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How Apple TV can score at the big 3.0

Daniel Eran Dilger

Steve Jobs’ Apple TV hobby, the box that brings iTunes content into the living room, is getting ready for its third revision. What will the company do to leverage the recent spurt of interest in the device and boost sales even further? Here’s what the company will and won’t do to push Apple TV.
Apple moves iTunes into the living room.

Apple TV uncharacteristically debuted months before Apple was ready to ship it. That teaser introduction in the fall of 2006 served two goals. First, it indicated that Apple had a strategy for pushing iTunes’ digital media content into the living room, and wouldn’t simply be blind-sided by efforts announced by rivals, including Amazon’s UnBox (since renamed to Amazon Video on Demand) and Microsoft’s Xbox.

Secondly, the early introduction of Apple TV (at the time referred to under the code name iTV) allowed the company to distract the tech media into a frenzy of chat over the new device while it scrambled to introduce an even bigger story: the iPhone.

Apple TV ended up quietly floating out between the colossal legs of the iPhone at Macworld 2007, and then served as a product Apple could sell while the iPhone was readied for sale, keeping the company perpetually in the headlines as it expertly oscillated attention between the two.

The Apple iTMS vs Amazon Unbox Rivalry Myth

It’s a Mac, not an iPod.

In 2006, the iPod appeared to be eclipsing Apple’s Mac lineup as being the new focus for the company. That led analysts, including yours truly, to think that Apple TV would be a glorified iPod dedicated to playing content to a TV rather than to its own built-in screen, and that the rumored iPhone would be a fancy iPod with phone features.

Instead, Apple surprised everyone by revealing that the iPhone was actually running a mobile version of Mac OS X running on the ARM processor, news shocking enough for Slashdot to famously insist that Apple was lying and that it couldn’t possibly be true. It was then discovered that Apple TV was also a stripped down Mac running on a low power Intel CPU. Rather than building the simple iPod into a more sophisticated line of devices, Apple was adapting its desktop Mac platform to serve both the mobile and home video markets.

By the end of the year, Apple’s flagship iPod touch would make it clear that the company wasn’t abandoning the Mac, but rather embracing its core technology portfolio to deliver a new family of products that would each share lots of technology. Apple TV was effectively a Mac scaled down to do little more than play music, videos, and photos.

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Apple TV, Take Two.

From the start, Apple described the home video market as a challenge, and called its initial entry in the race a hobby. Analysts ignored this appeal to cut the device some slack, and instead set monumental sales targets for it in its first year. As a consumer device, Apple TV apparently just hit the million unit per year barrier of failure (based on pessimistic forecasts of analysts; Apple didn’t reveal actual sales figures).

Apart from a TV ad that implied that Apple TV was essential to anyone with a Mac and an iPod, Apple didn’t do much to promote the new device. That changed at its one year anniversary, where the company released Take Two, a new software release that gave the box the ability to access the iTunes Store directly to download or rent movies, buy music and music videos, and listen to or watch podcasts. The update also supplied built-in support for 5.1 Dolby Digital audio, delivered with HD video content from iTunes.

Jobs began calling Apple TV a “DVD player for the Internet,” and the company subsequently released an update that allowed the system to play YouTube videos just like the iPhone, and also access Flickr photos and .Mac (now MobileMe) photos and video galleries. Those updates juiced sales of Apple TV, with the company reporting a three fold increase in sales during the fourth quarter compared to the previous year.

Apple TV sales up threefold, will see continued investment

Third times the charm.

On the cusp of Apple TV’s third update, what will Apple do to cultivate that growth? Analysts have voiced a lot of terrible ideas that would actually dismantle or saddlebag Apple TV, converting it from a fun hobby into a burdensome money pit failure. Here’s some of their worse ideas:

– Add a DVR, perhaps by buying up TiVo. The only thing worse than jumping into a dead market long after the lights have been turned out is buying out the leading failure in the market in order to do so. Not only are there no real signs of life in the DVR market (it’s the PDA of the living room), but trying to convert Apple TV into a DVR would be like converting a motorcycle into a pickup: pointless, absurd, and an evidence of strategic failure.

Apple TV exists to sell iTunes content. Unlike the company’s other products, which use software to sell hardware, Apple TV is loss leader hardware that supports Apple’s iTunes software and services. The company isn’t trying to distribute boxes as a public service, it’s trying to draw attention to iTunes, Macs, iPods, iPhones, and other devices as an ecosystem.

Converting it into an entirely different product by adding TV tuners to make it capable of recording live TV would not only do the opposite by distracting attention away from iTunes as a content source, but would also make it twice as expensive (and therefore half as attractive) and make Apple dependent upon cable TV providers. DVRs pan for gold in the stream of broadcasted programming. If you want to return to the 90s, that’s a great product strategy because cable was the only option for programming back then. Apple wants to sell next generation digital download content in its store. No DVR required for that.

However, the biggest problem Apple would face in selling a DVR is that it would have to court the favor of cable and satellite providers to even get its hypothetical DVR-box installed, or directly compete against the cheap subscription boxes they already provide their users. That’s why TiVo is losing millions. It can’t sell its boxes in competition with provider’s own, and it struggles to remain relevant even as a parter with various providers. It’s a loser’s game, which Apple wisely chooses not to play.

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– Add an optical disk, perhaps Blu-Ray. Talk about snatching defeat from the jaws of victory: Apple has been pushing digital downloads as an alternative to the DVD for years now, with pretty decent success. The entire industry’s push behind Blu-Ray had taken the format nearly nowhere, with consumers unimpressed by the slight bump in quality over DVD and irritated by the new format’s DRM restrictions and higher prices. Should Apple trade its early lead in order to bailout Sony, the company that managed to merge two wildly successful franchises, the DVD and the PlayStation 2, into a struggling successor?

Adding an optical drive would bump up the cost significantly, and adding a BR disc would elevate the device into an entirely new price category. In addition to the extra hardware costs (and remember that Apple is selling this thing as a loss leader to support iTunes, not as an exercise in distributing the company’s resources to support the strategies of its competitors), adding the ability to actually play DVDs or BR discs would incur additional licensing costs.

That’s why Nintendo’s Wii, which uses a DVD mechanism for its games, can’t actually play DVD movies. Adding that ability would have bumped up the company’s costs and raised the price of the Wii, when the device was designed to play games, not movies. While Nintendo makes money on the licensed Wii games, it wouldn’t make anything were users to play DVD movies on the Wii. Anyone with an Apple TV already has at least one DVD-playing computer. Why not allow that to stream DVDs to the Apple TV for TV playback? Because the DVD licensing terms don’t allow it. Sorry, blame the DVD cartel for that problem.

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– Add an HDTV screen. This one takes the cake for ridiculous. Recall when everyone and their dog demanded Apple take the display off of the iMac and sell it “headless?” Those same experts now think the way to expand the allure of Apple TV would be to bundle it into an HDTV so that rather than selling a cheap box that works with any HDTV a user has, it would require truck delivery and be tied to whatever screen sizes Apple decided it could stock in its small retail stores. Mind blowing.

The only way a partnership with HDTV makers might work is if Apple got them to bundle the Apple TV with sales, or license the components so they can integrate the box into their sets. The problem there is that many TV makers already face tough competition without adding a couple hundred dollars of extra parts to their displays.

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More sensible directions for Apple TV 3.0.

Apart from those top three ideas for wrapping an albatross and a millstone around the neck of Apple TV, there are a variety of smart things Apple could add to their box to make it far more valuable.

– Add iTunes radio features. Where are music visualization and Internet radio playback? Plug Apple TV into your speakers and have streaming radio with graphics. But wait, isn’t that just as bad as promoting cable with a DVR or adding Blu-Ray? Well, while Internet radio does potentially compete for attention with iTunes music sales, it doesn’t profit any of Apple’s competitors. Add a way to identify and purchase songs being played back, and you have a way to use radio to promote iTunes sales while also making Apple TV more desirable.

– More alternative content. While Internet radio is fairly popular (albeit under assault from Big Music with oppressive licensing deals), the other big free content source is podcasting. That market is well supported by Apple TV, although it could use some interface refinement. It’s fairly easy to find, subscribe, and play both audio and video podcasts on Apple TV.

So now add the ability to play iTunes U content and make it really easy, easy enough to promote the device as a virtual visit to a wide selection of universities. In addition to podcasting, make it easy for broadcasters to stream video feeds to Apple TV users as an alternative to watching podcasts, similar to Internet radio. Apple already sells QuickTime Broadcaster and Streaming Server, now it just needs to make it easy for users to pump their video out to an Apple TV audience.

– Add an iTunes Store, and an SDK for interactive content. The other obvious thing missing from Apple TV is a way for third parties to build modules that run on the device. The box is nothing close to being a conventional game console in terms of video or processing capacity, but there are lots of things it can do which third parties could provide for a nominal iPhone-like fee or for free. Apple could make it an ideal box for playing Keynote presentations, installed alongside a video projector in a conference room, for starters.

Third parties could write HDTV mini-games that let users interact using an iPhone or iPod touch, perhaps even multiplayer titles that borrow some of the casual family and party gaming allure of the Wii. Sure it’s not going to play Call of Duty, but how about multiplayer Scrabble, electronic versions of other board and card games, along with the other titles that developers can think up?

Make it easy to download little $5 games and app, and Apple TV will explode with the same software interest as the iPhone, perhaps with lots of crossover titles, such as iPhone games that interact in special ways when they discover an Apple TV. Enormous potential for fun and revenue.

With an SDK, third parties could offer their own DVR systems via USB. This would satisfy the niche market without requiring Apple’s resources to support things. Apple could also partner with third parties to offer their products in an online HDTV store, next to Apple TV apps and other iTunes content.

– Additional support for user created content. There’s already support for viewing MobileMe galleries, so how about a custom client for also accessing me.com email, contacts, and calendar on the big screen, navigated by the iPhone’s keyboard? And how about a tie-in to iWork.com, so users can pull up posted documents and comment on them? Or collaborative writing tools so that multiple people can write or draw on a shared HDTV blackboard, either using iPhones or a Bluetooth keyboard or trackpad (which would only require support for a USB Bluetooth dongle)?

Apple TV would make a great core system for digital signage and interactive kiosks, particularly when paired with a USB touch screen. Make it easy to create automated motion graphics and sell the device as a way to turn a standard HDTV into an animated window display, campus information system, or other navigation device. At home, turn the TV into a visualization center for calendar, to do events, posted reminders, streaming news headlines, and so on.

– Consider the controversial. While I’m quick to dismiss DRVs and DVDs as competing distractions, there are a variety of competitive services that Apple might benefit from partnering with, including ad-supported Hulu and subscriber-supported Netflix. Apple doesn’t favor either model, sticking to its guns as a pay-per-view digital media store. Making it possible to view third party content with ads or through a subscription would enable Apple to accommodate the fringes of demand in addition to pursuing an iTunes-centric model itself.

Adding provisional support for those services would make Apple TV more attractive, while also enabling Apple to recommend its own products. For example, it could offer to sell ad-free content at higher quality to Hulu watchers, or non-skipping, modern titles to users sifting through Netflix’s Instant Viewing catalog. Apple could also make a deal with Netflix to get subscription affiliate income from users who sign up with its service from Apple TV.

By making Apple TV the preferred way to stream any content to the living room TV, Apple would directly benefit from having a wider audience to offer its iTunes content and MobleMe services.

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– Hardware advances? Does Apple TV need a hardware update? It’s survived two years on the market without one, apart from a simple hard drive capacity boost. The device’s hardware is fast enough to do what it it was intended to do, which is to play back iTunes content. It was designed with future capabilities in mind. HD playback, digital surround sound, and DRM support to pacify the studios was all included from the start, even though all three weren’t unlocked immediately as the software struggled to catch up to the hardware.

In many ways, Apple TV is more like a games console than a computer, and was similarly designed to last for a long time on the market rather then being immediately obsolesced by a faster unit. Rumors suggest Apple may be eyeing a move to NVIDIA’s Ion platform, which pairs a dual core Intel Atom (low power x86) processor with the company’s high performance integrated graphics chip and system controller that first debuted in the MacBooks last year.

Whether that would enable Apple to deliver a similarly equipped box at a lower price, or slightly more capable box at the same price, remains to be seen. It does not appear that Apple TV really needs a hardware boost. The addition of Bluetooth might be nice, if Apple decides to provide support for keyboards and other peripherals, but the USB port can do that on today’s model.

What Apple TV really needs is a sharper 3.0 software update that keeps the box on par with advancements in the iPhone and iTunes. And if it can deliver that in the first half of the year, Apple TV will definitely keep pace with the success of Apple’s other products rather than boiling dry on the back burner as a neglected hobby.

Apple rumored to adopt NVIDIA’s Ion platform

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  • GwMac

    What good is an Apple TV is there is nothing to watch? As others have mentioned, the biggest problem is there is so little content. If Apple could partner with sites like Hulu, the network websites that show full episodes, etc.. that would be a huge step forward in making it more attractive.

    I think the vast majority of people do not tend to watch a TV show more than once and therefore do not want to buy it permanently. And certainly $2 for a 20 minute sitcom seems extremely overpriced. Some sort of subscription model for unlimited shows or even with commercials like Hulu would be far more appealing. As for me, the biggest complaint I have is the lack of codec support. Make it far easier to play other popular codecs.

  • ojavaid

    They should also create a better remote control, possibly incorporating that little ball they have on their new mouses. This would allow one to quickly scroll through the ever-growing catalog.

    The remote app for the iPhone and iPod Touch is a great step though.

  • Ted

    Daniel, MPEG-2 support is essential, and certainly do-able with the existing hardware if you include GPU acceleration. Apple already supports VIDEO_TS (DVD copied to your hard drive format) playback through Front Row — simply giving existing Front Row functionality to AppleTV is a logical first step.

    An additional step would be support for all the formats you can play back with software such as as Boxee — if Boxee can do it, clearly there are no hardware limitations. Keyboard support for easier YouTube searches is also essential.

    Lastly, if there is an AppleTV hardware bump, ATSC sourced MPEG-2 playback (1080i/720p, upscaled to 1080P) should be possible as well. That way people with DVR software (such as EyeTV) on their computer will be able to play back recordings on AppleTV without first transcoding it.

    All these steps fall into the category of allowing people to play back their existing A/V collections — just what has made the iPod so successful.

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  • Robert.Public

    …make something like a la carte Cable more of a reality. volume discounts for TV shows from particular networks? Package deals …. Netflix-like 3 at a time from certain channels.

    Live Sports! with season passes etc.

    Interface improvements….daily menus for podcasts…

    SDK – really

    iPhone or touch becomes the universal remote to end all universal remotes. Jeez if Logitech can do an acceptable job….

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  • http://redunionsalon.com macslut

    I would buy an Apple TV if it had:
    1) DVD/Blu-ray
    2) DVR functionality
    3) Codec plugins
    4) iPod dock

    Price is almost not even a factor.

    There is a ton of broadcast content that’s not available on iTunes. I’d love to be able to DVR it, and then watch it on TV or dock my iPhone and transfer it directly. Even the stuff that is available on iTunes, I’d hate to have to buy it when I already get it for free via cable, but the Apple TV can’t DVR it…and my TiVo is a hassle to transfer to my iPhone. I’m sure the Apple interface would be better than the TiVo interface, and it enables me to get rid of a box in my cabinet.

    Blu-ray would be a welcome addition too. The Nintendo Wii analogy doesn’t fit. First, I know a ton of people bought Playstations in part because of the ability to play DVD/Blu-ray. It helped in the decision. Secondly, the Wii *is* for playing games as stated in the article, but the Apple TV *is* for play audio/video content. It will appeal to everyone who will know that this device can play anything on your TV whether it’s from cable, DVD, Blu-ray, or downloaded from iTunes.

    The open codec architecture of course enables it to play pirated content, but also enables it to play any other format…like from various video recorders and things that are legally downloaded from other sources. More importantly, opening the platform up for development would go a really long way.

    The way I see this is that Apple could continue to sell a low-end Apple TV which is the Apple TV 3.0 mentioned in this article, but then also sell a higher end Apple TV that was really a Mac mini with additional features.

    They could strike a deal with Comcast that was similar to the deal with AT&T, and the device becomes *very* appealing at multiple price points and feature sets.

    It’s also a great time to evangelize developers for the platform.

    As it stands now, Apple is competing against DVD, Blu-ray, Cable, TiVo, Netflix, Amazon, piracy, and all of the set top boxes.

    Imagine how the iPod would’ve done if Apple declared the CD was dead and only enabled the iPod to play DRM tracks downloaded from iTunes.

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  • mattw

    I’m right there with you on the need for an Apple TV SDK. That might be the most interesting potential feature. Games, Hulu & other web video; could be really cool. Also agree with you that they should not do an optical disk drive. I kind of disagree on the TV tuner/DVR aspect though, or at least think there is more to the other side of the argument than you acknowledge. There are many reasons I say this: there is still lots of content that’s not available on iTunes (Conan O’Brien is a standout); $3 a pop for a TV show is just too much; certain programming that just doesn’t lend itself to the iTunes store, e.g., sporting events; sometimes I just want to channel surf, and not pay buy the minute with my credit card to watch shows. Don’t get me wrong I hate cable companies as much as the next guy with their ghetto-ass rushed to market set top boxes, and their d*mn bundling with phone services that I don’t want, and lack of any innovation and reliance on their monopoly. I admire Apple’s attempt to out flank them with the apple tv and the iTunes downloads, but I think that people don’t want to buy their tv shows. They want to own their music (cause you can listen to a song 200 times), they want to rent their movies (cause you only need to watch them once), and they want to get their tv shows in bulk/subscription/over-cable cause tv shows just don’t have the worth of movies. The only thing that would eliminate the need for a tv tuner would be the web video thing taking off. If the networks could get it together technically, and get APIs out to fetch and interact with their content.

    Interesting that you wrote this article only a week before apple put out a survey asking for customer feedback on the apple tv.

  • dickdotcom

    I have an apple TV and it is excellent – re your suggestion for adding Hulu support – in the UK adding support for the bbc iPlayer would make fantastic sense … the iPlayer is an incredible driver for online video and currently works on the iPhone …

  • DavidJHupp

    Hey all,

    I find it interesting that no one has made an obvious connection to AT&T’s U-Verse IPTV service, given Apple’s existing relationship with AT&T.

    AT&T’s U-Verse television essentially works with just a ethernet-connected broadband box, so it would be relatively easy for AT&T and Apple to support U-Verse content with a simple software upgrade. This would make a lot more sense than say adding CableCard to the AppleTV, which would be very much US-specific technology (CDMA iPhone?). This would also make sense given that AT&T has publicly stated that they are interested in releasing U-Verse related apps on the App Store.

    On the other hand, I think Apple could easily remedy any perceived shortcomings of the AppleTV by releasing an SDK, a-la-iPhone, perhaps with USB peripheral access. This way all of the following could be added:

    -optical drive via usb, possibly an official add-on (I don’t know if USB 2.0 has enough bandwidth for Blu-Ray, possibly USB 3.0 when it comes out, but that would require a hardware revision).
    -Netflix, Amazon, Hulu, Pandora, et al.
    -U-Verse (AT&T-published App would obviously be US-only, although I could see AT&T possibly offering it in non-AT&T-landline locales)
    -Bittorrent (though I’m suspicious that Apple wouldn’t let this into the App Store)
    -EyeTV support for those who absolutely must have a QAM/ATSC/DVB DVR, maybe HDHomeRun if Apple doesn’t allow USB access.

    In this way Apple would be able to turn the AppleTV into a convergence device much like the iPhone, without a direct investment in each niche market on Apple’s part. Additionally, Apple could add more first-party middle-ware, like PIM/MobileMe and Safari, etc. if they saw fit.

    The AppleTV’s App Store would neatly dovetail into the existing and vastly growing iPhone software market, with App developers tying in their software across the two devices, much like Apple offers their AppleTV Remote for iPhone.

    Actually, I would be very surprised if Apple does not eventually offer an SDK and App Store for the AppleTV, as it would be an additional revenue stream for them, and would make the device infinitely more attractive to consumers.

    (Disclaimer: I had AT&T U-Verse Television for a few months and was very impressed by it, but I ended up canceling in favor of ATSC on TiVo and Netflix Watch Instantly.)

  • DavidJHupp

    Also, I don’t get the correlation between buying music on the iTMS and buying video content on the iTMS. While one will most likely listen to one’s music over and over, most will only watch video content a few times.

    I don’t see the point of building a massive back-collection of video content, most of which one will never watch again, as compared to something like an unlimited Netflix subscription. My hard disk space is much more valuable than that. Streaming makes much more sense in a “watch it once” scenario, whereas with music it’s more a question of battery life.

    (Maybe the reason Real’s Rhapsody isn’t very popular is because people just really, really f***ing hate RealNetworks, not because streaming is inherently flawed. I mean, look how much people love Pandora.)

    On a different note, it seems somewhat specious that people would rail against the Amazon Kindle’s a-la-carte sales model (most people only read each book once), when the same argument also explains why iTunes video sales are so much slower than iTunes music sales.

    It just seems that iTunes video is overpriced compared to say Netflix: I can buy spend $30-50 buying each season of a show I’m going to watch only once, then have a large chunk of my hard drive used up, or burn the videos on expensive DVD-Rs. Or I could spend like $13 a month, and watch the show on Netflix. Or I could just watch it on Netflix, et al for free.

    The iTunes video sales model just seems ill-suited to anything more than occasional usage, given how overpriced and storage intensive it is, and you can’t even re-download content.

    While $0.99 for a song is a good deal (if you listen to your favorite song dozens of times, you’re getting a lot more than 4 minutes of entertainment out of a 4 minute song), $1.99-2.99 for something I’m only going to watch once or maybe twice seems like comparatively a very bad deal.

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