Apple TV: Time to Get Serious

As unit sales tripled in the first quarter from a year earlier, it's become clear that Apple TV is more than a hobby

Ever since Apple TV hit store shelves in early 2007, company executives have insisted on calling this curious little box-shaped gadget a "hobby."

In 2007, Apple (AAPL) CEO Steve Jobs used the label to describe this device, which lets users transfer to a TV programming that has been downloaded onto a computer. Chief Operating Officer Tim Cook, who has been running Apple while Jobs takes a six-month leave of absence, used the term as recently as Jan. 21, during a conference call discussing fiscal first-quarter results.

It's time to drop the hobby talk. First-quarter unit sales of Apple TV tripled from a year earlier, in part due to a software update introduced a year ago that lets users rent movies, including some in the ultra-crisp high-definition format. Version 1.0 of Apple TV let users watch programming purchased from iTunes or downloaded off Google's (GOOG) YouTube.

Would Buying TiVo Help?

At least for the foreseeable future, Apple is arguably unlikely to introduce a game-changing new product along the lines of the iPhone or iPod. So the company needs to make the most of its existing product line—and Apple is clearly not exploiting Apple TV to its fullest potential. It remains at hobby status when it should be considered an "A Team" product.

One idea already out there: Buy TiVo (TIVO). Under this scenario, Apple would acquire the digital video-recorder pioneer and turn Apple TV into a DVR. Apple could easily afford the $1 billion or so it would take to do the deal, but it would also end up having to provide ongoing support to an inherited customer base—not exactly Apple's bailiwick.

Sanford C. Bernstein analyst Toni Sacconaghi says Apple should turn Apple TV into a full-blown cable box. In a research note issued Jan. 6, Sacconaghi says Apple could do that via Tru2Way, a cable industry-backed effort to let consumers buy their own cable TV boxes at retail locations, rather than having to rent them directly from the service provider. Under Tru2Way, consumers could also have the set-top box's features built directly into the TV. It's not a bad idea, but it doesn't go far enough.

Flexibility Is a Must

My take is that Apple needs to allow for the same degree of flexibility around Apple TV as it does for the iPod. Remember that while Apple has sold more than 5 billion songs on iTunes, your average iPod owner only buys about 30 songs from iTunes. The rest come from other sources—existing CD collections, files downloaded from file-sharing networks, and more recently, MP3s purchased from Amazon (AMZN) or Rhapsody (RNWK).

Contrast that with Apple TV, which is essentially your iTunes collection—music, video, podcasts, etc.—moved from the confines of your computer to your TV or home entertainment system. Aside from YouTube, there are no other authorized video services, limiting Apple TV's appeal.

The iPod succeeds not only because it has iTunes behind it, but because it works with so many other things. More flexibility for content is a must.

Hackers Open Up Apple TV

So how does Apple arrive at that flexibility? Consider what happened when Apple TV first hit the market. In a matter of days, enthusiasts cracked it open and hacked together a handful of unofficial applications to support scores of video formats that Apple had ignored. Sure, those willing to go to the technical trouble may have voided their warranty, but after a little work, they had vastly more flexible devices.

There are software hacks out there that give Apple TV owners access to such movie rental services as Jaman and HungryFlix. Other fixes let you rip the content of a DVD to the device's hard drive in much the same way you'd rip a CD to a computer.

The most promising of the hacks I've seen is one for a service called Boxee. Installed on your computer or Apple TV, Boxee gives you access to pretty much any kind of video available on the Internet—be it,, (CBS), or something else. The user base is limited since Boxee is still in an early testing phase, but I'm told even the testers are dropping cable or satellite TV connections entirely. Yes, using Boxee takes some technical acumen that's beyond abilities of the average user, but that doesn't have to remain the case.

Following the Lead of the iPhone

Clearly, there's pent-up demand among a core group of early-adopting consumers to push their extensive video collections out of their computers and to their TVs. There's also a desire among software developers to build interesting applications for Apple TV. Kind of like for the iPhone, where developers have cranked out some 15,000 applications—many of them free, others selling for $10 or less. In less than a year, iPhone owners have downloaded half a billion of these applications. These legions of creative developers have turned the iPhone into the most powerful threat to existing phone manufacturers like Nokia (NOK), Motorola (MOT), and Research In Motion (RIMM).

And that's how it could be with Apple TV. Apple should give programmers the software developers' kit they need to make the device more flexible and useful. Buy the box, and you can buy or rent from iTunes—and if that's not enough, there are hundreds of easy-to-install apps that will let you watch whatever you want from the Internet.

Meanwhile other Internet-to-TV boxes have come and gone. Akimbo, an early Internet video box maker, shut its doors last year. Netflix (NFLX) has teamed up with Roku on its own movie-rental box that has met with rave reviews, and the feature has been added to TiVo boxes and will soon be built directly into some TVs. Then there's the upstart Vudu, which makes its own rental device. And TiVo has teamed up with Amazon's video-on-demand service. The options are multiplying quickly, yet none have hit upon the magical formula that causes an iPod-like wave of consumer mania.

It's Up to Apple

That formula may be lurking inside the mind of an as yet unheard of software developer who's envisioned an application that will blow all our minds and make our TVs talk to the Internet in ways we can scarcely imagine. That person just needs a supportive partner to provide the hardware. There is no reason in my mind why that partner can't be Apple. It's time to get serious about this hobby.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE