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Summary:

There have been several articles written about the possibility of a future update to the Apple TV that is based on iOS. These rumors have taken on a life of their own, in large part because everyone desperately wants them to be true.

Over the last few months, there’ve been several articles written about the possibility of a future update to the Apple TV based on iOS, the operating system used in iPhone, iPod touch and iPad. These rumors have taken on a life of their own on the Internet, in large part because everyone desperately wants them to be true.

The iTunes Store is a Dead End for Video

Apple sits in an enviable position in the smartphone market, has pushed the tablet category into the mainstream consciousness, and its Mac lineup is selling like hotcakes. It’s the king of music retailing as well, but movies and TV have been somewhat anemic. The iTunes store does not have the dominant position with video content that it does with music. The slow buildup of the video category has led Steve Jobs to refer to the Apple TV as a hobby: something for Apple to continue to dabble in while the market matures.

[inline-ad align="right"]So why has it been so slow? Because Apple was able to reach the top music retailer spot so quickly, media companies have been reluctant to concede control of electronic distribution to Apple. They feared the same fate as the record labels: their electronic plans dominated by a powerful distribution partner. NBC Universal even pulled its content from the iTunes store for a time during a public spat with Apple. NBC eventually returned, but the industry has still been slow to move on ideas like subscription services or lower pricing through iTunes. The pricing model for video content in the iTunes store has been static for years, and it’s not working.

The entire model for iTunes Store is based on owning the content you purchase. Unfortunately, the video content on the iTunes store is lower quality than what you can buy for the same price elsewhere. Why would anyone want to own mediocre quality content? The future is streaming for convenience and ownership for full HD.

How the iPhone Changes Everything

The explosive growth of the iOS platform (iPhone, iPod touch, and now iPad) has the potential to change Apple’s relationship to media partners. While there has been little change in the iTunes Store, there have been some innovative efforts in providing television shows and movies over the Internet.

iPhone apps provide a way to bring together these two worlds. Media companies can develop apps to bring their properties to consumers, while still retaining control over pricing and establishing a direct relationship with the consumer. The Hulu and Netflix apps are free in the App Store, but require a paid subscription to the respective service to access content. Of no small significance is the fact that Apple does not get one penny from these subscription services. And Hulu and Netflix know exactly who their customers are and how to reach them. App Store developers will be quick to tell you that one frustration is that they have no idea who is buying their apps, and no way to respond to people who complain in App Store reviews. Apple simply does not provide that information to developers.

You can see why media companies would be far more eager to pursue this path where they control pricing and have direct contact with their customers.

An End Run on the iTunes Store

In this scenario, Apple will miss out on a percentage of video content sales. It would be convenient to leap to the conclusion that this would upset Apple and it might take steps to prevent this from happening, but content sales isn’t what Apple is after.

I think the more likely scenario is that Apple continues to view the iTunes Store as the means to an end: selling more iOS devices. While the iTunes store contributed $1.2B to Apple’s revenue this past quarter, I suspect only a small portion of that number comes from video content. In comparison, Apple pulled in $2.17B on the iPad in the same quarter. I would bet that the margins are a lot better on the iPad than the iTunes Store as well, contributing far more to earnings than content sales. Apple will willingly give up growth in content sales in order to make sure that the App Store remains the preferred software distribution channel and iOS devices are the preferred hardware platform for media companies.

Great for Media Companies, Great for Consumers

The big media companies obviously win in this scenario. I think it also opens the stage for small media companies and startups to grow, because the App Store is a pretty level playing field.

Consumers also benefit. More choice, more pricing models, more innovation, more content. The opportunity provided by apps, multitasking in iOS 4, and remote control devices like the iPhone, iPod touch, and the new Magic Trackpad will create a great platform for developers and media companies to deliver existing content and innovative new features. Think Chopper 2 on the TV, controlled by an iPhone, and Scrabble on the big screen with iPod touch tile racks, and new apps that are designed to be controlled by a remote or Magic Trackpad. Maybe someone will finally figure out how to create compelling interactive content for movies that does not get in the way of actually watching the movie. Wouldn’t that be amazing!

Apple TV is Dead, Long Live Apple TV

The current Apple TV, a device where you buy and manage all your video content through the iTunes Store, is dead. But the next Apple TV, where media companies can produce apps to deliver their content to consumers, will be huge because it opens the marketplace back up to innovation again. I can’t predict if Hulu and Netflix will continue to ride the wave and hold their leading position, but I can guarantee that in an open market, someone will figure out a model that works for consumers. And Apple will be there waiting with the best devices for consumers to access that content.

Related GigaOM Pro Research: TV Apps Market to Hit $1.9 Billion by 2015

  1. Interesting…

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  2. We’re still not ready to let go of owning discs to store movies. Unlike music where most of us no longer buy CDs, but get digital formats from MP3s and such, such is not the case with movies. I own blu-ray discs and really don’t want to have to buy another version for the iPad. Instead, I try to buy blu-ray discs that let me have a free copy of the digital version.

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    1. The disc is just a byproduct of convenience and the space required for full HD. It will go away just like it did for music when people have something that is convenient and will play on their TV.

      I also look for blu-rays with digital downloads, but lately I’ve been ripping the blu-ray itself.

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      1. I have never been able to figure out the marketing behind apple TV. I honestly don’t understand what an Apple TV (or iTV) is.
        What can it do that my macbook connected to my hdtv can’t do?
        In my perception the Apple TV only imposes restrictions.

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  3. Wishful thinking and that is about it.

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  4. 1. Apple recently filed for a patent to allow some sort of ad streaming in OS X. This MAY mean that an update to Apple TV (with OS X) may be ready to stream free TV.
    2. You have a very short range of vision for a journalist. Hulu and Netflix are not available outside of the US. They block foreign IPs. So does Pandora. I doubt Apple would ever make anything that only worked well in one market. That’s just dumb.

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    1. 1. iOS and OS X are pretty closely related. If Apple did develop this technology, then it would be easy to make it work on Macs, Apple TV, and iOS devices.
      2. I may be short-sighted, but Netflix is the world’s largest streaming movie and tv service and provides a good example to illustrate how the industry is moving towards streaming. I actually think that your point strengthens my argument. Apple would just let the app store market sort out regional issues.

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      1. Yeah having a structure in place to support regional content could work. For example, in the UK LoveFilm would fill the gap left by Netflix, and SeeSaw or iPlayer from the BBC would fill the gap left by no Hulu.

        If each country Apple wants to sell in does have similar services like these is unknown to me, but having an App set-up could go some way to solve that issue.

        Of course it could make it a little less appealing to those in other nations if a service on offer wasn’t available, as despite being from a third party, the end user will see it lacking a feature which is available elsewhere.

        But yeah, Apple TV needs to change – a ‘hobby’ isn’t something I would feel comfortable buying into.

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  5. What you neglected to speak about was the rental market for AppleTV owners. Through the iTunes store, most of us rent movies. Getting immediate access to movies for 3-5 dollars was the biggest benefit. I never once bought a movie from iTunes. Never will. I’ll just buy BluRay if I want to own it.

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    1. True. I used subscription services to talk about streaming and didn’t mention rental as another non-ownership model. The larger point is still that ownership through the iTunes store is flailing and the app store approach opens up opportunities for consumers to decide which model works: rental, subscription, ownership, ad-supported, or something else.

      I also use the rental feature on Apple TV. It’s great. I’ve definitely rented more movies (10?) than I’ve purchased (1). If Apple would release statistics maybe we could confirm that you and I represent what “most of us” do with the Apple TV.

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  6. I ignore my AppleTV for movies for the simple reason of picture quality. I can download 1080i and 1080p movies either from satellite or via the Web to my DirecTV HD-DVR. My AppleTV doesn’t offer that quality.

    For small screen devices, e.g., iPod Touch, iPad, iPhone, 720p is adequate.

    You did manage to ignore a whole class of entertainment media that was made into the giant that it is – by iTunes and the ability to schedule automatic downloads for viewing in the living room as comfortably and casually as anything from another source. Albeit limited to 720p. But, so are sports events in HD from Fox. :-]

    Podcasts on cooking, geekdom, technology, any topic you might conceive of – entertain my family for a dozen hours a week, more or less, via our AppleTV. Virtually all of them wouldn’t be there if we relied on TV in any form to offer them. And hunting through every scattered website, hardware device acceptable to each – simply wouldn’t be worth the trouble for us if it wasn’t for the plain and simple ease of iTunes subscription.

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  7. Wow! How long did it take you to come up with that original title?

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  8. The success will depend on the implementation.

    I would be objectionable to an interface that is the same as the iphone/ipad, mostly because it won’t work well on a TV – touch interface compared to a remote control interface.

    If, however, content providers were presented as “channels” where you could then select from their programming, that would probably work.

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  9. This is Q2 data – before the iPhone 4 was released in Q3. The next quarter might look a wee bit differe

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  10. Apple is name of godfather in electronics industry now days, if they laucnh T.v. then it will be start of new era in this industry for sure.

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