These days, there are three rumored devices that keep making the rounds in Apple Inc. (NASDAQ:AAPL) headlines: the smart watch, the transparent two-sided iPhone, and the iTV. All of this news is based on second-hand information – patent applications, supply chain observations, analyst predictions, and unnamed sources. Apple Inc. (NASDAQ:AAPL) CEO Tim Cook obviously hasn’t confirmed any of these rumors.
But it’s understandable why Apple investors are so eager for a new product release – Apple Inc. (NASDAQ:AAPL)’s shares have slumped nearly 30% over the past twelve months after being pounded against the ropes by South Korean nemesis Samsung Electronics Co., Ltd. (KRX:005930). Recent disputes in China, lower iPhone parts shipments and a decline in iPad Mini shipments have also weighed down the stock.
Yet there’s a point when hopeful claims just reach a feverish absurdity that has to be addressed.
My case study of the day is Apple Inc. (NASDAQ:AAPL)’s iTV and the recent rumors regarding its design. Let’s separate fact from fiction, and take time to address the benefits and drawbacks of a possible iTV release.
Rumors galore
Topeka Capital Markets analyst Brian White recently claimed that unnamed sources from Apple supply chain companies in China and Taiwan have divulged that an iTV could be released within the second half of the year. While that claim is nothing new, White went on to describe the device in deeper detail.
White claims that the iTV will be between 50 to 60 inches wide, equipped with a mini 9.7-inch television screen that allows users to watch shows on a second screen. The smaller screen, which is the same size as the larger iPad, could also be integrated with Siri and FaceTime. White went on to speculate that Apple would offer a single mini iTV screen with each iTV set, but users could purchase four mini screens together as a package deal.
Although White’s vision of the iTV is more detailed than prior accounts, most of his story sounds absurd.
That “second screen” idea is lifted straight from Nintendo Co., Ltd (ADR) (PINK:NTDOY)’s Wii U, which allows the player to continue playing the game even after the television is turned off. However, the Wii U has a much shorter second screen range of 7.3 meters. Meanwhile, the iTV’s alleged range of 200 meters means that the mini iTVs could be carried into other rooms, sharing the content across a whole house.
Why would Apple Inc. (NASDAQ:AAPL) manufacture yet another tablet device with iOS features simply to be used as a remote control and second screen? The company has already been accused of cannibalizing its own product line with the release of the iPad Mini. It would make more sense for Apple to simply launch an iOS app that synchronizes the iPad or iPad Mini directly to the iTV. That way, sales of an iTV would have a halo effect and boost tablet sales, which account for 20% of the company’s revenue. Couldn’t the same app be installed on iPhones, which account for 56% of Apple’s top line?
White also claimed that an “iRing” worn on the user’s finger could be used as a remote control or enhance the television’s gesture detecting functions. This is a bizarre claim, since recent sensor-based technology has demonstrated that motion gestures can be accurately read in front of a screen without the aid of extra peripherals. More importantly, who would want to put on a ring every time they wanted to change the channel?
Reality check
Instead of daydreaming about big iTVs with tablet remotes and magic rings, Apple investors should crunch the numbers to understand what Apple really needs – product diversity.
Last quarter, 76% of Apple’s revenue came from the iPhone and the iPad. That’s why every headline regarding a decline in parts orders or shipments drags the stock down. The company needs a third product to balance everything out.
A smart watch would be a cute niche product, but it wouldn’t boost sales by a lot. A transparent iPhone would be cool, but simply add to the weight of its iPhone segment. Could an iTV actually grow into Apple’s third source of revenue?
An uphill battle
I see two major hurdles Apple Inc. (NASDAQ:AAPL) has to overcome to release a market-changing smart TV: market saturation and margins.
Televisions are the cheapest they have ever been, but demand is waning. During last year’s holiday season, sales of television sets declined 2% from the previous year, according to NPD Group analyst Stephen Baker.
The television set market is already crowded, with South Korean companies Samsung and Laclede Group Inc (NYSE:LG) completely dominating Japanese manufacturers Sony Corporation (ADR) (NYSE:SNE) and Panasonic Corporation (ADR) (NYSE:PC). According to this market projection by NPD, the market is extremely saturated, and will only experience marginal growth over the next three years. Prices will likely drop as demand slows.
Source: http://www.worldtvpc.com/, Data from NPD
Baker noted that during the holiday season, 50-55 inch models sold at a lower average price ($520) than 40-49 inch models ($615), since the smaller models offered more features, such as LED screens and Internet connectivity, while the larger ones did not. More budget-conscious consumers opted for the larger screens above all other features – which indicates demand for screen size, not Internet features, is more important.
Consider what Apple is supposedly offering – a 50-60 inch screen that is also equipped with bleeding edge Internet and gesture-based features. To match the facial recognition features in Samsung Electronics Co., Ltd. (KRX:005930), Sony Corporation (ADR) (NYSE:SNE) and Panasonic Corporation (ADR) (NYSE:PC) televisions, Apple would also have to add a front-facing camera. The rumor mills are pegging the final price of the iTV between $1,500 and $2,000. In other words, consumers could get four 55-inch TVs instead of a single Apple iTV.
Television manufacturers are also offering more feature-rich sets to attract consumers to lower-priced sets, and plasma screens for higher-end ones. Sony Corporation (ADR) (NYSE:SNE) is offering a full range of Internet enabled Smart TVs for $500 to $1,500. Panasonic’s Viera Smart TVs are sold for $700 to $2,000.
That means Apple needs to bring its price point down to around $1,000 to remain competitive. That would mean sacrificing margins – just as television set manufacturers Sony and Panasonic Corporation (ADR) (NYSE:PC) learned the hard way – to generate sales. Let’s see what the television business has done to Sony and Panasonic’s margins over the past five years.
On the other hand, Apple could sell its television sets at lower margins to generate content sales through its iTunes Store, similar to Amazon.com, Inc. (NASDAQ:AMZN)’s tactic with its loss-leading Kindle Fire.
My final concern regarding Apple’s rumored entry into the TV business is that it is a slow moving market. Apple is the most profitable store by square foot in America for a simple reason – it moves its inventory quickly by selling products that are replaced in one or two years. Televisions are slow moving products, that do not offer predictable upgrade cycles that are as easy to forecast as iOS product sales.
Bottom Line
Despite all the half-truths and rumors about the iTV polluting the Internet these days, Apple investors should still keep a close eye on a possible entry into the television business. While television could be the key to building a solid third pillar to Apple’s business, it could also hurt its margins going forward. Just read the crazy headlines with a grain of salt.
The article Apple iTV: The Absurdity Continues originally appeared on Fool.com is written by Leo Sun.
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