Apple TV Needs a Refresh … Now

The set-top box market is booming. In fact, Apple's (NASDAQ: AAPL  ) set-top box TV sales soared 80%, year over year, in the company's most recent quarter, according to estimates from Apple analyst Horace Dediu of Asymco. Even more, the playing field is still wide open, with only an estimated 35 million set-top boxes sold globally so far. But despite the obvious opportunity in the market, Apple has been moving at a snail's pace with its television plans. And now with Amazon (NASDAQ: AMZN  ) stepping up to the plate with an offering that is clearly better, is the e-commerce giant snapping up opportunity that was supposed to belong to Apple?

Apple TV. Image source: Apple.

Amazon's disruptive move
It's been more than two years since the last Apple TV set-top box refresh. That's about nearly twice the average time it usually takes Apple to unveil a new version of the streaming media device. And the last update was fairly minor, with the major selling point being 1080p versus the older version's 720p -- a difference I could care less about (hence my 720p Apple TV model in my living room).

But even for those who did upgrade, Amazon's new Fire TV is irrefutably a better alternative at the same $99 price the Apple TV and the Roku retail at.

Fire TV. Image source: Amazon website.

While loyal Apple costumers were sitting around and waiting for Apple's next big TV move, Amazon took upon itself the liberty to provide some of the features Apple TV users have craved for years. Beyond the typical streaming of TV shows and movies found on competing set-top boxes, Amazon's Fire TV also offers an add-on gaming controller for $39 to be coupled with games for the box, essentially promoting the Fire TV to gaming console status for casual gamers. And the biggest selling point of all? The ability to search using your voice -- I would speculate that most set-top box users today would agree such a feature would be incredibly useful.

From hobby to business
Should Apple investors lower their expectations for the company's opportunity in this new and fast-growing market?

Piper Jaffray's longtime Apple analyst Gene Munster is a bit worried.

"We still view a launch of an Apple Television in 2014 as likely," he wrote to investors Tuesday (via Fortune), "but note that each month that passes without credible feedback from the supply chain reduces our confidence."

Apple TV's AirPlay feature. Image source: Apple.

But given the consistently high loyalty of Apple's customer base and the stickiness of its ecosystem, Apple could save itself from the threat of Amazon stealing its incremental opportunity simply by bringing its new version of the Apple TV to market quickly.

Persistent rumors have suggested that Apple will, indeed, be bringing the much-improved set-top box to market this year. Some speculation even suggests we'll see the device as early as April. Apple CEO Tim Cook fanned these rumors into flames earlier this year when he said at the company's annual shareholder meeting that he no longer considers Apple TV a hobby.

But if Apple doesn't move soon, investors might want to begin to discount their expectations for Apple's opportunity in the living room. Fortunately, Apple TV is a small business for the company, so it wouldn't alter the thesis for Apple stock much. But this shouldn't prevent investors from taking the Fire TV and Apple's failure to refresh its set-top box seriously, because the opportunity down the road is far bigger than the existing size of the market today.

This opportunity could put the set-top box market to shame
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  • Report this Comment On April 05, 2014, at 2:47 PM, Chiam wrote:

    Dan, Can I answer your questions? I have the answer. Really I do!

    1. During the April 2013 eanrings call someone asked the following: "You talked about new product categories in your introductory remarks. You said this in April as well, saying consumers and investors should expect new products and categories in second half of 2013 and first half of 2014. Should we still have that expectation? New product categories, there have not been any yet? Want to make sure we’re on the same page."

    Cook answered: "Didn’t say you would see them in 2013 and 2014, but you will see exciting new products from us in the fall and across 2014. I stand by that and you’ve seen a lot of things over the last couple of months. In terms of new product categories specifically, if you look at the skills that Apple has from hardware/software and services, and the incredible app ecosystem, this set of things is very unique. No one has a set of skills like this. We obviously believe that we can use our skills at building other great products that are in categories that represent areas that we do not participate today. We’re pretty confident about that.”

    2. Well he said across 2014. But it looks like he should have said, "The same old upgrades during the last 4 months of 2014."

    3. Cook told shareholders that if they didn't like what he was doing they should sell their stock. Cook is far from interested in making the stock go up. He once said he wouldn't cut his wrists if the stock price fell.

    In conclusion I can say that Cook is taking his sweet time to come out with anything. While the products are good, there is much not to like in the company so his claims that we only want to make great products is false. ITunes store is terrible and their map app came out faulty and is still not up to the level of Google maps.

    I believe their will be no sapphire glass on the 4.7 inch phone (if we do get one) but maybe on the more expensive 5.5 inch phone which he will charge more for. I don't see a watch or upgraded TV device this year. Apple is still doing things to improve it and they are as usual far behind.

    Even when he comes out with the 4.7 inch phone which might sell well, it will be supply constrained as usual causing sales to suffer at the time they do their biggest volume.

    When they do come out with the upgraded TV device it won't have any games support. It could add a few new websites to it. Again it will be a mild upgrade. Eventually he will upgrade it and come out with a watch but he needs 2 or 3 more years to work out the details. The larger phone if it exists will be next year at the earliest.

    Cook knows the bigger phone will give him a little breathing room. Though he could still come out with the same size phone as the 5s. That would tank the stock but it would be a great way to buy back the shares cheaper.

    Gene Munster just gets it wrong at every turn so if he says it is coming out, then just believe the opposite. Also you can't believe Cook anymore either. BMO and others expect earnings to be a disaster this past qtr and June too. Miss after miss. The only thing that picked up EPS was more buy backs. Again that will help. If you back that out you see terrible yoy sales, margins and profit.

    Expect a small bump in buy backs and dividend payouts and together they will help put a floor of 430 under the stock. Expect Apple to fall as the p/e drops and Cook is then given a life contract to work at Apple.

  • Report this Comment On April 05, 2014, at 2:49 PM, TMFAeassa wrote:

    Completely agree. Thanks for the article, Daniel!

  • Report this Comment On April 05, 2014, at 4:31 PM, marv08 wrote:

    Don't really agree with your "opinion stated as fact" that the Amazon device is clearly a better alternative.

    There is no Airplay alternative, the single most used feature on our Apple TVs. There is no great integration with personal photos and videos created on other devices, and it lacks the convenience of Apple's ecosystem, which allows me to access any track, TV show or movie I have ever bought, no matter where in the world I take my device (countries with censored internet excluded). I had a three months business assignment in India last year, and all I had to pack was my Apple TV to carry all my media with me - just connect a TV and a decent stereo or 5.1 system and everything is just there and just works.

    What does Amazon have instead? A game controller (for a device that has not even enough memory to store most advanced mobile games) and voice search? I really do not care for either one (Apple TV does need some universal, like Spotlight on Macs and iOS, search feature though).

    I am convinced that Apple will introduce the next Apple TV operating system and SDKs at WWDC in early June. And it will include a new mean to interact with the Apple TV (the current supplied remote control is abysmal, you really need an iOS device to use the Apple TV properly). The hardware refresh will come once developers had a few months to make content for the device. Apple never ships something you can't use from day one.

  • Report this Comment On April 06, 2014, at 5:28 AM, fauxscot wrote:

    I'm with Marv08... opinion stated as fact.

    Word is, a lot of the stuff Amazon said they were providing, they didn't.

    Apple has a platform. It's selling and making a profit. They 'need' nothing, but if they DO something, especially something that actually DELIVERS, now or soon would certainly be better.

    But 'need'? Nope. MS needs something. Nokia needs something. Blackberry needs anything. A missing need will cost you your life. Apple is far from dead. The choice is between a large success and a larger success, and they seem to know what they're doing. They need very little from the financial blogosphere.

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