Apple's Assault on the Living Room and Video Is Coming: The New Halo Effect

In addition to subscription revenues, we think Apple could potentially benefit from a halo effect that increases units and average selling prices for its existing products and provides a foundation for the launch of an iTV-like device, said Peter Misek, an analyst at Jefferies.

We spent the last couple of weeks channel checking with developers and content providers on Apple’s possible plans regarding the cloud and their assault on the living room, said Misek.

Misek believes Apple’s data center in North Carolina has gone live or will do so shortly. Some unconfirmed indications point to Apple possibly building another super data center next to the first: Apple purchased adjacent land at a high price; aerial footage shows Apple has cleared adjacent land; and at the announcement ceremony for the facility, a mock-up showed two side-by-side data centers.

Also, based on discussions with large multinational players, Misek additionally believes that plans for data center builds in other parts of the U.S. and Europe are accelerating meaningfully. Misek cannot trace the owner of these others back to Apple, but believes the specs to be similar. He can envision Apple creating the service first in the United States and then rolling it out internationally.

We find it notable that the content companies, citing a lack of domain license, asked Cablevision to remove channels from its iPad app. We believe these same companies are negotiating some sort of deal with Apple. We would find it easy to believe that Steve Jobs’ final hurrah before turning the reins over would be to revolutionize video much in the same way Apple has transformed the mobile, computing, and music world. It is also notable that his authorized biography is due in 2012, said Misek.

Misek believes Apple will benefit from two of his three secular growth themes: Tablets and mobile touch devices cannibalize PCs and change computing allowing for more interactive and easy to use computing experiences; and Super data centers arise and bring cloud-based services and media to the masses.

Misek believes Apple will launch a new far reaching cloudbased service that is more than just a music or content locker and focused on video. Misek believes this service will allow Apple to maintain higher than expected average selling prices for longer than he and the Street think. It is also likely to lead more people to buy Apple devices, in Misek's view.

Misek believes Apple's assault on the living room is likely to include a new device. He is not sure what it is, but would guess a TV or a new set-top box. For the analysis he would assume an iTV and a possible launch in 2012 or 2013.

While a simple TV is certainly possible, Misek just believes Apple wants to do something completely different. Given Apple’s historical preference to innovate a new category could Apple’s introduction of the iTV allow it to launch a premium hardware?

Aside from incorporatng Apple TV-type functionality, what else could Apple include in the iTV? We believe a full browsing experience potentially incorporating an iPad, iPod Touch, or iPhone as remote control or input device is very possible. We think Apple could provide an extremely elegant solution effectively allowing the user to move content between the multiple screens, said Misek.

Excluding any impact from a potential iTV launch, Misek has tried to estimate the financial impact of the roll-out of video-based cloud services in fiscal 2012 and 2013. Misek assumed a Netflix-like model at $10 a month assuming 5 million, 10 million and 20 million subscribers.

Misek assumed that 70 percent of the revenues goes to the content companies with 30 percent to Apple. On Apple’s 30 percent, he assumed either a 75 percent, 85 percent, or 95 percent gross margin. To reflect the halo effect, Misek increased unit shipment estimates by 5 percent for the iPod Touch, iPhone, and iPad by 5 percent. He also increase his average selling price estimates by 5 percent.

We have run a sensitivity analysis on the potential impact. Assuming an iTV launch, a cloud-based services launch, and a halo effect on existing devices (boosting units and average selling price by 5 percent), fiscal 2012 revenues would range from $150 billion to $171 billion versus our $134 billion and consensus' $118 billion, said Misek.

Misek said these revenue ranges would be 50 percent or 70 percent higher than fiscal 2011 consensus revenues of $100 billion. 50 percent to 70 percent revenue growth would appear to be a fair tradeoff for about 100 to 200 basis points hit to gross margin. Finally, EPS would range from about $32 to $36 versus Misek's estimate of $28 and consensus' about $26.50.

Apple stock closed Monday's regular trading down 1.27 percent at $330.80 on the NASDAQ Stock Market, while in after-hours the stock further declined 0.12 percent to $330.40.

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