Apple is abandoning its usually high profit margins with the Apple TV, according to an analysis by iSuppli. 

The analyst firm calculated that the device costs $237 to manufacture. The $299 retail price gives the Apple TV a 20.7 per cent gross profit margin, which does not account for cables and marketing costs.

Apple's iPod media players, by comparison, typically offer a 40 to 50 per cent profit margin.

Apple started shipping the Apple TV in March after a three-week delay. The device allows users to view photos, watch home movies and videos purchased from the iTunes music store on their TV and listen to music.  

Andrew Rassweiler, a senior analyst at iSuppli, said that Apple is not looking for Apple TV to boost its bottom line, but is attempting to build market share for Apple TV and the iTunes media store.

"This suggests that Apple is taking a market-penetration strategy, rather than the simple profit-per-unit approach it has always used in the past," said Rassweiler.

Apple TV is a fully functioning computer with an Intel processor, 512Mb memory and a 40GB hard drive.

ISuppli's analysis showed that the designers had to cut corners to control its price. Most notably, it features a customised 1GHz Intel Pentium M processor manufactured on a trailing-edge 90nm process. The chip costs an estimated $40.

Because the Apple TV is grossly underpowered to function as a computer, iSuppli instead refers to the device as a set-top box that acts as a media hub which could evolve into set-top box for internet television.

This assertion would be further supported by last week's announcement that Apple TV users will be able to watch YouTube videos.  

Secondly, its $15 Nvidia GeForce Go 7300 video card with 256Mb of memory fuels speculation because it allows the device to broadcast high-definition video. Apple's iTunes store does not currently sell HD video content.

ISuppli predicted that Apple will sell one million Apple TVs this year, and 1.4 million next year. But the company warned that Apple faces several hurdles outside its control.

Consumers require a home network, broadband internet connection and HD television to make optimal use of the Apple TV.

Consumers could also get confused about its functionalities because they overlap with those of digital video recorders, satellite set-top boxes and DVD players. The Apple TV does not replace any of these devices.