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Apple Inc.’s (AAPL) Apple TV Is Back in the Game

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One of the more puzzling chapters in Apple Inc. 's ( AAPL ) recent history was its neglect of the Apple TV. The set-top streamer was a market leader that evolved into a billion-dollar business. But the company failed to update the hardware for years.

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Even as streaming was taking off in popularity, it got trounced by competitors and was in danger of being an also-ran in a market it helped create.

AAPL is back in the space, though. Long-awaited, new Apple TV hardware released last year boosted sales by 50% and it's once again a contender.

The first Apple TV was released in 2007 and the company continued to update the hardware, software and video capabilities through to the third generation released in 2012 (that received a very minor spec bump at the start of 2013).

Then the company did nothing.

While AAPL focused on the iPhone, Apple Watch and other high-profile projects that were expected to have a material impact on Apple stock prices, some very big competitors hit the living room. Alphabet Inc 's ( GOOG , GOOGL ) Google fired the first shot with the Chromecast streamer. Then Amazon.com, Inc. ( AMZN ) released the Fire TV and Fire TV Stick.

Roku wasn't sitting still either, releasing new streamers, including inexpensive HDMI stick options to combat the much cheaper Fire TV Stick and Chromecast.

The only move AAPL made was to lower the price of the aging Apple TV hardware from $99 to $69. Consumers weren't buying it, though, and Apple saw its global lead and second place position in U.S. video streaming hardware (at 26% of U.S. broadband households ) in 2013 evaporate.

By the time 2014 wrapped up, AAPL had dropped to a fourth place position in U.S. households, capturing just 13%. It was eclipsed by Amazon at 16% and Google at 23%.

Apple TV Strikes Back

In the fall of 2015, AAPL finally struck back with an all-new, fourth generation Apple TV. It was much more powerful, came with a new tvOS operating system, a touch remote with Siri support, introduced a new App Store and was capable of playing games.

It was also expensive. When competitors like Chromecast leapfrogged the $99 (and then $69) Apple TV by selling for less - the Chromecast and Fire TV Stick cost just $39 - many analysts expected the new Apple TV to be priced competitively. Instead, AAPL offered two Apple TV options: $149 and $199.

The company also skipped 4K video support. Consumers can still buy that third generation version at $69 as well, but AAPL completely refused to play the race to the bottom game.

Apple's position was that the new Apple TV was an entertainment center, not just a streaming box, and its capabilities would only grow with time as developers took advantage of the new App Store. In addition, with 4K content limited, that capability wasn't deemed a must-have. Not everyone was convinced by this strategy, but it appears that AAPL made the right call.

A report just released by Parks Associates says that Apple TV sales in the U.S. increased by a whopping 50% in 2015 compared to 2014. That's the largest gain of any of the big players and brought AAPL up to 20%, despite the fact that the new hardware was only available for the final few months of the year. That's within spitting distance of Amazon and Google, which were tied for second place with a 22% share.

This is good timing for an AAPL living room resurgence, especially one that isn't tied to slashing prices and accepting lower margins.

That Parks Associates report showed set-top video streamer adoption is gaining steam (they were in 36% of broadband-equipped U.S. households in 2015 compared to 27% in 2014) and predictions are for sales to hit 86 million units globally by 2019.

At the same time, that growing market is attracting additional competitors. Notably, China's Xiaomi announced it will be releasing its popular 4K, Android-powered, game-playing Mi Box streamer in the U.S., while Rovi Corporation 's ( ROVI ) recent acquisition of TiVo represents another potential video streaming powerhouse in the making.

While the Apple TV represents a drop in the bucket in terms of overall Apple revenue, it still brings in more cash than many entire companies generate. And the Apple TV's importance to AAPL and Apple stock goes beyond direct sales revenue. Owners who buy or rent videos add to iTunes' revenue, as do app sales.

The box gets the Apple logo into the living room and integration with other Apple gear - for example, iPhones and iPads can be used as Apple TV remotes - helps add value to the entire Apple hardware ecosphere.

In short, it took a while for AAPL to react to the moves by Amazon and Google, but it eventually did, and the latest Apple TV sales numbers show the company is on the right track, at the right time to be a dominant player in the living room once again.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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