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What's Behind Apple's Curtain?

By Arik Hesseldahl Apple Computer (AAPL) has summoned journalists and analysts far and wide to an unveiling of "just one more thing." The e-mailed invitation includes a curtain that looks suspiciously like those found in movie houses, fueling speculation that the Oct. 12 event concerns a souped-up version of the iPod that can play movies.

So what does Steve Jobs have behind that curtain? As is often the case with Apple product announcements, the tea leaves tell little, the signals are mixed, and the rumor machine has kicked into overdrive.

Judging from analysts' comments, media reports, and chatter on Mac-enthusiast Web sites, it appears all but crystal clear that some kind of update to Apple's mainstream iPod line is in the offing, and most Apple observers suggested that the long-rumored video-capable version of the iPod is about to become a reality.

MUSIC-VIDEO STORE? There's plenty of reason to think they're right. PortalPlayer (PLAY) supplies chips used in most variants of the iPod, and it has said it has a video-ready product in the pipeline. Apple -- because of iPod sales volumes -- would likely be guaranteed first crack at it.

For many, the video iPod is a product whose time has come. Already competitors like Creative Labs (CREAF) and Archos have tried -- and mostly failed -- to build a groundswell for portable devices that play video. And though Hollywood studios remain skittish about online distribution of movies, music videos are already appearing on high-end wireless phones. Apple could build on its reputation as the world's most successful online music store in a bid to become the world's most popular music-video download store.

Jobs has in the past dismissed video as antithetical to the reason the iPod has been successful -- the device works because listening to music is a passive activity you can do while doing other things. Watching video is far too active and distracting, he has said. But those criticisms of video seem to have quieted down lately. And Apple hasn't posted a new music video to its online store for a few months, suggesting that a pay-for-download video service may be the next new feature enabled on iTunes.

HOLLYWOOD JITTERS. Still, Apple has cause for holding off on a video iPod. It just released the iPod Nano, its flash memory-based music player that's the size of a business card. And the Nano is the current belle of Apple's holiday-season sales ball. Since the mainstream iPod line was just updated in July -- Apple merged the iPod and iPod Photo lines -- it may be too soon to launch a fourth iPod flavor while the Nano is just finding its sales legs.

Second, scant evidence points to Apple having cut significant deals with major video-content providers. Hollywood studios are far from settling on a digital-rights management scheme that would let consumers download movies. Instead, there are reports that Apple has licensed music videos from some of the record labels already selling music though the iTunes Music Store and that it plans to charge about $1.99 each.

But will selling videos through iTunes make a video iPod compelling? Apple might not have to start with much content at first, and instead follow the model of music sales, which were at first limited to a library of only a few hundred thousand songs. The business could grow from there as more content becomes available.

MOTHERLOAD COMING. And it's clear that content will increasingly be freed up. This week Viacom (VIA) disclosed plans to split its cable and broadcast TV operations. Its Securities & Exchange filing also outlines plans for a broadband video service called MotherLoad that will be based primarily around the programming of Viacom's Comedy Central cable network, similar to MTV Overdrive and VH1's VSpot service.

Additionally, Viacom says it has landed deals to distribute music videos from three of the four major record companies. And Universal CEO Bob Wright recently told an audience in London that his company plans to put its movies online by the end of 2005 or early 2006, calling the effort "something we have to do."

So while there's plenty of speculation that Apple has a video iPod up its sleeve, the Oct. 12 event could focus on other products. At least one report on the rumor site suggests that Apple's Macintosh computers will be the center of attention. The site, which has a record of predicting Apple's moves correctly, says the iPod update won't be video-centric. It'll be more of a traditional upgrade, coupled with new Macs on the high end of its lineup. The site expects the iPod's storage capacity to reach 80 gigabytes, up from 60, and some cosmetic changes, such as a version with a silver casing. Apple routinely declines to comment on product announcements.

TWO BRAINS. New computers are certainly due. The last time Apple upgraded its PowerMac G5 line was in April. And though Apple's transition to using chips from Intel (INTC) will get under way in earnest by summer of 2006, Jobs & Co. have said at least one major upgrade of its flagship machines for professionals was due before then.

A revamp would be well timed, following IBM's (IBM) recent release of a dual-core version of the PowerPC 970 chip, which Apple uses in its PowerMac G5 and iMac G5 computer lines. Dual-core chips have two brains on them and thus get more computing work done more efficiently and more quickly than single-core chips. Video and sound editors are key Apple customers, and they're always eager to make their work faster. Dual-core chips would aid immensely.

While many Apple customers may be waiting for the transition to Intel chips to be complete before they buy another Mac, some with more urgent needs will be eager to get their hands on some of the last Macs of the PowerPC era.

HEAVY BUZZ. Also among the rumors has been speculation about a change to Apple's Airport Express wireless networking device. The Airport Express is small Wi-Fi router that also connects to stereo systems and gives users access to the iTunes playlist stored on computers. Apple could update Airport Express so that it connects to a TV screen to stream video stored on the computer. This would be a nice enhancement for Apple's iMovie software, which is aimed at consumers who like to edit their own digital home movies.

Whatever Jobs is hiding behind the curtain, he has already generated a heavy buzz around the announcement. His last big event was the unveiling of the iPod Nano. So far, the device has been mostly a hit -- and a hard act to follow.

Hesseldahl is a reporter for BusinessWeek Online in New York

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