Kneejerk reaction

Response to Apple TV overblown

Surely Steve Jobs can't be all that scary.

The Apple CEO said this week that iTunes will start renting movies, and investors hammered Blockbuster stock down 17% that day to an all-time closing low of $2.69.

But DVD players are in nearly every U.S. home that has a television set in it, compared with only about a million homes that sport an Apple TV, the set-top box needed to play iTunes videos on a TV screen.

Plus, Apple said it will only have about 1,000 films available for rental at iTunes by the end of February, while more than 90,000 titles are available for rental on DVD through Blockbuster, Netflix and Movie Gallery.

In short, Wall Street overreacted to the Apple news, especially since it wasn't even a surprise, having been reported weeks ahead of the official pronouncement made by Jobs this week at the annual Macworld convention.

Indeed, many investors did a bit of bottom fishing for Blockbuster shares, and they closed Thursday $2.96, down only 8% since Tuesday's Macworld announcement.

Coming to Blockbuster's defense the earliest were Michael Pachter of Wedbush Morgan Securities and Arvind Bhatia of Sterne Agee.

Bhatia noted that the iTunes rentals will be available in the VOD window, 30-45 days after the DVD window. That's important, considering that Blockbuster generates most of its revenue from new movies within the first 45 days of their release on DVD.

Plus, Blockbuster already has a competing service, Movielink, that has a library more than four times larger than what iTunes will have at the end of February.

Blockbuster hasn't an easy solution for viewing Movielink content on TV screens, but one is expected soon, according to insiders.

Bhatia also said that Blockbuster is in discussions with major portable device makers to put Movielink content on Blackberries and the like.

Bottom line? "We see very little impact on Blockbuster" from the iTunes announcement, he said, reiterating his $5.75 price target on shares.

Pachter has an $8 target on Blockbuster. He notes that Apple TV is a niche product and that studios still make a fortune from DVD sales and are not likely to kill that golden goose just to placate Apple.

The day of the Apple announcement and Blockbuster's 17% drop in share price, Pachter called it a "buying opportunity."

Considering the stock rose 10% in the past two days, his advice appears sound, so far.