Apple TV (Nasdaq: AAPL) Will Be Huge in 2014 – But Not Because of Comcast

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Apple Inc. (Nasdaq: AAPL) will indeed make a big splash with Apple TV this year, but don't look for clues in the talks the tech giant is supposed to be having with Comcast Corp. (Nasdaq: CMCSA).

Apple TVTech analysts and pundits have been beside themselves since Sunday when The Wall Street Journal revealed that Apple and Comcast were negotiating some sort of deal that would keep Apple's streaming video separated from other Internet traffic, ensuring a smooth user experience.

Somehow many immediately assumed that such discussions will lead to a much bigger deal that would combine Apple TV and Comcast's content.

Such speculation pushed Apple stock higher on Monday by as much as 1.43%.

While the idea of a cool, easy-to-use Apple-designed interface connected to Comcast's vast trove of content is compelling, it's never going to happen. It's simply not in the DNA of either company to share control of the user experience.

Any Apple-Comcast deal - if it happens - will be a straight-up payment by Apple of a "toll" to Comcast to ensure the smooth flow of its video traffic. Netflix Inc. (Nasdaq: NFLX) made a similar deal with Comcast last month.

All it means is that Apple wants to make sure that as it moves forward with additions and changes to Apple TV, its customers will continue to get the best possible experience. Apple learned the hard way (MobileMe, anyone?) that nothing else matters if customers have trouble using a service.

But what does Apple have in mind for Apple TV?

Apple has spent a long time trying to find the right strategy for its TV "hobby." The Apple TV set-top box debuted in 2007, but rumors of an actual Apple television set, sometimes called the iTV, have raged for at least three years.

Some analysts still think Apple will introduce an actual big-screen $7,000 ultra-high definition smart TV this year or next.

But that's not going to happen, either.

Steve Jobs said so himself, according to the just-released book on Apple, "Haunted Empire: Apple After Steve Jobs." The late Apple founder and chief executive officer told a group of top executives in 2010, "TV is a terrible business. They don't turn over and the margins suck."

But supposedly Jobs also said the company had plans to dominate in the living room via the $99 Apple TV.

And two things the company is likely to introduce this year will go a long way toward turning Apple TV from a hobby into a significant source of revenue.

How Apple TV Could Boost AAPL Stock

Apple TV has grown into a $1 billion a year business, but it could get much bigger.

More content would help, which is why the Comcast deal got people so excited. But Apple TV has managed to grow its content, with Netflix, Hulu, several Disney channels, YouTube, HBO Go, MLB.tv, PBS, Bloomberg, and The Weather Channel all on board in addition to the movies, TV shows, and videos on the iTunes Store.

That process will continue creeping forward, but it isn't the only way Apple TV can get consumers' attention. Here are two ways Apple TV can make a splash in 2014.

First, it could produce a remote that combines an iPhone touchscreen with the Siri voice interface. As anyone who uses a cable service knows, managing the huge amount of content available with a confusing, clunky remote peppered with mysterious buttons can get extremely frustrating.

The ideal Apple remote could respond to voice commands ("I want to watch the Orioles game," "Show me a list of children's movies") but also provide a context-sensitive touchscreen for scrolling through channel listings, for example.

Second, Apple TV could introduce a completely new must-have feature - it could become a gaming console. It would not be copy of the Microsoft Corp. (Nasdaq: MSFT) Xbox line or the Sony Corp. (NYSE ADR: SNE) PlayStation, but something much more Apple-esque.

Apple TV could easily become a gaming console via downloadable apps. Instead of using expensive and bulky cartridges, people will simply download games from the Apple TV App Store, just as they do now with their iPhones and iPads.

While Apple TV games would not have the same amazing graphics as an Xbox or PlayStation, they would be far cheaper and far more numerous, particularly if existing iOS games - hundreds of thousands of them - can easily be converted.

Steve Jobs himself suggested the possibility of an Apple TV App Store back in 2010 in a Bloomberg Businessweek interview, saying Apple could do it when the time is right.

A few other tidbits support this possibility; iOS 7, the latest version of the iPhone operating system, includes software tools for third-party hardware game controllers (Apple TV runs a modified version of iOS) as well as Bluetooth-connected controllers.

And last month the Financial Times reported that some new Apple TV hardware as well as software was due by mid-year, and both are expected to include more support for games.

The jump into the home gaming market won't impress most pundits and analysts, who will be disappointed at the lack of a giant Apple-branded smart TV.

But selling downloadable games makes much more sense.

Analyst Ben Schachter of Macquarie Capital estimates that Apple's software and services business has gross margins of 90% and operating margins of 80%. Schachter estimates Apple's software and services business will account for 21.8% of the company's profits in 2014 and as much as 36.4% by 2020.

And that will do much more for the Apple stock price than an expensive television with razor-thin margins.

What do you think Apple is doing with the Apple TV? Will turning it into a gaming console as well as a content aggregator send sales soaring, or will the public ignore it? Speak out on Twitter @moneymorning or Facebook using #appletv.

Whatever happens with Apple TV in 2014, the company has yet another new segment of tech it plans to conquer - wearable computing. But don't expect the so-called "iWatch" to be merely a curved iPhone that wraps around your wrist. Apple is focusing its efforts on the one thing that will drive the most people to buy and use wearable tech devices...

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