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

By Arik Hesseldahl

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.