Apple's Living Room Strategy Can Conquer Gaming

| About: Apple Inc. (AAPL)

Apples have a storied history. Eve allegedly ate an apple from the Tree of Knowledge, giving her great insight into the world. On a sleepy Sunday afternoon, an apple dropped onto Isaac Newton's head, causing him to discover gravity. And during the Great Depression, former stock traders began selling apples as a means to get by. Remarkable, really. For such a relatively benign fruit to have such a history is impressive. But more impressive than the history of Apple (NASDAQ:AAPL) the computer company?

I'm not so sure.

Down, out and near bankruptcy in 1997, Apple brought back Steve Jobs to replace CEO Gil Amelio. Thanks to a $150 million investment from Microsoft (NASDAQ:MSFT), Jobs successfully steered Apple toward success, as it came roaring back with iPods, iPhones, Macbooks, etc. Impressive.

Yet now, all of a sudden, hungry wolves and hyenas are circling a company with $100 billion in cash lying around collecting dust and interest. Does that make sense? Can we count out a company that has an EPS of $44?

Compare 2013 to 1997. In '97, Apple was broke and validly counted out. But in 2013, Apple is again counted out, though this time with revenues of $54.5 billion for the most recent fiscal quarter. Are we really that skeptical of Apple's ability toward innovation? Haven't we learned anything in the last 16 years? Sure, the absence of Steve Jobs doesn't help things, but his death is not reason enough for a near 40% drop off the 52 week high.

The global market for video games and consoles has reached $67 billion, and is expected to hit $82 billion in another 4 years. Constant rumors of Apple's around the corner video game console have persisted for quite some time. The funny thing is, Apple's video game system already exists. Much like Siri is Apple's default search engine project, it seems increasingly clear to me that a combination of Apple TV and an iOS device is Apple's clandestine path into immediate gaming success. And remember, this is a market where a combined 150 million console units have been sold between Xbox 360 and PS3. The stakes are high, and after 7 years since their respective releases, the video game market is relishing a new product.

More recently, Gabe Newell said the following to a group of likely miffed students over at the University of Texas' LBJ School of Public Affairs:

"I think that there's a scenario where we see sort of a dumbed down living room platform emerging - I think Apple rolls the console guys really easily. The question is can we make enough progress in the PC space to establish ourselves there, and also figure out better ways of addressing mobiles before Apple takes over the living room?"

My first reaction is disbelief that not one student stood up to argue Newell's rather flippant "Apple rolls the console guys really easily" remark. As an on and off member of the gaming world, and a buyer of products from "console guys", I can confidently say that Apple is not rolling anyone easily. Sony's (NYSE:SNE) PS4 is already garnering significant interest, with over 600,000 registrations for a product which doesn't even have a price yet. And let's not forget Microsoft. Its upcoming console, the Xbox 720, is already being crowned the winner of the looming Holiday season console battle. I suppose I should also mention that Nintendo's (OTCPK:NTDOY) Wii U console is already out, but sales have not been robust. Needless to say, Apple would have serious competition.

Regardless, one cannot be quick to dismiss Newell's words, considering his background. A Microsoft billionaire who worked on Windows, Newell went on to found Valve Corporation, which produces video games and hardware. For Newell to acknowledge Apple's presence in the living room is rather poignant, and serves as a reminder that it is easier than most for Apple to forge into the video game world. It might not "roll the console guys", but the groundwork is there. Additionally, Newell is developing his own computer-based hardware, and for him, an Apple gaming system would indeed be a direct competitor. While Newell may have exaggerated a bit in regard to Apple's ease of doing so, he speaks as someone who will certainly be affected by an Apple foray into gaming, and his remarks serve as an obvious sign that Apple has console plans.

The method for Apple's console entry seems to revolve around Apple TV, which has already sold 10 million units. Here is an interesting comment from an interview given by Tim Cook over at All Things D, about a year ago:

Q: What about the gaming space? You've sort of fallen into being a big player in the gaming space. Do you see big-screen gaming as something you'll get more into?

Cook: I view that we are in gaming now in a fairly big way. One of the reasons people buy an iPod touch is gaming. Some buy it for music. I realize that is not the big screen you are talking about. Gaming has kind of evolved a bit. More people play on portable devices. Where we might go in the future, we'll see. Customers love games. I'm not interested in being in the console business in what is thought of as traditional gaming. But Apple is a big player today, and things in the future will only make that bigger.

Q: But what about the TV?

Cook: I think it could be interesting.

Cook's deliberately stated disinterest in developing a console does not discount a console. I believe that it merely points to a new era type console, such as utilizing and upgrading the Apple TV, in conjunction with an iOS device to create a console experience. With over 800,000 apps available on iTunes, the crossover to a full on gaming experience could be swift.

You the reader might be skeptical - how can Apple simply take Apple TV and announce it will become a console? Surely tinkering with the TV might not be enough to A) convince consumers to leave the Xbox and Playstation, and B) convince software companies to create big industry games such as "Call of Duty" for the Apple console.

Nat Brown, original member of the founding Xbox team, seems to agree with Newell, in that Apple will have an easy time beating Microsoft and Sony due to its built in presence in people's living rooms and pockets:

"Apple, if it chooses to do so, will simply kill Playstation, Wii-U and Xbox by introducing an open 30% cut app/game ecosystem for Apple TV."

Problem #1 is solved by the 90% year to year growth of Apple TV, as well as 400 million iOS devices already sold.

Problem #2 would be by heeding Nat Brown's dream for an open app development - for Apple's gaming console. While there is no official word on a software development kit, we know that something is brewing with Apple TV. The rumor of an imminent Apple TV announcement seems to have been denounced, but Apple is aware of what it has on its hands, in terms of sales and a watchful public. With its yearly conference looming in either April or May, I'm expecting an announcement of sorts.

To be fair, it is hard to tell if big time game development companies will produce their flagship games for Apple. Having a company like Activision (NASDAQ:ATVI) on board would be critical to Apple's success, as it would mean access to the "Call of Duty" franchise, "Guitar Hero", and other flagship games which could make or break Apple's console.

It is important to note that overall, Cook has been demure, even referring to Apple TV as a hobby. But with 2012 sales of Apple TV doubling that of 2011, Cook's words in regard to Apple TV have to be weighed heavily: "We'll continue to pull the string and see where it takes us."

Analysts like to point out the lack of expected growth of Apple's future. They poo poo Apple's incredibly robust earnings, and denounce its innovation as simply resizing its products. In terms of current production, one can easily point to Apple posting the slowest profit growth since 2003, though I can counter that Apple's sales in India have risen 400% in the last 3 months. More important than current numbers is Apple's penchant for innovation.

I think that it is foolish for analysts to essentially ignore the notion that Apple can and will innovate. Whether it's creating a new device or improving pre-existing ones, Apple has proven it with the iPod, iPhone, and iPad. The promising growth of Apple TV and the strong likelihood of an adjacent console and SDK will create an opportunity for growth in two markets: TVs and gaming.

Still not convinced? Still bothered by Apple's last attempt at a gaming console which failed miserably?

That's fair.

A skeptic is a speculator's best friend. Which is why it is important for any skeptic to at least consider two important legal filings by Apple.

In 2008, Apple extended its trademark into new areas:

Toys, games and playthings, namely, hand-held units for playing electronic games; hand-held units for playing video games; stand alone video game machines; electronic games other than those adapted for use with television receivers only; LCD game machines; electronic educational game machines; toys, namely battery-powered computer games.

And the latest, a patent filed in 2012 related to a gaming controller. Check out page 16 which contains an Apple TV image, as well as an iOS device.

Of course, this wouldn't be a complete Apple analysis without a mention of Google (NASDAQ:GOOG). Though not its console, Google's Android system will be the software used for the Kickstarter funded OUYA console. With an open platform for developers, Apple might even be behind in that regard. But in the grand scheme of things, i.e. competing with Microsoft and Sony, Apple has a big leg up with its Apple TV. I do believe that through a quietly strong sales season of Apple TV's, buoyed with the staggering amount of iOS devices already in people's pockets, there is a path that is simply too simple and obvious for Apple not to take full advantage. A gaming console by way of a juiced up Apple TV would create a red carpet for Apple to enter a $70 billion market. It might soon be game over for Microsoft and Sony. Google will live another day.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ATVI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.