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The New Guns in Apple's Arsenal

Apple Computer lured reporters to its latest carefully scripted product announcement with an invitation to peek behind a curtain for a look at "just one more thing." In the end it was more like six.

But certainly the above-the-fold headline describing what Apple (AAPL) unveiled in San Jose on Oct. 12 would have to highlight the video iPod. Were it not for the slightly wider display screen -- 2.5 inches diagonally, about a half-inch larger than the previous flagship model -- you might almost miss the fact that it has been redesigned at all. The scroll wheel looks the same, and it's thinner than previous iPods.

But now you can watch your own home movies, pay two bucks to download music videos from a catalog of some 2,000 now available on the iTunes music store, or watch an episode of Desperate Housewives, one of a handful of TV shows from Disney's (DIS) ABC network, for $1.99 each. Disney CEO Bob Iger was on stage with Apple CEO Steve Jobs, calling the new iPod and iTunes video service a "breakthrough" -- and likely signaling a new, more amicable phase in relations between Disney and Jobs's other company, computer-animation titan Pixar (PIXR).

REDMOND FUMBLES. As with the first iterations of iTunes, which sported a library of only a few hundred thousand songs to download, the video offerings are off to a modest start. It won't stay modest for long. With a device that can store 150 hours of video, the program choices will have to grow -- and fast.

Portable video players aren't a new idea. Microsoft (MSFT) has pushed its portable media centers since last year, through hardware partners such as Creative Labs (CREAF), Samsung, and others. It also tried to create its own digital hub with the Media Center PC line, developed with hardware partners including Hewlett-Packard (HPQ), Dell (DELL), and Toshiba. But neither the mobile devices nor the Media Center PCs have sold well.

Until recently, Jobs had been dismissive of the idea of turning the iPod into a portable video platform. Why watch videos on a tiny little screen when you can see them on a much bigger and better screen in the living room? This argument had -- indeed still has -- a lot of merit. But the iPod or a device like it has a lot of potential as a portable storage medium that connects directly to a larger screen, like a TV or a PC display. This iPod -- note there's no change to the name -- does both, allowing you to watch video on its small screen or connect to a home monitor.

HOME TURF. While the video iPod got the attention, it's only a small part of what looks like a much grander strategic attack on the digital-media space. The new iMac G5 says much more about Apple's stance on digital media going forward. Sporting a built-in iSight camera for video conferencing, and a remote control so you can start and stop music and video on the screen from 30 feet away, this machine, which starts at $1,299, reflects Apple's increasing attention to the living room.

Is this a living room Mac? Maybe not. Is it a big part of Apple's answer to the Media Center PC? Definitely so. Media Center PCs run a special variant of Windows that allows users to record TV shows, organize a digital-music collection, and play streaming audio from services such as XM Satellite Radio (XMSR).

Earlier this year, Microsoft released a product called the Media Center Extender that brought the PC and traditional home-entertainment devices like the TV and stereo together on a home computer network. The idea was to bridge the gap between a PC hard drive stuffed full of video and music and traditional entertainment equipment. But consumers still don't seem to be biting.

SPEED THRILLS. Meanwhile, Apple's campaign to conquer home entertainment keeps marching forward. Just this week, it joined 26 other companies in a new industry consortium called the Enhanced Wireless Coalition that's developing a standard for the next generation of wireless fidelity, or Wi-Fi, networking technology.

That next step is known by its arcane technical name, IEEE 802.11n, but it translates into a Wi-Fi network that would be 10 times faster than anything available today. Products using the current standard -- known as 802.11g -- boast download speeds of as much as 54 megabits per second. The new standard would push that speed to 600 megabits per second, fast enough to deliver high-quality streaming video whenever, wherever.

Once you get wireless networks running that fast, you can start thinking realistically about pushing multiple streams of high-quality sound and video content all over the house. And here Apple already has a ready-made brand of products -- the Airport Extreme and Airport Express wireless networking products -- that are both due for a refresh.

Airport Express can already be used to stream music from a Mac or a PC's iTunes playlist to home stereos. And Apple launched its current flagship Wi-Fi router, the Airport Extreme, months ahead of the official industry ratification of the 802.11g standard. It might do something similar with a new Airport lineup before the 802.11n standard is ratified.

UTOPIA NOW? Apple has been traditionally strong in the Wi-Fi business. Last year, it was second only to Linksys, a unit of Cisco Systems (CSCO), in share of the market for Wi-Fi gear based on the 802.11g standard (see BW Online, 2/19/04, "Apple's Other Hardware Hit").

The division that includes Airport products accounted for $296 million, or about 8%, of sales in the most recent quarter. Recognizing the potential for growth in wireless-media-related gear, the Linksys unit just paid $61 million for Kiss Technology, a Danish startup that makes DVD players that can be connected to the Internet for video-on-demand functions.

We've been hearing about this utopian digital-media environment for a long time: music, TV, and movies available anytime, all over the home. And now, with the video iPod, you can have it outside the home.

CONNECTING IT ALL. Microsoft had the vision, but lacked the ability to push it through in a way that consumers find compelling. It built an ugly portable product that's confusing to use. Apple has a proven record of turning the needlessly complex into beautifully simple designs.

Music videos and a few TV shows may be the first of its iTunes video offerings, but Hollywood can't be far behind. The iPod, the new iMac and a faster wireless network will tie this digital media environment together. If Apple can't do it right -- and make billions of dollars in the process -- I don't see who can.


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