Apple Inc.'s Rumored TV Service: How Profitable Could It Be for Investors?

Although it remains a rumor, consumers and analysts have spent the past several weeks pining for, and opining on. the possible implications of Apple's (AAPL 1.27%) upcoming cable offering.

I've made my own big-picture argument in favor of an Apple over-the-top content service, but it's been hard to get a sense of the potential financial opportunity the service could provide for Apple shareholders. Thankfully, one recent analysis attempted to do just that. Let's have a look.

Running the numbers
Recently, Morgan Stanley analyst Katy Huberty issued a research note  attempting to gauge the financial opportunity of an Apple TV content service. In the note, Huberty and her team argue that an Apple over-the-top content service could attract somewhere in the neighborhood of 15 million subscribers in just its first year.

To arrive at this 15 million figure, Huberty estimates an Apple TV content product could capture either 8% of Apple's U.S. user base or 12% of U.S. households. It's unclear whether that 8% figure represents iTunes users, iPhone owners, or consumers who own any Apple product. However, viewed through this lens, Huberty's 15 million estimate seems eminently achievable. And based on that, she estimates Apple could generate $5.4 billion in revenue in year one and $1.6 billion in operating income.

Here's the meat of the analysis:

Sources: Morgan Stanley, Tech Trader Daily. 

Either intentionally or otherwise, this analysis implies that Apple's TV offering would have the same 30% gross margin structure that Apple has long been rumored to maintain for iTunes and App Store sales. This also doesn't take into account the absolutely massive international opportunity such a service could present for Apple, with a global iTunes user base of around 500 million registered users. That would obviously require some additional finagling of licensing for Apple.

But with the potential domestic and international operating income approaching $6 billion annually under Huberty's 8% iTunes user adoption assumption, the service has the potential to add more than 10% of Apple's operating earnings. That's not a financial game-changer necessarily, but it's certainly compelling, especially when you start to consider the broader strategic importance such a service could have for Apple's future.

The start of something bigger?
As Apple makes the majority of its profits from hardware sales, I'm inclined to think an Apple TV service would have to help fuel future hardware sales of Apple in some way. And while such a service could simply help make Apple's current ecosystem even stickier with the sole intent of simply selling more iPhones and iPads, I see an Apple over-the-top service as creating another major opportunity.

At the risk of sounding like a broken record, I've recently been advocating the idea that an Apple over-the-top service is part of a broader land grab for Apple's smart-home software, HomeKit. Think of it this way. Apple, like many others, sees the smart home and the broader Internet of Things trend as a next great growth market in tech. It's part of why Apple launched HomeKit with no real obvious tie-in to its current business model last year -- it wanted to get out ahead of the pack and signal that it means business in this space to developers.

And an Apple over-the-top TV service would probably need some kind of hardware to function, since plenty of TVs today still aren't Internet-connected or software-enabled. Putting that hardware into millions of living rooms would be a perfect way for Apple to push HomeKit into millions of homes. This would carry the dual benefit of grabbing developers' attention and creating a new area of hardware into which Apple could enter and sell any number of devices.

As we've seen, the rumored Apple over-the-top service makes financial sense even without this strategic agenda. However, it's certainly nice to know that such a move could facilitate even more significant opportunities for Apple as well.