margin is likely somewhat smaller.

"This suggests that Apple is taking a market-penetration strategy for the Apple TV, rather than the simple profit-per-unit approach it has always used in the past,” said Andrew Rassweiler, teardown services manager and senior analyst for the firm. "The Apple TV itself is a very low-cost design, primarily due to its use of a trailing-edge microprocessor."

With Apple TV not expected to generate much profit, Apple's goal for the product appears to be one of infiltrating the living room with its highly-successful iTunes digital media service. It's a high risk gamble, says iSuppli, noting that previous attempts by companies to deliver Internet content to the television have failed miserably.

To his credit, however, Apple chief executive Steve Jobs recently categorized Apple TV as a company "hobby" rather than a business like the Mac, iPod, and soon, iPhone.

So if Apple isn't seeing high returns from Apple TV, who is? It could be the Mac maker's primary silicon provider. With the microprocessor and associated core logic, Intel accounts for the largest single bundle of dollar value of any component supplier in the Apple TV, according to the tear-down. The combined estimated value of the Intel microprocessor and the northbridge and southbridge core logic chips is about $68.

In terms of semiconductor components, other major cost drivers include the Nvidia GeForce Go 7300 Graphics Processing Unit (GPU), which has an estimated value of $15, the unit's 40GB Fujitsu 2.5-inch hard disk drive ($37), a Broadcom Mini PCI-E WLAN Board ($19), and 36W power supply from Delta ($7.25).





Despite some limitations and an initially undefined product identity, iSuppli believes that Apple's successful track record with the iPod and iTunes makes it likely that the company will be able to sell a significant number of Apple TVs this year and next.

The biggest challenge may be lining up compelling content, according to the firm.

"Apple has good access to content, but there will be lots of complications," said Mark Kirstein, vice president, multimedia content and services for iSuppli. "Already Starz Entertainment has sued Disney, because it has exclusive television distribution rights for certain Disney properties. This wasn't an issue when Disney licensed to iTunes for personal media players, but becomes one for TV-based distribution."

Still, the firm believes Apple TV shipments will reach about 1 million units during 2007, and 1.4 million units in 2008.

"There’s a slew of these Digital Media Adapter devices on the market today that offer similar capabilities to the Apple TV," said Kirstein. "Yet, nobody has found the secret sauce to get more than a few hundred thousand units shipped. However, if any company can find the right formula for success, it's Apple."

For those interested, we've published an exploded view and some additional shots of the Apple TV's primary logic board on the next page.