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Here’s Why Apple Would Be Wise to Stay Out of the TV Business

The economics of making a television aren't like those of smartphones and computers

Carl Icahn makes a pretty compelling case for why Apple should get into the television market. The billionaire investor says people spend a quarter of their free time watching TV, and that the market, which he says is worth about $575 billion, excluding advertising, is more valuable than smartphones.

Sounds nice on paper, but the reality is that the economics of building a TV set are very different from those of mobile phones or laptops. The key difference is that the entire product essentially hinges on one component: the display. In many TVs, the screen accounts for about 80 percent of the production cost, according to data compiled by Bloomberg. In a smartphone, it's about 20 percent, says market research firm IHS, which leaves plenty of room to differentiate with other features.

Whereas savvy smartphone shoppers look at software, memory, processing power, and other tech specs when deciding on a phone or computer, people tend to choose TVs based on picture and price. Apple doesn't make its own displays, so both factors would rely almost entirely on whatever ones it can procure from a competitor in Asia. Perhaps that, more than the lack of exciting new features, is why Apple put an end to its efforts to develop a TV set last year, according to a report in the Wall Street Journal.

To gain a foothold in TVs, you'll want a great screen, and only a few places sell them. Two South Korean tech giants, Samsung Electronics and LG Electronics, supply about 42 percent of the world's liquid crystal display panels, according to market researcher IDC. To get access to those panels, Apple would have to persuade them to let it compete with their TV businesses. Samsung and LG-brand TVs together account for about 38 percent of purchases by consumers around the world, according to researcher TrendForce.

The Koreans have gained a technical edge over Taiwanese, Chinese, and Japanese panel manufacturers. Samsung and LG have been at the forefront of new TV technology, such as curved displays, OLED organic displays, and 4K ultra-high definition. There aren't many other alternatives. China Star Optoelectronics Technology in Shenzen and other companies with similarly catchy names are rapidly climbing the ranks of suppliers by feeding a growing domestic demand for local, low-cost brands. While Sony still sells a lot of TVs, its market share has been declining for years. Sony placed its TV manufacturing business into a separate structure to boost performance after years of losses. Apple buys screens for some products from Sharp, another Japanese consumer electronics company that's not exactly in ascendance. On May 11, Sharp said it was considering reducing capital and issuing preferred shares to shore up its balance sheet.

There's probably never been the kind of opportunity in TVs that Apple exploited in other areas of consumer electronics. When it entered the phone market in 2007, Apple used a game plan that had already borne fruit in music players with the iPod. It wrapped industry-standard components in an attractive package and married it with easy-to-use software. It also helped that Nokia, Motorola, and BlackBerry were painfully slow to respond.

The TV business is already fiercely competitive, and profit margins are slim. The latest sets on the shelves at Best Buy can be easily hung like picture frames and have bezels measuring a fraction of an inch. Smart TVs, set-top boxes, and game consoles offer all kinds of innovations in voice search, motion control, and content. You can already get Netflix or Hulu on many of those—including the Apple TV box or similar devices from Google, Roku, and Amazon.com, each available for less than $100.

Despite all the odds stacked against this project, more than a few Apple watchers were surprised by the prospect of the company not making a TV set. Icahn told CNBC he was confused by the Wall Street Journal article. Besides that apparent miscalculation, we'd like to check Icahn's work on the value of the TV industry. IDC says the TV industry generated $149.5 billion in revenue last year. While still a hefty sum, that's about a quarter the size of Icahn's estimate and less than half of the smartphone market, according to IDC data.

Gene Munster, an analyst at Piper Jaffray who's been among the loudest beating the drum for Apple's TV project, is trying to come to terms with the loss. “Given how adamant we have been about the reality of an Apple television, it's hard to accept the reality of no Apple television,” wrote Munster in a note on Tuesday. Don't worry, Gene. There's a lot of other good TVs you can buy.

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