What Should Investors Expect From Apple’s September 9 Event?

Apple (NASDAQ:AAPL) will conduct a media event on September 9, where it is expected to unveil its latest iPhones and a revamped version of the Apple TV media player. Since a lot has been written and said about the iPhone refresh, we will focus much of this note on the prospects of the Apple TV, a device that Apple is apparently counting on to make a bigger push into the living room.

Trefis has a $140 price estimate for Apple, which is about 30% ahead of the current market price.

See our complete analysis for Apple here

Apple TV: Looking To Disrupt Casual Console Gaming And Pay TV 

Unlike Apple’s iDevice business, which is essentially a high-volume, high-margin hardware business, the focus with the Apple TV has been to sell content and bring the Apple ecosystem onto a larger screen format. The device has sold just about 25 million units in the last seven years, and its price points have also been relatively low (the current version retails for $69). Now, Apple is believed to be making the refreshed Apple TV more premium (the New York Times reports a potential $150 starting price), while transforming it into more of a multi-purpose entertainment hub. There are apparently two key markets that the company will be targeting with Apple TV, namely video games and pay TV.

Gaming is reportedly a big focus area with the new device, which is expected to feature improved graphics capabilities and a redesigned remote control that can double-up as a game controller. The $27 billion (projected for 2015) console gaming market may seem like low-hanging fruit for Apple – which is already a powerful force in the mobile gaming space – but will it really translate into a significant earnings opportunity? ^[1] Probably not. We believe that Apple will focus on the casual gaming market (targeting Nintendo’s audience), instead of the more high-end gaming market (PlayStation and XBox) that accounts account for a bulk of the console game sales by value. Now, while Apple’s entry could get more people interested in casual console gaming, leverage familiar titles on its iOS devices, it’s still unlikely to really move the needle for the company. Assuming that the overall console game market grows to over $30 billion by 2016 and optimistically assuming that Apple is able to take 15% share, this would translate to roughly $4.5 billion in title sales. Assuming Apple’s usual 70-30 revenue sharing agreement with developers, this would translate to under $1.5 billion in incremental net sales.

The updated Apple TV is likely to be integral to Apple’s planned streaming TV service, which is expected to be unveiled in the coming months. The company is reportedly in talks with major programmers including ABC, ESPN, CBS and Fox to offer a slimmed-down bundle of TV channels on its devices. This could prove to be a meaningful opportunity for Apple, in our view. The North American pay TV market, which is valued at over $100 billion a year, has come under pressure, on account of cord cutting and a shift to online video services, and Apple seems well placed to capitalize on this opportunity, given its large base of connected devices, affluent user base, software and user-interface expertise and track record in negotiating content deals. ^[2]

New iPhones Launching Amid China Tumult, But Apple Seems Bullish

The iPhone is Apple’s biggest product line – accounting for over 60% of the company’s value, according to our estimates – and this upgrade cycle will be very keenly watched by investors, who have been jittery about the company’s prospects amid a slowdown in China, its biggest growth market, and some concerns that the iPhone’s growth momentum is cooling off (Apple missed Wall Street estimates for iPhone shipments in fiscal Q3). The new handsets are likely to feature industrial designs similar to the 6 and 6 Plus. However, they are likely to sport some interesting feature upgrades, such as pressure sensitive touch screens – much like the Apple Watch – significant camera improvements and the usual specification upgrades. We don’t think that Apple will meddle with its storage mix and pricing strategy (16GB, 64GB, 128 GB), since this was responsible for much of the ASP and margin growth with the iPhone 6.

Apple seems to remain bullish on the iPhone’s prospects. In its most recent earnings conference call, the company noted that just 27% of its installed base of customers prior to the launch of 6 and 6 Plus have upgraded, indicating that there was still plenty of room for volumes growth. The company has also noted that it was seeing its highest ever switch rate from Android customers.

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1. New Apple TV Is Said to Focus on Games, Challenging Traditional Consoles, NYTimes, September 2015 [↩]
2. Apple Plans Web TV Service in Fall, WSJ, March 2015 [↩]