Apple TV + YouTube = What's Next

Google and Apple's deal to show video clips is a major step in the race to bring Net entertainment to TV

In the high-stakes race to bring Internet entertainment from the PC to the TV, Apple and Google were already at the head of the pack. By joining forces, the electronics maker and search giant just extended their lead.

On May 30, Apple (AAPL) Chief Executive Steve Jobs said Apple TV, the company's newly introduced device that transmits digital entertainment to television sets, will begin carrying clips from Google's (GOOG) YouTube. For Apple, the addition of content from an already popular video-sharing site could help sell more Apple TV units, says Tim Bajarin, president of technology consultant Creative Strategies. "With YouTube, [Jobs] might have struck a new nerve and in the process gotten more interest," he says.

Big Plans

And it's likely to be a harbinger of future cooperation between the two companies, especially considering their existing ties. "You can't rule out more collaboration," Bajarin says. Google CEO Eric Schmidt and Google adviser Al Gore sit on Apple's board of directors. The companies have a history of collaboration. A Google Maps application, complete with satellite photos, was one of the headline features Jobs demonstrated when he first unveiled the iPhone in January (see, 1/10/07, "The Future of Apple").

How might Google and Apple build on their bonds? Apple TV could incorporate additional Google features, like the ability to search for clips instead of navigating Apple TV's existing control panel, which is more like that of a digital video recorder, Bajarin says.

Whatever role Google (see, 5/30/07, "Google Is Making You Dumber") and its tools play in the future of Apple TV, it's apparent Apple has big plans with regard to downloadable video in the living room, and it's natural to expect that the relatively low-quality video available on sites like YouTube will only improve.

Mixed Success

No doubt scores of online video services that either mimic YouTube or approach online video distribution in different ways will start jockeying for Apple's attention and a partnership deal similar to Google's. "This deal underscores the nature of this type of connected device to delivery of more than just your traditional commercial content," says analyst Michael Gartenberg of Jupiter Research in New York. "We're in a phase where there's a great deal of overlapping functionality with respect to video content."

And as Apple TV becomes the conduit of a wider range of content, Apple's circle of rivals widens. Apple TV competes in various ways with TiVo (TIVO), which lets users port video records of their favorite TV shows to their PCs. Game systems like Microsoft's (MSFT) Xbox 360 and Sony's (SNE) PlayStation 3 are increasingly able to support video entertainment.

But these are still early days for Apple TV, which went on sale in March. Tech companies have had mixed success in efforts to make online content more accessible. One startup, Akimbo, has struggled to make headway with its set top box that downloads video content directly from the Internet to play on a TV set.

Microsoft and its many PC-making partners, such as Hewlett-Packard (HPQ), Dell (DELL), and Toshiba have seen some limited success with the Media Center PC edition of the Windows operating system, which turns a standard consumer PC into a digital home entertainment center.

And new video content startups are appearing online almost daily. Joost, for instance, uses a peer-to-peer technology—the same technology behind such services as KaZaa and eBay's (EBAY) Skype—to deliver licensed TV video content to its subscribers. Other sites born in the wake of YouTube have been acquired by larger companies. was acquired by Sony in August, 2006, while has recently been working with Verizon (VZ) to supply video for its FiOS broadband service as well as its Verizon Wireless mobile phone service.

Don't Ruffle Wal-Mart

Meanwhile, NBC Universal (GE) and News Corp. (NWS) earlier this year unveiled plans to launch their own video site that will compete with YouTube with partners AOL (TWX) Microsoft's MSN, and Yahoo! (YHOO).

Apple TV is a work in progress, to be sure. It lacks movie rentals, for one. It sells TV shows and feature films on a download-to-own basis, but there's no option to rent any of that content. That parallels a frequent criticism of Apple's music download business on iTunes. Apple has firmly stuck to the download-to-own model amid occasional complaints that it doesn't offer a music subscription service such as one created by RealNetworks (RNWK) with its Rhapsody service.

There's also the issue of Apple's next partner on Apple TV. In Google it found an easy, friendly partner. But other partnerships are less likely to present themselves so readily, especially on the video front. Movie studio executives are widely thought to be resisting the idea of putting their films on iTunes.

One big reason: Doing so will offend Wal-Mart (WMT), which sells millions of DVDs and would demand more favorable wholesale prices on DVDs should it appear that movie downloads from iTunes threaten DVD sales the way music downloads have eaten into music CD sales (see, 8/31/06, "Wal-Mart and Apple Battle For Turf,"). An obvious exception may be Disney (DIS), where Steve Jobs has a seat as a director, and which has a history of cooperating with Apple on various digital media initiatives.

New Kind of Drive-in Movie?

One potential target for Apple, Gartenberg suggests, may be the satellite TV operators, such as EchoStar Communications (DISH) and DirecTV (DTV), which both have partnered with AT&T (T) to offer a video service combined with AT&T's broadband Internet. AT&T also has its own video service called U-Verse.

Also, satellite radio player Sirius Satellite Radio (SIRI) has long been talking about offering its own video service, dubbed Sirius Backseat, aimed at the automotive market, which it expects to launch in several car models including Chrysler, Jeep, and Dodge (DCX) vehicles beginning with the 2008 model year. Sirius and its rival XM Satellite Radio (XMSR) offer streaming music services for their subscribers that could easily enhance the iTunes Internet radio offerings. And what might start as a simple iTunes partnership could easily lead to a deal under which video content could appear on Apple TV.

At times, Apple TV has appeared something of a sideshow to the iPhone, the music-playing mobile phone to be released with AT&T (T) in June. But the Google partnership and the possibilities it presents demonstrate the digital-TV box will hold its own in the pantheon of Apple products. Says Gartenberg, "Wherever iTunes can go, Apple TV can follow."

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