Itunes is the most popular music distributor, but Apple can't get a toehold in the video or TV market. Here's how to change that
Before I get to the points that might create a stir, here's one that won't: For music, Apple's iTunes store is an enormous success. Customers have downloaded 8.5 billion songs, making iTunes the top music retailer in the world. The online media bazaar stores credit-card data on 100 million people, indicating that each customer, on average, has downloaded 85 songs.
But when it comes video, iTunes just isn't a force to be reckoned with. As of Mar. 19, the latest figures available, iTunes customers had bought 250 million TV shows and purchased or rented 33 million movies. That indicates that customers on average have bought 2.5 TV shows and one-third of a movie each.
Let's face it: iTunes just isn't where consumers want to buy video entertainment. Yes, it's great for watching on a PC or handheld device. It also works nicely for TV, if you happen to be one of the relatively small number of AppleTV owners.
Which brings me to another area where Apple (AAPL) hasn't set the digital world on fire. AppleTV, the device meant to help you watch on TV all that content you've downloaded to your computer, hasn't caught on with consumers who don't want another device cluttering up the space around their TV.
Here's a modest proposal for how Apple could remedy both shortcomings—the dearth of video sales on iTunes and the failure to make substantial inroads to the living room.
TVs with "iTunes inside"
Apple should consider making iTunes an ingredient brand by embedding it as an application on smart TVs from other manufacturers. Yes I understand this is a heresy, but hear me out.
Imagine the possibilities: TV sets will be marketed with "iTunes inside" and boast a remote control that itself includes an iTunes button. Pushing the button triggers something very similar to the AppleTV experience, and contain links to the iTunes Store, allowing movies, TV shows, and music to be downloaded directly to the TV set and even shared with the nearest PC, iPod, and iPhone. AppleTV could be a feature on TVs from Samsung, Vizio, and—dare I suggest it?—even Sony (SNE), among others.
How might it happen? Apple could build and design an iTunes module using a microprocessor designed by PA Semi, the chip company it acquired in 2008, and the other chips necessary to embed iTunes software directly into the TV. Throw in some flash memory for storage, a network interface for wireless and wired connections, and offer the whole package as an add-on to TV manufacturers.
At this point you're probably thinking Apple is giving away more than it should. The margins on this iTunes module would be lower than if Apple made its own TVs—a low-margin business if there ever was one. But Apple would likely sell fewer units of the Apple TV set than many companies could sell of TV sets with "iTunes inside."
And yes, I realize this would be a fundamental departure from Apple's typical business model. ITunes, after all, exists primarily not to sell content but to give people who buy iPhones and iPods something to do with those devices. But imagine how many new iTunes accounts might be created. And if you've never owned an iPod before, and happen to buy a TV with "iTunes inside," you may be motivated to buy one. The universe of potential iPod and iPhone buyers will grow.
Ironing Out the Details
The trick of course will be in convincing content owners, especially TV networks and their affiliates, to allow iTunes video to be seen on the big screen. If you can pay $2.99 for that episode of Glee and watch it on the main TV set in your house, there's a smaller chance you'll tune in on Thursdays at 9, and thus see the ads that Fox (NWS) has sold against it. Why do you think online TV site Hulu has had such a hard time keeping its programming out of Boxee, an open-source video entertainment application that's all the rage among the early-adopter set (and installed by technically adept AppleTV owners).
And granted, this plan has some fundamental technical questions that I can't fully answer. For one: Won't the storage boost the cost to build the TV, thus boosting the retail price? Moreover, how do you easily get the Internet connection to the TV? And, of course, Apple's consumer strategy is all about selling hardware that runs great software and about controlling the entire experience from beginning to end. It's not selling chips to third-party hardware vendors à la Intel (INTC).
Doing this would require a wide-ranging philosophical shift in the mind of Steve Jobs and his executive team.
Next month will mark eight years since Apple unveiled the first iPod and thus set out on its quest to remake the music industry. Video is proving more difficult for all concerned. The way things stand now, Apple stands a chance of losing the unfolding battle for control of the digital living room. To borrow a phrase from its history, to turn the tide it will need to think different.