Talk about Apple's (NASDAQ:AAPL) mythical TV set has somewhat subsided in recent months as investors have turned their attention to possible iPhone deceleration and new rumors about a potential iWatch in the works. Let's talk TV.
Jefferies analyst Peter Misek now believes that Apple is preparing to host a TV-centric event in March. That's just around the corner!
Hold your horses
Before you get too excited, Misek doesn't believe this event will be the long-awaited unveiling of the new product. Instead, the analyst thinks that Apple will focus on getting developers on board to a TV platform by release a software development kit, or SDK, geared for Apple TV. Apps on TVs are the inevitable progression of the platform wars, and Apple has surprisingly not opened up its current Apple TV platform to third-party developers.
Meanwhile, Google (NASDAQ:GOOGL) already has a relatively larger catalog of apps that are optimized for its Google TV platform. The search giant currently offers three different devices through hardware partners in order to boost the platform. Even Intel (NASDAQ:INTC) has now officially confirmed that it is working on an Internet TV service, complete with apps. The chip giant was rumored to unveil a TV service at CES in January, but supposedly ran into some last-minute delays.
Ramping up content to bolster the platform ahead of an official product launch is the best way for Apple to balance its penchant for secrecy with its broader strategy. Not only will the company need to work through difficult negotiations with traditional content providers, but growing its TV app catalog will also be critical, especially in categories like games, since iOS has become a robust gaming platform.
Thus far, Apple has only partnered with a select number of third parties to bring video services to the platform, such as Netflix, Hulu, and The Wall Street Journal, among a few others. Amazon.com is still nowhere to be found with its Instant Video service, even as the e-tailer offers several of its content services on other Apple platforms, mobile competition aside.
Apple can also maintain the facade that the SDK is intended for its current set-top box device, which is due for an incremental upgrade. The last one was introduced in March 2012 with an A5 processor, and a new model recently made its way through the FCC's regulatory hurdles carrying a beefier A5X chip and newer Broadcom BCM4334 combo chip (the same one found in the iPhone 5).
Releasing an Apple TV SDK now will give the company a head start on growing its app catalog and it can maintain reasonable doubt that it has nothing else up its sleeve. But investors know better.
iTV could become bigger than Apple circa 2010
Misek's checks point to a full-blown iTV launch later this year, likely in the September to October time frame. The rumored device may be priced in the neighborhood of $1,500 and have a 42-inch to 55-inch screen. The iTV will likely carry lower gross margin compared to Apple's corporate average, but that's inevitable considering the economics of the TV business, which has always been plagued by long upgrade cycles, low margins, and increased inventory risk.
That's pretty close to Morgan Stanley analyst Katy Huberty's predictions; she thinks the iTV will fetch an average selling price of $1,300. Eventually, Huberty is modeling for the TV business to generate $68 billion in revenue annually and generate earnings per share of $18. For context, that would be more revenue and profit than the entire company did as recently as fiscal 2010.
Have no fear
Investors shouldn't worry too much about lower gross margins on a TV because the device's strategic importance lies more in its ability to bolster the broader ecosystem and widen the "halo" around all of Apple's products.