Barron’s – 02/07/2011
Apple may be getting ready to reinvent the television. Here’s what we’d like to see.
I haven’t owned a television in years. For the news stuff, online is a lot more satisfying, with greater depth and context. And if there’s a show I want to catch now and then, or even a whole series, I can generally find it on Apple’s iTunes, or Hulu, or Netflix. What would it take to put my digital life back in the living room? I imagine coming home, kicking off my shoes, using some kind of remote control—but much easier than looking for the actual remote, perhaps waving my hand, clapping, shouting « TV on! » or some such—and immediately immersing myself in any number of interesting channels finely tuned to my particular tastes.
I would be able to save programs I like for later viewing, or send them to another device—an iPhone or iPad, for example. Or to a friend, the way you’d send via computer, but easier. Did I mention that this device, occupying pride of place in my home, would also be far more attractive from an industrial design standpoint? Most television sets are big, ugly pieces of furniture, when you come right down to it. All of which explains why a note put out this past week from one Wall Street shop caught my attention.
Gene Munster, who analyzes Apple (ticker: AAPL) for Piper Jaffray, has for quite some time now been speculating that Apple will offer a television set as its next Insanely Great and Magical gadget. Munster on Thursday reported that he had put together some new clues that made him more convinced than ever that Apple would attempt such a feat. Back in mid-January, when Apple announced fiscal first-quarter results, Apple COO Tim Cook told analysts that Apple had secured long-term supply agreements for a single electronics part that Cook described as « strategic » to Apple’s products. With Apple’s penchant for secrecy, Cook wouldn’t say what it was, precisely because it’s strategic. Munster, after talking with some sources in Asia, has concluded that the part in question is a display of some kind. Although Apple makes a lot of devices with screens, Munster thinks the supply agreements are not just for iPhones, iPads and iPods, but also for a future television set, which he believes the company would begin to offer sometime next year.
Now, Apple already has a device for the living room, called Apple TV. It is a little black box that sells for $99 and lets you download movies, music and TV shows from iTunes and play it on your Sony (SNE) or LG (066570.Korea) or Panasonic (PC) or Samsung (SSNLF) flat screen. It has met with mixed success, certainly selling nowhere near the tens of millions of units Apple’s iPhone is doing each year. Standing in the way, as Jobs himself said last year during a technology conference, is the fact that consumers expect to get the box for free and pay only for the content package.
A full-fledged TV might be a tough sell to people who, unlike me, have a trusty telly. But Munster believes Apple can thoroughly reinvent TV, mostly because the company has reinvented other mature markets, such as the cellphone. He’s even put numbers to it. Just for argument’s sake, he constructed a model that has Apple selling 1.3% of the 220 million TVs that may be sold in 2012. That would add $2.5 billion to Apple sales, assuming an average price of $1,800. That extra revenue, given that Apple will probably generate over $100 billion in revenue next year, is not a big deal. But, hey, it’s a start. The question is whether TV needs to be reinvented, and whether it’s really possible. I would say « yes » on the first score, and a cautious « maybe » on the second.
TV hasn’t kept up with those secret desires I spoke of above. It doesn’t let you easily share content, move it around, manipulate it, etc. And even in the case of things like TiVo-ing your favorite shows, there’s far too much work involved. That is the kind of complexity that Munster sees Apple simplifying by putting a screen in your living room. Munster explains it like this: The screen is the window into the software, with Apple’s software being the thing that sets the device apart from the pack, as with all its gadgets. But Apple would have to take care not to go too far. There’s still a place for « appointment television, » where you sit down at a certain hour and expect to just be entertained, without having to make decisions, or browse through catalogs. There’s nothing like vegging out. So Apple would have to have not just subscription offers, with a package deal, but really programming, of a sort, where content just flows, 24 hours a day, rather than being downloaded like an individual song. And that amounts to becoming a kind of cable operator, with all the complexities of content deals. If Apple can do all this—and who else could?—it would be one more reason to like Apple’s stock. As I argued a couple of weeks ago, the shares are looking exceedingly cheap, to the point where they’re drawing interest from value investors. At a recent $346.50, they’re trading at just 15 times this year’s earnings, even lower if you exclude the company’s cash hoard. And that for a company that can’t build iPhones fast enough to meet the crushing demand. If those multiples ever appeared on a TV screen, I’d say something was wrong with the picture.
SPEAKING OF iPHONES, Verizon Communications (VZ) on Friday said that it sold out of its supply of Apple’s iPhone 4 when the device was put online for sale to Verizon customers early Thursday. While no numbers were released, the early read is that the swift stock-out is going to further boost analysts’ estimates for Apple’s additional revenue this year. One analyst, Brian Marshall with Gleacher & Co., even released a nifty chart on Friday showing a very, very tall bar, and some very, very short bars. The point: Apple’s potential $28 billion in « incremental revenue » this year from the iPhone, the iPad, and other products totals more than the $27 billion in revenue gains expected from Hewlett-Packard (HPQ), Dell (DELL) and several other tech stalwarts combined this year. As the increasingly huge Apple keeps zipping along, investors could wind up with handsome gains and a TV, too. Sure beats a toaster at the bank.