Speculation On Apple's Next Big Thing: A Home Entertainment Center

| About: Apple Inc. (AAPL)

Steve Jobs of Apple (NASDAQ:AAPL) stated in his just released biography by Walter Isaacson that “television” is another consumer product area that he wanted to revolutionize. He goes on to say that "I'd like to create an integrated television set. It would be seamlessly synced with all of your devices and with iCloud ... It will have the simplest user interface you could imagine."

Given that, you have to believe that Apple has initiated a highly secret internal project to move this idea forward. The only question is how far downstream are they?

Monday morning Gene Munster of Piper Jaffray who has also been speculating on this idea for some time, is saying that Apple is already building prototype TV sets and has a supply chain starting up in Asia.

It is only logical that Apple will apply its perfectionist “Gucci” like design skills in combination with existing hardware and software core competencies to start up yet another highly profitable business. This business will produce home entertainment systems that one more time will turn an existing marketplace upside down and produce products that customers will stand in line for. Munster is speculating that this could be a $6 billion business for Apple by 2014.

These new “television” products will be much more than just an HDTV of the type being sold at Best Buy (NYSE:BBY) - they will be full-fledged PC centric “home entertainment systems.” This home entertainment system will anticipate and be designed to meet unmet consumer needs and frustrations with existing alternatives. User friendliness is a given and hardware and software features will be added that proactively anticipate what the user wants.

Of course the video display would be an HDTV screen but the resemblance would end at that point. It is obvious that this system will be software controlled and computer based. It will be a living room styled home entertainment system that will have full Internet, iOS and PC functionality. Automated video and audio retrieval, playback and storage are givens. Internet, computer, wireless and hand held computing technology will be seamlessly integrated to enable state-of-the-art media access and system control functions.

This will be a huge new business area that is complementary to all of Apple’s other products. This business will not only be much bigger than just a "television" business but it will add significantly to the size and grip strength of the existing sticky Apple ecosystem. This stickiness will include use of the iCloud and the download of “home entertainment” and other apps, games, music and video (including Netflix-like delivery of movies).

I would not want to speculate on the exact name for this new product but one could start with a guess like iHome (already in use unfortunately) or to have some fun and maybe more appropriate, iYoda or even iHal.

We are talking about a smart home entertainment center that does away with all the remotes, the external wiring and the complications while providing instant access to stored music and videos, media in the iCloud or on the Internet as well as cable and satellite programming.

We are talking about a smart home entertainment system where all video and audio functions are managed remotely in a handheld interactive iPad or iPhone like device eliminating the need for any other remotes. Verbal control via Siri is a given. Of course the video and audio functions including streaming and storage and backup would be under a PC equivalent computer control system invisible to the user and managed at the iPad or iPhone equivalent remote control.

The presence of Siri leads to all kinds of opportunities, some of which are unimagined at this point in time. For example; “give me a listing of the latest news reports on Libya,” or “show me a video on how to cook asparagus” or “give me the latest updates on how the eurozone is dealing with the financial crisis and by the way exclude any ads and Fox News reporting.”

We are talking about a modular system where the addition of a new video source like blue ray DVD would be a simple plug in - no need to buy a complete player that adds another layer of complexity, a remote, its own streaming video access and a bunch of messy wiring.

Of course gaming on the Apple entertainment system is a given. It is just one more reason that this product will be very successful.

The system will sort out all of the endless, and in some case mindless, cable (and satellite) television and Internet video content in a way that addresses user interests and preferences. A smart prioritization and sorting system that exists today on Tivo is a starting point but many enhancements including user specific preferences would be included. These capabilities would be continuously updated via iOS and the iCloud making the system largely independent of the usual hardware and firmware limitations.

I would imagine this system will have an ability to beam different programming to different rooms using an HDTV monitor and WiFi or equivalent. This would also require a wireless iPad like control unit in each room as well - not a big deal with today's technology.

A wireless gaming console specific to the Apple system would be yet another product. I suppose you could also add an X-box or Playstation interface if it was a smart thing to do - I am not a gamer so I am not sure on that.

Munster breaks out his prediction for this new business area as follows: “Apple Television could add $2.5b or 2% to revenue in CY12, $4.0b or 3% in CY13 and $6.0b in CY14.”

This additional revenue and earnings potential is currently not in either the professional sell side analyst or blogger forecasts. Some might predict that being in the “television” business might reduce overall Apple margins. I do not think so. Apple’s new system will not only have premium pricing due to the additional value it brings to the end user, it will also drive additional high profit revenue into other Apple businesses including iCloud and iTunes as well as emerging video sales.

Emerging video sales can be expected to include network programming and Netflix equivalent movie streaming. With this additional business Apple becomes an even more compelling investment.

I believe that there is a huge and very profitable opportunity here for Apple, probably greater than Munster is predicting. Its introduction will one more time revolutionize an industry that has been blind sighted of what is possible and complacent about what the user needs.

Of course the end user will be the big winner as is usually the case with Apple's new products. How many other companies have people lined up at storefronts waiting to buy the latest thing? I look forward to this development. Maybe next year?

Disclosure: I am long AAPL.