Up next for Apple TV: Networked cable television

Posted by Christian Zibreg

Chicago (IL) - A suspicious lack of Apple TV-related announcements at the MacWorld Expo last month could mean either that Apple is phasing out its set-top box or preparing to take its "hobby" business to the next level. Although Apple TV sales tripled last year and have been estimated to have barely reached one million units so far, Apple will all but abandon the gadget which stands a shot at becoming the fourth leg of its business. In order to do so, Apple needs to put more "TV" into Apple TV - and the right way of doing it is enhancing the box with DVR functionality and cable TV support.





Eagle-eyed readers will note that our own Apple TV "Take 3" predictions called for a built-in digital TV (ATSC) tuner to allow next version of Apple's gadget to interface with an aerial or cable signal in order to decode free digital TV channels and an associated electronic programming guide. Now, Bernstein Research analyst Toni Sacconaghi is taking TG Daily's wish list a step further by suggesting that Apple should employ the power of software to bring DVR functionality and broader cable support to the next Apple TV. The analyst said that a new interactive software standard (dubbed Tru2way) that enables two-way interactive television on enabled TV sets might help put the "TV" part in Apple TV.



The analyst thinks that Apple TV has "the potential to become a major product line." He sees Apple TV as a uniquely positioned set-top box, the only one in fact that combines Hollywood entertainment streamed from the iTunes Store, user-generated content (user photos, movies, Flickr and MobileMe galleries, YouTube videos, etc.) and premium TV programming delivered by cable TV. The key is to put more "TV" content into Apple TV, a move that could easily grow Apple TV from niche business into fourth leg of Apple's business.



"Given roughly 65 million cable TV households in the U.S., capturing a modest 10 percent penetration in two years would lead to cumulative Apple TV units of 6.5 million - or more than six times the sales rate seen so far," he said. Sacconaghi said that increased functionality and broader content could "contribute roughly $1 billion in hardware revenues per year," under the assumption of an average sale price of $300 per Apple TV.





Tru2way can deliver "TV" into Apple TV



At its core, Tru2way leverages Sun's Java environment which acts as an intermediary translating cable's digital services on a target platform. It can "understand" the full range of cable's digital services, including interactive guides and video on demand, and can be easily expanded with custom-made applications and new interactive services, such as games, shopping, music, news, weather, local information, sports, interactive advertising, voting and polling, banking and other services.



Tru2way has already seen strong support from industry heavy-weights who licensed the technology, including AMD, Cisco, Intel, Sony and Toshiba. The software platform enables cable's interactive services to be deployed across different devices via set-top boxes or enabled digital TVs and Sacconaghi suggests there is no technological barrier that would prevent Apple from enabling Tru2way even on today's Apple TV units, simply by means of a software update.



Should Apple enhance Apple TV with Tru2way support, the company can easily add two-way interactive cable services on top of existing content offering without the need to update hardware with a dedicated cable tuning cards.





Content sells



The move would bring more value to Apple TV in content and functionality as users will no longer need to lease a dedicated set-top box from their cable operator that enables cable's services. In addition, DVR-enabled Apple TV could replace specialized DVR devices that also require a set-top box or services like TiVo. As a result, users might start to see real benefits in Apple TV as opposed to viewing it as just another set-top box that fights for living room space with IPTV boxes, cable set-top boxes and DVR gadgets like TiVo.



Attaching real value to Apple TV might boost sales of Apple TV, already estimated to have sold around one million units since it went on sale early 2007 - hardly a success by Apple's standards. Although Timothy Cook, Steve Jobs' temporary replacement, maintained during last conference call that Apple TV remains a "hobby business," the executive did say that sales of the device tripled in past year due to wealth of movies and TV shows that users can now rent in HD quality, following Apple's aggressive persuasive negotiating tactics with major Hollywood studios. Apple knows very well that content sells gadgets but rivals learned this lesson, too. Netflix-enabled players from Roku or Microsoft's Xbox 360 with unlimited Netflix streaming all battle for the same entertainment space under your TV.





Read on next page: Apple TV to become just TV?, Conclusion...








Apple TV to become just TV?



Piper Jaffray echoed Sachonaggi's report with its own prediction of DVR-enhanced Apple TV. But the investment bank also bets that Apple will bring a networked television by 2011 that will have Apple TV functionality built-in (something this author also predicted a while ago). Apple's $500 million agreement with LG Electronics for supply of LCD screens is another indication of this.



"We expect Apple to design a connected television over the next two years with DVR functionality built-in," wrote the analyst Gene Munster wrote in today's report to his clients. The analyst also added that users could sync recorded shows with Macs, iPhones and iPods utilizing a wireless network.



Apple-branded television set with Apple TV functionality built-in could become the center of connected interactive entertainment, argues Munster, encompassing games, music, movies and interactive TV. Opposite to Saconaggi, Munster proposed the use of CableCARD to enable reception of digital TV signal in HD quality. He thinks Apple could easily command premium in a cut-throat TV market estimated at 10 million units a year if it innovates the category.



Munster estimated Apple could sell up to 6.6 million of Apple TV units during 2009 by applying last year's triple growth rate to 2009 estimates.





Conclusion



Although Sacconaghi's suggestion makes lots of sense, there are some things to consider. For starters, Apple reluctantly licenses third-party technologies. The company's vertically integrated strategy mainly evolves around building key technologies that make up the user experience in-house. Success of the iTunes Store, now the largest online content store in the world, also casts doubts over Tru2way move.



In reality, there is nothing to stop Apple from bringing cable's premium television programming to Apple TV users via iTunes Store: Theoretically, users could rent individual or bulk TV programs for streaming in the same way you now get bulk TV programming from your cable operator for a monthly fee. On the other hand, bandwidth caps and sluggish broadband speeds in this country present serious obstacles to this path.



If you ask us, licensing Tru2way is the easiest route for Apple to put more "TV" into Apple TV. Unlike other set-top box makers, Apple is really the only player who can deliver unmatched ease of use and intuitive user interface packed in an eye-candy form factor. Attaching the Apple logo on a product like this doesn't hurt either given the company's credibility in consumer electronics. They key to this could be, as always, vertical integration of Apple TV with huge iPhone/iPod/iTunes ecosystem designed to bring more people under the Apple umbrella.



From the perspective of end-users, Apple TV could replace other DVRs and set-top boxes and truly become the center of their digital media universe - especially if Apple brings casual gaming to the Apple TV by opening up the platform to third-party developers via SDK and App Store.



Apple TV may at present be remain "hobby business" for Apple, but opportunities that lie ahead are certainly too tempting to ignore.