Apple TV + YouTube = What's Next

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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. Grouper.com was acquired by Sony in August, 2006, while Revver.com 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 BusinessWeek.com, 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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With Aaron Ricadela in Silicon Valley
Hesseldahl is a writer for BusinessWeek.com in New York