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

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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.

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