Higher Hopes for Apple TV

Steve Jobs announced improvements to the device that are already boosting its appeal, and more are likely on the way

Two weeks ago in this space, I raised my objections to Apple TV. Given its current capabilities, features, and, frankly, a handful of limitations, I made a case explaining why I'll be sitting on the sidelines and not buying an Apple TV for the time being.

I did however, leave room to be convinced that my initial judgment was wrong (see BusinessWeek.com, 5/17/07, "Tuning Out Apple TV—for Now"). Since Apple (AAPL) had already promised a series of changes to the device through software upgrades, I was willing to reevaluate the device as new features were added.

A Hint of Things to Come

On May 30, in a conversation with Walt Mossberg at the D: All Things Digital conference in Carlsbad, Calif., Apple CEO Steve Jobs showed exactly what he has in mind for the Apple TV, and while it doesn't look like a big deal today, the implications are very interesting. After a software upgrade available in mid-June, Apple TV users will be able to watch video downloads from Google's (GOOG) YouTube.

Jobs described Apple TV as a "hobby," saying that Apple's three main businesses are the Mac, the iPod and the iTunes store, and soon, the iPhone. There's not much of a business yet in bridging the gap between Internet video and the TV set—Jobs ballparked the current addressable market at just hundreds of thousands of users. So for now, Apple TV remains an interesting sideshow to its existing $20 billion to $24 billion business of selling Macs, iPods, iPhones, and everything else Apple purveys. In time, it may grow into something much bigger, just as the iPod did.

Hobby is an interesting choice of words, considering how important Internet video is widely expected to become in the next several years. Market research firm eMarketer reckons that ad spending in conjunction with Internet videos could grow to a $3-billion-a-year business. So when Steve Jobs calls something a hobby, I'm reminded of a professional baseball player named Bo Jackson who took up a "hobby" in 1987—playing pro football for the Oakland Raiders. Only one month into that hobby, Jackson rushed for 221 yards against the Seattle Seahawks, a rushing record for a Monday night game, and scored three touchdowns.

A Record-Breaker in the Making?

So if online video is to be a hobby for Apple, lets take a look at the scorecard so far. Is it off to a Jacksonian start? Internet video and YouTube are essentially synonymous, and YouTube is the biggest thing to happen to the Web in several years. In fact, in the days before Google paid $1.65 billion to buy YouTube, there was much speculation that Apple would be the one to acquire it. Meanwhile there are scores of YouTube knockoffs trying to make a go of the business. And with cheap digital camcorders and simple digital production software only getting cheaper and easier to use, the amount of video content will only increase and the quality will only improve. Some day, YouTube will carry high-definition video. Some day, HD video will be everywhere on the Web.

This tie-up between Apple and Google isn't about what YouTube is today. Do you really want to watch videos of college kids mixing Diet Coke (KO) and Mentos on your TV when you have an entire season of Lost on your TiVo (TIVO)? Probably not. But YouTube and its ilk aren't always going to be about novelty videos passed from friend to friend via e-mail and blog postings. In time—and that time isn't far off—the Web is going to be the premier method of video distribution. Sometimes it will be free, and sometimes you'll pay for it.

My expectation is that this is only the first in a long line of partnerships bringing video of all kinds to the Apple TV box. Some of it is already arriving without any formal partnership with Apple. Sling Media recently made its Slingbox compatible with the Mac OS, adding a feature that gives users remote access to video content stored on an Apple TV box. Another outfit, Roxio, a unit of Sonic Solutions (SNIC), has created software called Crunch that converts digital video into the right format for Apple TV, as well as for the iPod and the iPhone.

Content Will Move Toward Apple

Independent software developers have also created a bunch of unofficial features for Apple TV. There's Streamer, an application that can stream live Internet radio stations to the box. There's EyeTV, from Elgato Systems, which turns your Mac into a digital video recorder that can record high-definition TV shows that can then be pushed to an Apple TV.

There's already an online vendor of independent films called HungryFlix that sells shorts and features—mostly from filmmakers you've never heard of—that are formatted for Apple TV. I have a hard time believing that others won't follow suit in some fashion, either through an unofficial "hack" or by an agreement with Apple. One I'd particularly like to see on Apple TV would be Jaman.com, which distributes world cinema films online, creating what my colleague Steve Wildstrom has described as "an online art house."

Bigger Is Better

One of my big complaints about Apple TV concerned the hard-drive size. I wasn't the only one complaining. I mean, come on, 30 gigabytes of usable space (the drive is actually 40GB, but about a quarter of that is devoted to software) isn't all that big when you get into creating a serious video collection. Thankfully, Apple is now offering a build-to-order option with a 160GB drive for $399.

So, even if online video in the living room is merely Apple's latest hobby, it's now off to a better start than before. The outlook may even be more promising than in the early days of the iPod, which needed about two years of development and improvements before it was really a prime-time product. No touchdowns yet. But suddenly, I have fewer doubts about Apple TV's prospects.

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