Content will drive Apple’s TV success

Hans is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple (NASDAQ: AAPL) sits on a mountain of cash.  At the current rate, Apple will surpass $180 billion by the end of its current fiscal year (ending September 2013). That's a ridiculous amount of money for any business to have in its reserves ... unless Apple is saving for something huge. 

Indeed, Apple may have been saving the cash to create a major shift in the TV industry.  As Tim Cook said in last week’s Rock Center interview (paraphrased): the development of TV has been left behind and it continues to be an area of interest for Apple. Coincidentally, this week the Wall Street Journal reported that Apple is testing TV designs with both Foxconn and Sharp.

Apple’s push to dominate our lives started on our desks and progressed into our mobile lives.  The next logical step will be our living rooms and Apple has been planning for this for years.  In all of Fiscal 2011, Apple sold 2.8 million units. In Fiscal 2012, Apple sold 5 million units.  That is an increase of 179%. 

Those numbers pale in comparison with iPad, iPhone, and iPod sales figures.  Apple is okay with that.  Apple TV in its current form is highly likely a live dry run of a test product that forms the foundation of the end product. Ever noticed the resemblance between the various iPods and the iPhones?  That is more than just coincidence.  Apple is consistently testing the market for its next big thing.  The best of the current Apple TV technology will be integrated into its next generation TV device.

So what could transform Apple TV from a niche product into iPad type of domination? Apple needs to expand its ecosystem.  It has to figure out how to alter our television watching behavior. To transform Apple TV from a niche product into iPad domination, there are 4 critical components that must be reaized:

  1. A vehicle to store and distribute content. This is already in place with iTunes and iCloud.
  2. Apple integrated hardware to control the content.  Today it is the second generation of Apple TV. Tomorrow it will be an Apple TV product probably similar to a large iPad. 
  3. Exclusive content.
  4. User Control.

Points 1 and 2 are already launched or being developed (according to the WSJ). 

What is missing is Apple owned content, which the company may need in order to dominate the TV market.  Apple has a culture in which it wants to do a few things exceptionally well. They will not create their own content.  Partnerships with content providers to make content exclusively available to Apple will be very difficult to forge, as it would limit a content provider’s exposure to the market (equals less revenue) rather than expanding it. 

The remaining option is that Apple acquire content creators, so it owns the rights.  Content that people love.  Content that is part of their daily lives and which they do not want to go without.  Content that can only be improved by having it available at all times so the consumer can watch it on their schedule (anyone getting tired of the DVR recording conflict message?). Technically this can all be done via the web, using the Cloud, and lots and lots of storage.

That $180 billion Apple is sitting on could be very well invested in acquiring that content and expand its iTunes and iCloud environment with existing on-demand services delivery vehicles.  By making part or all of that acquired content exclusive to Apple TV customers or offer additional services, customers will be driven to Apple’s product over its competition’s. Nobody else could do something this audacious.  The below potential targets are well within Apple’s reach. 

Content delivery targets in the US could include:

  • Hulu - Free streaming of TV Shows and Movies - Market Cap/Cost is $ less than 180 billion.
  • Pandora Media (NYSE: P) - Internet Radio – Market Cap $1.4 billion.
  • Netflix (NASDAQ: NFLX) – On Demand Video - Market Cap $4.8 billion.

 Content creator targets in the US could include:

  • Yahoo! (NASDAQ: YHOO) – Online Search and Services – Market Cap: $23.2 billion.
  • Time Warner (NYSE: TWX) – Home of CNN, HBO, and Cinemax – Market Cap: $44 billion.
  • Disney (NYSE: DIS) – Home of ESPN and Disney Movie Studios – Market Cap: $88 billion.

The point here is that, as in any other industry, in order to break into TV Apple must disrupt the industry. Apple cannot just come out with a “me-too” product that has an apple stamped on it. It must break the rules.

Viewing is video content.  The right content at cheaper prices or exclusively available via Apple TV with on-demand user control gives the customer unprecedented access and control. That would go a long way driving mass adoption of its Apple TV.  This unique value will allow Apple to continue its ability to charge premium pricing and drive superior margins. 

Finally, a view of the TV opportunity for Apple: It is estimated that in 2014, 280 million television units will be sold worldwide, growing at about 5% per year. By 2014, the smart TV segment (or connected TV segment) is expected to represent approximately 40% of the 280 million units, growing well over a 100% per year over the next years.  If Apple can capture 20% market share, Apple would sell 22 million units per year.  That is on par with its iPod sales, with much higher revenue. 

NotDutchNotMuch has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Walt Disney, and Netflix. Motley Fool newsletter services recommend Apple, Walt Disney, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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