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The Opportunity Apple Can't Pass Up

By Eric Bleeker - Updated Apr 6, 2017 at 11:53AM

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Rumors of an Apple TV refresh take center stage ahead of annual iPod event.

Apple (Nasdaq: AAPL) kicked off a frenzy of speculation last week when it announced Wednesday as the date for its annual iPod unveiling event. What was especially interesting about the invitation was that it featured a guitar with an Apple logo, which doesn't exactly jibe with reports that a refreshed Apple TV would be the star of the show. So, with fewer than 48 hours to go, what should investors be looking forward to from Apple this Wednesday?

First things first -- the iPod
It's a virtual certainty that we'll be seeing a refreshed line of iPods. One of the more interesting rumors floating around is the unveiling of a new iPod Nano that loses the click-wheel in favor of a compact touchscreen-only design. The rumor has picked up momentum as cases that could only accommodate a smaller touchscreen design surfaced late last week.

If true, the design would be a significant departure from previous Nanos and drive the media player's size small enough to differentiate it from larger iPhones and Touches. That's important; as the iPhone user base and smartphones in general grow, it pushes Apple to become more innovative with its design. Apple must find a way for consumers to want both a media player and a media-savvy smartphone. Shrinking the device's design to the most ultraportable levels is a good step in that direction.

Still, excitement over iPod refreshes should be tempered by the fact iPods aren't the driving force they once were for Apple. Last quarter, the company reported $1.5 billion in sales for the segment, about 30% lower than the just released iPad. In addition, unit sales were down 8% year-over-year while the iPhone line increased 61% and Mac computer units were up 33% over last year.

The iPod's still an important contributor to the bottom line; it just doesn't have the outsized impact it did in years past.

Introducing the iTV?
What's more interesting to me is the new video rental deal Apple might announce, and the possible refresh of Apple TV as the iTV. Apple has long offered its Apple TV product, but it's never been able to move beyond "hobby" status for the company since its capabilities stopped short of a full set-top box experience.

However, reports of the new iTV should excite. The product is rumored to cost only $99 and come loaded with Apple's iOS, which would enable better integration with other Apple products and use of apps on television screens. Coupled with reports of a deal where iTunes users could stream television shows for $0.99, a cheap TV offering seems like a natural extension of Apple's ecosystem of products and media software.

Just don't expect iPad-like levels of excitement around a refreshed iTV. It's still additive to consumer's set-top box and not capable of powering the full media experience most TV watchers require. The device reportedly comes with a meager 16 gb of storage, and lacks a DVR. Also, at a $99 price tag, once you factor in component costs (processor, memory, etc.), the iTV shouldn't be a high-margin machine.

However, what it does do is push Apple's iTunes media and app platform further into the living room. The battle for home entertainment is heating up. Microsoft (Nasdaq: MSFT) is using the Xbox as a media capability beachhead with its Xbox Live service, and is connecting the service as part of its new Windows Phone 7 offering. Likewise, Google (Nasdaq: GOOG) made waves announcing its Google TV service.

The reason for this push into the home is simple: It's the next frontier of Internet advertising. Traditional television has kept the same model of commercial advertising across its history, and is ripe for disruption. Not only that, but it's a massive and lucrative market.

In the end, current generations of iTV should be about extending Apple's mobile operating system and iTunes media management into the home, while future generations should unleash Apple's iAD creative agency to find the real profit opportunities through advertising.

Bottom line
About the only known part of Apple's Wednesday announcement will be refreshed iPods. But I think Apple could be mistaken if it pushes Apple TV to the tail end of its video strategy and doesn't announce any Apple TV news at its press conference.

While there are tremendous challenges to disrupting the telecom industry's status quo, Apple has gone down this road before. Last decade, the company managed to create significant concessions from the music industry that no one could have imagined in 2001. Also, Apple managed to work with AT&T (NYSE: T) in the mobile industry largely on its own terms. Given the right product, it could move into home entertainment without making significant sacrifices to large telecoms.

Eventually, some high-tech giant will unlock the nascent value of the television market. Even if sales are middling in the interim, Apple should keep the pedal to the metal on innovating within the space.

Eric Bleeker owns shares of no companies listed above. Google and Microsoft are Motley Fool Inside Value choices. Google is a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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