Original URL: http://www.theregister.co.uk/2007/06/15/apple_tv_hurdles/

Steve Jobs: struggling to redefine the TV paradigm

The devil is in the detail for Apple TV

By Faultline

Posted in Media, 15th June 2007 13:02 GMT

Comment Getting into the mind of Steve Jobs isn't all that simple, and sometimes you just have to wait until he tells you what went through his mind in order to explain the latest Apple phenomena. But the picture around Apple TV is starting to clear with some rumours and snippets revealed this week.

The first is a rumour only, that iTunes will soon launch a film rental site. Now that's interesting for oh so many reasons. The first is that Jobs has always said the way to introduce new media to existing entertainment is to allow for, and potentially copy, the way that people used that entertainment in the past. Music was purchased in singles, in albums and on DVDs, not rented, or bought as a subscription, which is why iTunes was offered in the same way. Film, he has said, is entirely different, but that's where our clues end.

Movies are either watched in the cinema or on TV, bought on pay per view, but more recently and importantly, they are both rented and purchased as a DVD. So when Jobs says Apple TV is an appliance like a DVD player, he is thinking about replacing the DVD, and so he would prefer to offer both rental and purchased content.

But in order to simplify the process the Apple TV device has to be out there in volumes. During its first year the Apple iPod sold not very many, and it was only really a success when iTunes came along, some time later. This could be what Jobs is planning for Apple TV, and it requires the creation of a low priced film service with a huge amount of content. Rental is the second wave of attack, because when Apple first began negotiation with the major US film studios, they refused to give in to Jobs' $9.99 one price fits all video purchase strategy, a fight which was well publicised at the time.

Instead, Apple got the same pricing as Amazon and appeared at that point to become sluggish and less enthused over movies on the internet. Pricing was at $14.99 for new releases with and library titles available for $9.99 for purchase to own. Apple was clearly unhappy and thought this was too complex a message and only a small amount of content was licensed. And Jobs went into a rethink.

That rethink was tricky. He would have to offer rental video, which is where the studios had been pushing him, but how could he emulate the DVD experience online, from iTunes? He would need a route from the download to the TV and it would need to be iTunes only and it would need a rental business model. If the rumours are right (and why wouldn't they be?) this will be announced at Apple's developer conference any day. Deals will emerge with Disney, of course, but also with Universal, Paramount, and Warner Brothers which leaves just Sony and it captive MGM and 20th Century Fox and perhaps Lions Gate to have a full Hollywood house.

It doesn't matter how Apple TV (or the PC or the Mac or the iPod) manages the rental, because that technology is easy, but insiders told the Think Secret website that downloads will be date stamped and restrictions will placed on the number of playbacks or the time period for playback. It does sound a little too much like the CinemaNow and MovieLink failed business model for our liking, but if it can be scaled and pulled off by any company, it's Apple. It would be far better if the rentals have a 72 hour playback or longer, rather than the 24 hour limits of those prior services. Better still would be a multiple number of plays.

The nice thing is that the Apple TV only has to have virtually all the same code as a video iPod, and it can use the existing DRM, Fairplay, in its current iteration, to look after the playback and encryption. And so when iSuppli, the US teardown specialist, says that this is pretty much what Apple TV is, a video iPod with resilient wi-fi, then this fits the picture.

The device turns out to be an old Intel processor, the 1GHz Pentium M, worth $40, an Nvidia graphics chips, the GeForce Go 7300, worth $15 by iSuppli estimates, and components that just anyone can buy on the open market. Even the Wi-Fi is not radically different, but the Wi-Fi in the new Apple AirPort Extreme wireless routers handles the video resilience.

The conclusion that iSuppli reaches is that this device is priced to be at as low a price as possible with a margin of just 20 per cent on the $299 product. That means that anyone trying to copy the Apple TV route to market has to find a retail environment that is prepared to accept an incredibly low margin, and of course they won't. And iSuppli says this doesn't take into account the costs of cables, packaging, and marketing, so Apple's actual margin is actually even less.

Apple just about has the sales power to sell the Apple TV online and from its own retail stores and is expected to get just a million devices out there this year, because that appears to be the component volumes that Apple is ordering. But if a rental online movie service becomes viable and has that old Apple magic, then those order numbers can easily rise.

iSuppli is right in pointing out that Apple usually wants a 40 per cent to 50 per cent margin on its devices, but that in this case it is prepared to accept far less, because it means that a) no one else can follow the strategy through a retail set up, and b) that it needs the combination of Apple TV and rental video iTunes together to spark the next revolution. It is after volume here, not profit.

But what everyone is saying is that the Apple TV is NOT a DVR. By that they mean that it does not allow copying from broadcast TV. But if you go back three years to when Akimbo first introduced its service, it was a $250 set top that stored programs sent to it over the internet. But it WAS thought of as a DVR despite not recording from broadcast, and it soon amassed 15,000 programs or so that customers could rent. Apple TV is digital, and it does record video, it's just choosy about where it records it from.

iSuppli calls it a home-bound iPod video with no display and an HDMI output, pointing out that it does not function as a DVR, set top, or DVD player, and therefore does not replace any of these products.

We would say that it is a home bound video iPod which uses the TV as a display and functions as an internet appliance which directly competes with DVRs, DVDs and set tops. The ambition of Apple will be to start here and gradually reveal new appliances, with new amounts of storage, new capabilities to suit every home and budget.

Content that lives on massive hard drives, served through the Airport Extreme wireless router, huge archives of video on PCs, Macs, and the Apple TV, all available from one single interface, which will include YouTube shortly, and one day all the major broadcast TV channels (why wouldn't Apple allow live TV shows through its system from CBS, NBC, Fox and ABC), would create a system which has the potential to effectively get rid of the need for ALL of those devices – the DVR, the cable set top, and the DVD player. Never underestimate the extent of Jobs' ambition, successful or not, and thwarted by the studios or not, that's his plan.

Another minor move that came out this week was that when Apple introduced a new version of its Front Row software, the one on its new Leopard version of the Mac operating system, the interface that lets a Mac behave like a TV, it is now identical to the Apple TV interface.

And it's clear that a lot of thought has gone into making the entire suite of Macs work towards replacing IPTV services, and making Pay TV unnecessary with multiple ways of engaging with Apple.

Last week's deal that announced that Apple will shortly allow YouTube content onto the Apple TV, was signed just in time for YouTube to introduce its copyright filtering technology so that Apple suffers no embarassment there.

By the end of the summer it will be pretty clear what was in the mind of Steve Jobs all those months ago when the collision with the studios made him rethink his vision for an Apple digital video future, but already it is starting to take shape, and the image is both ominous for operators and rival TV technologies and threatens to be more far reaching than outsiders ever imagined.

Copyright © 2007, Faultline

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