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Carl Icahn’s dubious TV advice for Apple

Somewhere, Gene Munster of Piper & Jaffray is smiling. In his open letter to Apple CEO Tim Cook released Thursday, in which he urges Cook to use some of Apple’s $132 billion cash hoard to fund a tender offer for the company’s own shares, billionaire investor Carl Icahn predicts that Apple will introduce a UltraHD TV set in 2016 and will sell 12 million in the first year at $1,500 and 25 million the next.

“We think television represents a large opportunity for Apple, one that reaches far beyond “the hobby” that Apple TV currently represents,” Icahn writes. “As we highlighted in our previous letter, we believe UltraHD’s (ultra-high-definition television) superior picture quality in comparison to regular HD will drive a major TV replacement cycle as the price gap between them narrows. It should also be noted that Reed Hastings, CEO of Netflix, has referenced UltraHD as a major catalyst for Netflix going forward, and while this is true for Netflix, we believe it is also true for Apple. Against the backdrop of this replacement cycle, FY 2016 represents an opportune time to introduce an UltraHD TV set.”

With that bold prognostication, Icahn joins Munster, a long-time and often lonely believer in an integrated Apple TV. Whether Icahn actually believes it, or not, however, is hard to say.

Icahn includes his UltraHD prediction as part of showing his work for how he gets to a current valuation of $203 a share for Apple, roughly twice its current trading price:

While we think adding a TV set to the Apple ecosystem would be meaningful from a financial perspective, we understand that you may choose not to do so, as you have wisely stated that “the toughest choices for Apple are what not to work on.” But, even if Apple chooses not to offer a TV set, our earnings estimates would only be revised for FY 2016 and FY 2017, and the impact is not significant enough for us to question using a P/E multiple of 19x our FY 2015 EPS for Apple today, especially since, even without a TV set, our forecast shows EPS growth of 19% in FY 2016 and 23% in FY 2017.

Icahn’s goal, however, is not to hype an Apple TV or any other product but to persuade/pressure Cook into a tender offer for Apple shares, of which Icahn owns some 53 million. In a bid to “preemptively diffuse any cynical criticism” of his motives, Icahn in the letter pledges “not to tender any of our shares if the company consummates any form of a tender offer at any price.” But of course he wouldn’t have to tender any shares to profit the rise in the price of Apple shares that would result. He can always sell later. So a certain amount of cynicism is probably fairly assumed.

In any event, I still wouldn’t bet on an Apple TV, whether UHD or otherwise. While there’s little doubt that Apple could make an compelling UltraHD set, and that UHD will drive some amount of replacement buying by consumers (although how much and how quickly is not yet clear), that’s one turn of the cycle. It’s very unlikely that the industry would see another one for a decade or more. One replacement cycle every decade or so makes TV hardware a very awkward fit with the rest of Apple’s businesses.

In the standards-based TV hardware and broadcast industries, moreover, Apple would have nothing like the sort of unilateral control over the ecosystem it has with iOS devices and could do little on its own to affect the pace of iteration.

While Apple might be able to capture a little bit of the UHD upgrade cycle before Samsung catches up with whatever innovations Apple introduces, and before the bottom falls out of UHD prices, it seems like a long way to go for a short beer.

Further, Icahn is misreading the evolution of the TV business and the digital living room. Pace Icahn, televisions are less and less “a centerpiece to the modern living room and thereby a promising gateway into the home for Apple’s growing ecosystem.” Ever more TV content, both live and on-demand is being viewed on mobile devices and Apple already makes the best mobile device for watching TV: the iPad.

The TV ecosystem, in fact, is growing ever-more mobile-centric. The “large opportunity” in TV, for Apple or anyone else, is not in TV hardware, as Icahn suggests, but in figuring out how to get the kind of TV content and services consumers increasingly want onto mobile devices as seamlessly as possible (and what Reed Hastings’ comments about streaming 4K video have to do with building UltraHD TVs remains a mystery).

Fortunately, as I discussed in a previous post, Apple seems to realize this and is honing its own strategy for pursuing that opportunity. Apple has quietly been adding linear channels to the Apple TV set-top and has been in high-level talks with pay-TV providers about integrating their services with Apple devices. Apple’s strategy appears to be to build a universal TV Everywhere platform that will interoperate with as many pay-TV services as Apple can persuade to go along that would allow users to take all or part of their existing TV service with them on Apple mobile devices.

Such a platform would then allow Apple to introduce its own direct-to-consumer channels via the app store that could be ported to the UHD set in living room when necessary via AirPlay.

No need for Apple to sink a lot of money into building TV sets when what people really want is TV content.