Is Apple Entering Streaming Video Market?

| About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) may be negotiating a deal with CBS (NYSE:CBS), Disney (NYSE:DIS) and News Corp (NASDAQ:NWS) to stream TV shows through iTunes for 99 cents an episode, according to a recent Bloomberg report.

This deal could help Apple challenge established streaming video players like Netflix (NASDAQ:NFLX) and Hulu. Even if the negotiations succeed, however, we don’t foresee any immediate impact on the $337 Trefis price estimate for Apple’s stock. Our analysis follows below.

Apple Unpeeled

Apple sells music, movies, eBooks and TV shows through its iTunes store. We estimate that iTunes constitutes less than 3% of our stock price estimate for Apple.

Currently, iTunes users can download TV shows for a fee of $1.99 to $2.99 per episode. We expect the average rent for a TV episode on iTunes to decline during the Trefis forecast period, from $2.23 in 2009 to $1.80 by 2016. You can drag the trend-line in the chart below to create your own average rent per episode forecast for Apple and see how it impacts the company’s share value.

Obviously, the average rental fee on iTunes could drop significantly if Apple starts offering TV shows for 99 cents apiece. But even if average pricing declines to $0.99 an episode by 2016, we see no meaningful impact on the company’s stock.

Apple rented around 114 million TV episodes through iTunes in 2009. We expect total rentals to hit 174 million by the end of the Trefis forecast period. Presumably, Apple could sell many more TV shows if content producers like News Corp and Disney agree to the lower rate.

Once again we don’t see this trend moving Apple’s stock, primarily because iTunes is a relatively small business for Apple (about 3% of the Trefis price estimate). In the next interactive chart, you can drag the trend line to create your own forecast for Apple’s TV show unit sales and see how it impacts the company’s estimated share value.

Look Out, Netflix and Hulu

Apple’s move into the streaming content business could help it challenge Netflix and Hulu, the two dominant players in the streaming video market. Online video consumers increasingly favor streaming, which is faster and more convenient than downloading large video files. In another article, we argued that Apple’s stock could suffer from the lack of a streaming option on iTunes.

According to the Apple rumor mill, the company is preparing a new version of the iPod Touch with a higher-resolution screen, along with a $99 version of the Apple TV set-top box that will include a smaller hard drive and allow users to stream iTunes content. This announcement could come as soon as September 7, when Apple plans to hold an event in San Francisco.

Discloure: No position