Analyst: 6.6 million AppleTV units in 2009; an Apple-connected TV on the horizon

If a Wall Street analyst is on track with his predictions for Apple, we'll see an upgrade to AppleTV - the product that Apple still refers to as "a hobby" - late this year. In addition, Piper Jaffray analyst Gene Munster also sees an Apple-connected television set - think iTunes built directly into a Web-connected screen -on the horizon in the coming years.

Also see: Apple TV: End of an error?

Apple has repeatedly downplayed AppleTV, its only real offering for the living room. But during Apple's last conference call with analysts, COO Tom Cook - who's filling in for Steve Jobs - said the company saw AppleTV growth triple from the year-ago quarter. Specifically, the online movie rental feature is attractive to consumers and "we believe there’s still something fundamentally there for the future,” he said.

Munster thinks so, too. He predicts that Apple will sell 6.6 million AppleTV units this year, which could increase the company's earnings-per-share up by more than 18 cents for the year. He also expects to see new AppleTV hardware with live TV signal input for DVR functionality this year. As for a connected television set, Munster writes in his note:

We expect Apple to design a connected television over the next two years (launching in 2011) with DVR functionality built in. These recorded shows could then sync with Macs, iPhones and iPods over a wireless network. The device would push Apple further into the digital living room with interactive TV, music, movie, and gaming features. With its iTunes ecosystem, Apple could develop a unique TV without any set-top-boxes or devices attached. With the use of a CableCARD for digital HD TV signal, Apple could effectively replace the home entertainment system (including a music stereo, cable box, Blu-ray/DVD player, and gaming console) with an all-in-one Apple television. Such a device would command a premium among a competitive field of budget TVs; we believe Apple could differentiate itself with software that makes home entertainment simple and solves a pain point for consumers (complicated TV and component systems)

At a press event last year where Steve Jobs introduced a new lineup of iPods for the holidays, the company made a big deal about the arrival of games in the app store. Gaming has always been a sweet spot for device loyalty and retention (just look at the loyal fan base of PlayStation, XBox and Wii owners) but not an arena where Apple has previously played.

For that matter, the living room hasn't really been a place for Apple either. Point-by-point, here is why Munster believes Apple now will become more aggressive in the living room:

• Indications From Management. The company appears to be determined to capitalize on its opportunity to bring the iTunes ecosystem to the living room. On the Q1'09 conference call, interim CEO, Tim Cook, said, "We're going to continue to invest in [the Apple TV], because we fundamentally believe there is something there for us in the future."
• DVR And TV-Related Patent Filings. Patents filed in Oct-06 and published in Mar-08 indicate that Apple is exploring DVR functionality, which would require updated Apple TV hardware (with a TV input) and software.
• LG Partnership For LCDs. Apple recently announced a five-year, $500m agreement with LG Electronics for supply of LCD screens. While this agreement likely covers LCDs for Macs, displays, and portable devices, it could also include LG's larger LCD TV displays.
• The Addressable iTunes User Base. Apple's addressable market for Apple TVs is strong and growing. As of Sep-08 Apple has over 65m iTunes users, and as of Dec-08 Apple has sold over 32m iPhones and iPod touches, which can already be used as remote controls for the Apple TV.
• Apple Could Win In A New Market. We believe television market is increasingly moving towards a connected TV environment where software will be the key differentiator. Despite the ~70% price declines in the overall TV market in the past three years, Apple could enter this high volume (~10m US units a year) market at a premium price point because of its ability to deliver hardware and software that works well together. Apple has indicated that it only wants to participate in categories it feels it can make a difference (and win) in, and like the smart phone market, we believe connected TVs fit the company's criteria.

For more than a year, my family has had an AppleTV unit in the living room. My wife streams music from our iTunes playlists on the big screen during Saturday morning house cleaning. My kids love to rent their movies from AppleTV - and we can even watch HD flicks without a Blu-Ray player. And we've shared vacation photos (with even some background music) with friends on the living room big screen.

I can't speak for Munster's projections - but I can say that his arguments make sense. Apple should start grabbing a bigger piece of the living room entertainment pie. Speaking as someone who's already had a taste of an Apple living room, I'm all for it.