"Apple will never make a TV again."
-- Steve Jobs 

Apple's (NASDAQ:AAPL) forthcoming television product has garnered plenty of headlines lately, and rightfully so. I'm a firm believer that entering the TV market could pave the way for a new frontier of growth for the tech giant.

However, the news that Apple intends to upend the cable industry has rekindled speculation that Apple will also launch the branded television that's been so widely discussed over the years. However, I'm more inclined to agree with the above Steve Jobs quote. Apple doesn't need -- and in fact shouldn't want -- to make televisions in order to make TV into its next massive market opportunity.

The case against an Apple TV set

Source: Apple

Recently, well-known Apple bull Gene Munster of investment bank Piper Jaffray appeared on CNBC. Among other things, Munster once again reaffirmed his long-standing claim that Apple will launch its own TV set as soon as fiscal year 2017, according to his calculations. 

That certainly could be the case, but it shouldn't be.

Apple mints its billions in profit by selling high-margin hardware. And as one of the most expensive and popular consumer electronics companies, an Apple-branded television set seems like a natural extension for Apple's iDevice empire. However, as I've noted in the past, the economics of the TV industry positively stink. Even some of the largest players in the space routinely struggle to break even.


TV Market Share 

TV Segment Operating Margin







Source: S&P Capital IQ

The TV market's replacement cycle also makes it an unappealing market for Apple. One of the most commonly cited drivers of the recent slowdown in Apple's iPad business has been that the replacement cycle for tablets is longer than for smartphones. Although there's no perfect number for it, it appears most agree that tablets are replaced around every 3-4 years. However, consumers purchase new TVs on average every seven years. 

Now, if Apple were to enter the TV market, it would unquestionably use a contract manufacturing partner like Foxconn as it does with its other iDevices to hedge out the low-end manufacturing side of the business and mitigate its inventory risk. Additionally, Apple would almost certainly price its hypothetical TV device firmly at the higher range of the market. It's also true that Apple generates strong margins in the PC and smartphone markets, even though many of its competitors are barely profitable.

However, the average price for many of today's software-enabled TVs almost certainly sits north of $1,000. Since Apple tends to price toward the higher-end of each category it enters, I'm skeptical that Apple would be able to generate enough unit sales to make a meaningful difference to its massive revenue and profit bases.

I'm by no means disputing that Apple could probably produce a branded television set that it could sell to some users at comfortable margins. But between the sluggish refresh cycle and the likelihood that Apple would have to price its TV well into the thousands of dollars in order to maintain a suitable level of profits, the overall business opportunity for Apple in a branded TV isn't as appealing as it might initially seem. I'm still bullish on Apple's prospects in the TV market, just not through its own branded television.

A bold Apple TV prediction
It might seem counterintuitive, but I believe Apple's rumored live streaming TV offering should give Apple investors far more confidence than a branded television set ever could. However, laying out the argument in its favor does require a fair bit of long-term thinking.

To me, the potential TV service revenue stream pails in comparison to the beachhead it could create for Apple in the emerging "connected home" space that should become increasingly important in the decades to come. This interpretation involves plenty of projection on my part. Take the following with a grain of salt, but hopefully this doesn't seem too outlandish.

In order to continue to grow at a meaningful clip, Apple needs to continue to target increasingly large market opportunities. That's part of why the notion of Apple entering the automobile space caused such a stir. Similarly, the Internet of Things, or the smaller subset of the "smart home," offers another massive financial opportunity for Apple. Apple has already demonstrated an explicit interest in the emerging smart home space via its HomeKit software, which Apple launched last year.

Source: Apple

However, in order for HomeKit to become a dominant software platform for the smart home, Apple needs a way to, well, actually get HomeKit into people's homes. And that's exactly where an Apple-branded streaming TV product would prove ideal.

Most "cord-cutting" offerings that run their own operating systems like Google's Chromecast and Amazon.com's Fire TV require some kind of minimalist hardware offering, and that will likely be the case with Apple's upcoming cable offering as well. And with this new hardware in homes en masse, Apple could also include its HomeKit as part of the pre-installed software, giving it a quick entry point to the mass-market audience.

This strategy's benefits would be two-fold for Apple and its shareholders. For starters, like the App Store before it, providing HomeKit with a built-in mass audience would help entice developers to build hardware and apps for the HomeKit platform, which could help strengthen Apple's overall ecosystem. It would also position Apple to create its own branded hardware for the smart home. Although it's not clear what those offerings might be at the moment, it doesn't take an overly active imagination to conceive any number of in-home electronics or appliances Apple could produce under its brand.

Obviously I could be far off in left field here. I'm not presuming that this will be the case, but I certainly think this makes eminently more sense than either Apple making its own branded TV or Apple's streaming offering being limited to nothing more than a better version of today's cable options.

Remember, Apple typically tries to run its software at break-even and use it as a means of creating hardware sales opportunities. As such, whenever there is news of Apple launching a new service of some kind, investors should automatically begin trying to connect the dots between that service and some kind of new hardware. I could be dead wrong, and Apple could launch a full-blown TV next year, in which case I'll certainly admit my mistake. However, this is my bold prediction when it comes to Apple's future in the TV space and one I certainly think Apple investors should consider.