Analyst on Apple TV in digital living room

Many investors are questioning Apple's ability to carry its formidable digital music lead into the living room alongside the market size of the digital living room, but Piper Jaffray senior analyst Gene Munster believes the Cupertino-based company is entering that market with a 10x lead over the next closest competitor -- Microsoft's Media Center. The analyst points to iTunes becoming the de facto "media center" application of choice, and estimates that there are 110 million active iTunes users compared to just 12 million active Media Center users. "We estimate the digital living room market in calendar year 2008 will be $4.7 billion, and we believe the Street is looking for $1.2 billion in Apple TV revenue in calendar year 2008," Munster said. "We are currently modeling for Apple to sell 2 million Apple TV units in calendar year 2007. For every 500,000 additional units Apple sells, it adds $0.02 to our calendar year 2007 earnings-per-share estimate." Piper Jaffray maintains its 'outperform' rating on Apple shares with a $124 price target.

Munster suspects that iTunes is a "Trojan horse media center" that will give Apple a sizable early lead in the digital living room. The analyst believes that his estimated 110 million iTunes users represent the preliminary addressable market for the Apple TV, stacking up against the closest Windows Media Center.

"To compare, the closest Windows-based product is Windows Media Center, which serves as a media hub for music, TV, and movies on PCs," said Munster. "While the comparison is not apples-to-apples, as Media Center is part of the Windows operating system, we estimate there to be 23m Media Center-enabled PCs."

The analyst estimates that there are 12 million actual Media Center users, pointing to a 10x lead for Apple in the digital living room. That market, according to Munster, will likely total $4.7 billion in calendar year 2008, assuming Apple maintains its MP3 player market share in the living room of 70 percent, and that one in 10 iTunes users purchase an Apple TV in calendar year 2008. Munster believes that Wall Street is estimating 4 million Apple TV units in calendar year 2008 worth $1.2 billion in revenue.

"With a wireless media streaming device simplicity is key, and Apple carried its focus on simplicity to this product," the analyst noted. "During our tests of AppleTV at Macworld we found it very easy to use with a simple remote and intuitive navigation. The product answers a problem many users don't even know they have. Viewing downloaded content on a TV is presently too difficult for the average iTunes user. But with AppleTV, the connection with iTunes is made automatically and all of the setup takes place in the familiar iTunes environment."

Filed under: Apple