"You watch television to turn your brain off and you work on your computer when you want to turn your brain on."

-- Steve Jobs

The Apple TV has received a lot of press lately, primarily based on the overall concept, enthusiasm for Apple, and fueled by the HDTV transition. However, a few things need to be looked at in much more detail. In fact, in recent weeks of study, I've changed my mind about Apple's domination prospects, primarily due to my day job of paying close attention to the industry as a whole.

This is not to say that the Apple TV won't be financially successful. I believe it will be. However, I don't think it's going to change the rules or seriously challenge the rest of the TV industry. Let me put it this way. Last week I looked at the positives. This time, I'm going to examine the negatives.

The first generation Apple TV is troublesome in many respects. It has certain limitations, and while I argued last week that sometimes placing limits on a product's design brings focus and excellence, it's also true that missing a key design point can cripple a product's value as a more strategic weapon.

The Single Source Issue

Video arrives on the Apple TV one-way, from iTunes, via 802.11/b/g/n and is piped out to the HDTV. The possibility of accessing the regular carrier feeds, such as cable and satellite TV are cut off. Fine. We know that it's Apple agenda to do an end-run around the traditional carriers. That, however, makes the Apple TV merely an accessory, like a DVD player. Just another box to connect to your HDTV. The result is that the door remains open to the cable companies to develop a new breed of set top boxes with much more powerful software and a protocol called OpenCable Applications Platform (OCAP).

Using OCAP, well funded and resourceful cable companies who want to keep their legacy customers away from the Internet (unless its their own IPTV feed) will be able to offer "Apple TV" like functions that will, they hope, make the living room TV experience much more enjoyable. Articles I've read predict that your cable company will start switching out your old, stupid set top box, for an OCAP enabled box in 2007.

In time, I think this will become a problem for Apple.

The Resolution Issue

A very smart writer, Robert X. Cringely, wrote recently that the Apple TV is simply version 1.0. In this version, your movie format is limited to 640 x 480 which is a 3:2 aspect, not 16:9. Right away, the customer figures out that he's still better off buying an anamorphic disc at Wal-Mart and having the physical CD on the self. After all, as I said last time, how hard is it to drop a DVD into an attached player?

In Mr. Cringely's hypothetical version 2.0, however, Apple makes some changes, introduces a BitTorrent-like P2P file sharing service that better distributes an HDTV load, and voila, you'll have genuine HDTV movies in your iTunes library. That is, if Hollywood will strike a deal with Apple to deliver this content, undermine the stand alone Blu-ray and HD DVD players, piss off almost all their channel partners, and undermine the sales of HD movies on plastic.

Hollywood probably considers it preferable to have a Blu-ray/HD DVD player directly plugged into an HDTV and control the digital signal via the DRM and HDMI cable. While Apple's system appears, at first glance, to be just as robust, it isn't. Even if we presume the movie would have DRM in iTunes satisfactory to Hollywood, that the radio transmission is encrypted to the Apple TV, and then regulated by the HDMI cable, there is another issue. We have an intervening party, Apple, that bypasses the ability of a stand-alone player via the Internet to disable the encryption keys for a given HD movie, if necessary, under the studio's control. And that's the key word: it's a fight for control.

The bottom line is that, in my opinion, Hollywood has too many axes to grind and too many controls in place, to allow Apple to sell a complete portfolio of HD movies. I hope I'm proved wrong. But here we are in early 2007, many, many Blu-ray players have been sold in PS3s and as stand-alone devices and many, many HD DVD players have been sold*. Clearly, Hollywood is holding Apple at bay until customers get accustomed to buying HDTV movies on plastic.

Consider: Apple isn't even allowed, due to the protection on ordinary DVDs, to pull the movie off your Superdrive and pipe it to the Apple TV. Perhaps Apple is being punished because it hasn't come out with HDMI enabled displays, and so the studios are waiting for that to happen before they ever allow a full HD movie into your Mac's iTunes library. Otherwise, you could just send a digital copy out via the DVI cable and be in pirate heaven.

What is Apple waiting for? The entire PC industry is rapidly converting over to HDMI displays and HDMI connectors on the PC. Apple is way behind. Maybe Mr. Jobs is waiting for Hollywood to drop the whole DRM thing.

I hope not.

Mother Apple Knows Best?

We know from Steve Jobs' quote above, that he has no great love for what Newton Minow coined The Vast Wasteland of TV. And, as I described above, there is no current mechanism to get TV, from a cable box or a Joost client, into your Apple TV. This appears to be a very serious matter. It so severely restricts the capability of the Apple TV that the cable providers merely need to ask themselves, "what do we need to do to duplicate, with OCAP, the functionality of the Apple TV?" Apple may have made a mistake here.

To make matters worse, Google blundered, in my opinion, when they bought YouTube. [Google, according to Mr. Cringely, would be Apple's partner in the P2P file sharing scheme.] The undisciplined posting of copyrighted content on YouTube has pissed off just about every network executive and everyone who has valuable IP. Google keeps trying to remove offending, copyrighted material, by the tens of thousands of files, and Netizens instantly reload. As a result, an important deal with Viacom was lost. Viacom turned to Joost, whom Viamcom thought would better be able to protect their content and provide a better business model.

In a February 21st Wall Street Journal editorial, Paul Vigna wrote a great editorial: "Content Will Always Be King." In his explanation of how the traditional business models are still viable, he wrote: "...Ad dollars will continue to flow to the programs that draw the most viewers. The video of two guys dropping Mentos into [diet] Coke bottles and setting off a symphony of exploding soda is brilliant, and shows how creative user-generated video can be. But shows like "Lost" and "The Office" -- which can't be produced out of someone's garage -- bring in millions of viewers, week after week, year after year. Advertisers pay handsomely for access to those audiences, and that won't change." [Emphasis mine.]

So there you have it. The industry has figured it out. The TV business model works. Advertisers are quickly figuring out where to spend their ad dollars. The carriers are working with Motorola to develop new software with OCAP enabled boxes. DirecTV is spending millions to put up new satellites and provide 150 channels of HDTV. Apple is being blockaded until, at least, the True HD format takes off and millions of players are sold by Samsung, Panasonic, and others. To predict that Apple is going to do anything more, in the short term, but sell you a few movies to slap on your iPhone to amuse your friends, may be a stretch in the face of the TV industry's current initiatives.

Mr. Vigna continued, "Shows like "The Simpsons" and events like the Super Bowl may attract fewer viewers as the marketplace expands, but don't expect the cost of an ad to go down. The ability to cobble together millions of viewers consistently will only become more valuable, not less, and the networks know how to do that. YouTube does not."

Reading the Tea Leaves

Apple is taking their adventure into home HDTV very slowly. There are lots of things to figure out. Unfortunately, we aren't privy to the maneuvering behind the scenes, so we can only hope that Apple is working out these issues:

• Apple isn't shipping a Blu-ray drive in the Mac Pro.
• Apple isn't shipping displays with HDMI. And current models remain grotesquely over priced.
• Apple, so far, won't tell us if the HDMI output of the Apple TV complies with the HDMI 1.2 or 1.3 standard. Why is that worth hiding?
• Apple's movies for sale in iTunes are not HD movies. But millions of customers are watching HD movies right now via cable and satellite.
• Apple hasn't been allowed, so far, via licensing, to let DVD movies on a SuperDrive narrowcast to the Apple TV. Alternatively, evil Apple wants you to, gasp, repurchase content from them. Either option is distasteful.
• Apple has not struck any agreements with content providers to deliver wide ranging TV via something like Joost. Instead, iTunes appears to be simply exploited by the TV studios to hype interest in their programs. Is Apple success here a delusion?
• The Apple TV is capable of 720p** output. But that does not guarantee we'll ever see major iTunes content, TV, movies and sports, in that resolution.

Mr. Jobs may think that television turns one's brain off. But focusing solely on a pay-to-own item model instead of the traditional advertiser supported business model of broadcast television cuts Apple off from an important growth avenue. Is that what Mr. Jobs wants?

I would be very pleased to be wrong about Apple's current prospects, and I'd love to see them energetically become a player in the delivery of broad spectrum, ad supported traditional TV. While iTunes has a rich selection of TV shows, it just isn't economically feasible for most people to pay $1.99 for every show they want to watch. As a result, I think, we're all going to have cable or satellite set top boxes/DVRs for a long time to come, and Apple TV could end up simply being a nice medium-definition gadget and a successful but niche market product.

I hope Apple wants more than that. How they achieve it will be fascinating to watch.

* The hardware sales of players in each camp, aside from Xbox and PS3, are still closely held.

** Even more interesting, we haven't been able to find out if the Apple TV does the scaling or just passes the signal on to the HDTV and lets it do the scaling.