Most investors aren't even valuing the TV opportunity that Apple (AAPL 0.64%) is facing. With the Mac maker's currently depressed valuation, investors are effectively free-riding on the incremental gains the company could see in the TV market that's ripe for disruption.

How many TVs could Apple sell?

A lot
According to a recent research note from Morgan Stanley's Katy Huberty, Apple could potentially sell upwards of 13 million units. That's based on a recent survey gauging consumer interest of over 1,500 households in the U.S. Of these respondents, 18% owned a smart TV, but somehow only 13% of them knew it could connect to the Web.

That discrepancy hints that there's a lack of usability in existing offerings if consumers don't even realize that the TV they just bought is more capable than they know. That's where Apple could come in with its penchant for user friendliness. Huberty's results showed that 11% of people are "extremely interested" in buying an Apple TV set, which implies 13 million units domestically.

A larger 36% chunk said they're "somewhat interested." Combined, that's 47% of respondents that are either "extremely" or "somewhat" interested. That's pretty bullish in the context of the 23% response that the iPhone garnered before its official launch and the corresponding 21% figure for the iPad.

On the pricing side, the study showed that almost half (46%) of consumers would pay over $1,000 for the rumored device, which is higher than what the average TV costs nowadays. Huberty estimates that most people would pay approximately $1,060, but a small portion (10%) would go as high as $2,000.

In the end, Huberty figures that an "iTV" could be an incremental $13 billion opportunity for Apple that could boost its bottom line by $4.50 per share.

Wouldn't a hobby anymore
At $13 billion, the iTV business would still be smaller than the Mac business, which generated $23.2 billion sales last year. However, it would be much more meaningful than the current "hobby" Apple TV that sold 5 million units last fiscal year. Since the Apple TV only comes in one $99 model, its average selling price is probably close to that price point, so the device probably generated close to $500 million in revenue last year.

Tim Cook further stoked speculation of Apple's entry into the TV market last week when he sat down for a pair of interviews. He told NBC's Brian Williams, "When I go into my living room and turn on the TV, I feel like I have gone backwards in time by 20 to 30 years. It's an area of intense interest. I can't say more than that."

Decisions, decisions
Steve Jobs always said the biggest problem in the TV market was the "go-to-market strategy," since the market is inherently structured as a subsidized market. Huberty figures there are three ways to address this challenge:

  • Become a cable service provider.
  • Partner with TV carriers and provide the set-top box.
  • Bundle a TV with the current set-top box.

The first option is clearly ludicrous, although slightly less so than the notion of Apple becoming a wireless carrier primarily using Wi-Fi spectrum that Jobs had reportedly considered. The infrastructure build out and low margins make that a particularly unattractive business to pursue, particularly in order to pursue another lower-margin business (TVs).

Partnering with an existing provider is possible, much like Apple's early exclusive iPhone partnership with AT&T (T 1.17%) that benefited Ma Bell for several years in the form of envious subscriber growth and increased revenue per user. The challenge here is that there are far more cable operators than there are wireless carriers. That issue compounds when you move internationally, as every country has different standards and regulatory procedures.

The last option is feasible, but somewhat redundant; building a TV to hook up to its existing set-top box doesn't solve any of the industry's problems.

None of these choices are optimal, but the second is the most realistic to get Apple's foot in the door. Besides, Time Warner (TWX) CEO Jeff Bewkes is already looking forward to an Apple TV set and Time Warner Cable (NYSE: TWC) has already hinted at working with Apple when it talked about "giving up control of the interface." That's a content creator and cable operator seemingly on board with Apple.

Another halo
An Apple TV would never be as much of a growth driver to Apple's business as the iPhone or iPad. Instead, it would be an incremental opportunity worth tapping that would further reinforce its moat and ecosystem while expanding Apple's presence in the household. The company has long talked about halo effects from selling complementary products, and the Apple TV would be no different.