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Monday, March 19, 2007, 07:00 am PT (10:00 am ET)

Apple TV said to be worthy of overtaking both TiVo and Netflix

Although AppleTV has ceded the limelight to iPhone and similarly been overshadowed by the buzz preceding the launch of Leopard, it could prove to be as disruptive to legacy video purchase-and-consumption behavior as the iPod has been to traditional music business model, one Wall Street analyst says.

"We believe the potential is huge for this small device," ThinkEquity analyst Jonathan Hoopes, who maintains a bullish outlook on shares of Apple Inc., said on Monday. "Apple TV is an ideal conduit for multiple services including DVR, paid-for content, gaming, or advertising."

In a note to clients, Hoopes reiterated his Buy rating and $120 price target on shares of the Cupertino-based company, explaining that the combined value of the business opportunities presented by Apple TV could be worth $5.3 to $11.4 billion.

"In addition to sharing digital content within the home, we believe investors should understand the value of the various potential business models that Apple TV could enable," he wrote. "As a digital media content delivery vehicle positioned in users' living rooms, we think the AppleTV/iTunes combination could become as disruptive to legacy video purchase-and-consumption behavior as the iPod/iTunes combination has been to the traditional music business model."

In addition to the higher average selling prices offered by movies over music tracks, the analyst believes there is potential for Apple TV to eventually target gamers and feature TV guide-like services, presenting interesting opportunities for high-margin and recurring subscription or advertising revenue models.

Calling it a "network computer in disguise," Hoopes said AppleTV could easily see hardware and software enhancements that will allow it to do more than just stream media from the home Mac or PC.

"Apple TV can, in our opinion, be easily turned into a DVR with little or no hardware modification and a software upgrade," he wrote. "We think Apple's brand, established distribution, marketing power, over 100 million total iPod unit shipments, and 22 million active Mac users would create more than enough energy to propel an AppleTV TiVo-like service to a higher subscription base than TiVo's current 4.4 million users."

Similarly, the analyst said that Apple TV has already established itself as a direct competitor to Netflix even before the first commercial unit is connected to a TV monitor. "Whereas Netflix brought 'Blockbuster' to your mailbox, we believe AppleTV will bring Hollywood to your living room," he told clients. "Moreover, we think this device is well-positioned to quickly overtake Netflix as broadband Internet access becomes more ubiquitous and the Internet becomes the de-facto channel for content delivery."

Among the potential revenue-generating strategies said to be available to Apple under a Netflix-like model are: a movie subscription service, pay-per-view downloads, and advertising opportunities in the living room. Given time and focus for the details of such strategies to fall into place, Hoopes believes Apple TV could eventually flourish as a rental platform.

In his note to clients, the ThinkEquity analyst also spoke at length about the potential for Apple to flex its muscle in the video game market if Apple TV is able to achieve central status as a next-generation home entertainment enabler. However, he warned the company would face still competition from the likes of Sony, Microsoft and Nintendo, should it embark on such a journey.

"That said, Apple could use its AppleTV to join the gaming game given the margin-rich opportunities that reward game designers who successfully meld a solid understanding of what users want with software design skills," he wrote. "We note that Apple CEO Steve Jobs founded Pixar, a successful animation film studio. While we acknowledge that making popular cartoon movies is not the same as making video games, we do see some links in terms creativity and animation skills."

The first shipments of Apple TV are expected to begin making their way to stores sometime this week.