Apple's New Video Strategy Coming Into Focus

The blogosphere has been buzzing with talk of a radically updated version of the Apple TV set-top box. It turns out Apple plans to unveil the $99 device at an event on Sept. 7, my Bloomberg colleagues and I reported today . But that’s not the big video news Apple wants to impart.

Rather, look for CEO Steve Jobs to focus on the ability for customers to watch their favorite TV shows and movies on their iPads, iPhones, and iPod Touches, says a person familiar with the plan. The company will announce that customers can rent many TV shows for 99 cents–the same low-enough price that convinced millions of people to buy iPods to play songs purchased from iTunes (Also, thousands of 99-cent iPhone apps helped make the iPhone a hit, by making it popular for mobile gaming and other things). And Jobs will also show off a new iPod Touch that features a high-resolution screen like the one in the iPhone 4. That’s important, because the company can now say that all of its products are capable of near-HD quality video. Rent a TV show once, and you’d be able to enjoy it on your iPhone during the morning commute, on your PC during a lunchbreak, or on your iPad after dinner.

Making Apple TV the tail on Apple’s video strategy makes sense. Kaufman Brothers analyst Shaw Wu estimates that Apple has sold fewer than three million Apple TVs since the product was introduced three years ago. Even with the refresh, Jobs isn’t convinced the new version will be a mainstream hit, says the person familiar with Apple’s plans. Most consumers aren’t ready to cut the cord to their cable company, or put up with the tech-nastics required to stream content from the iTunes collection on their PC to their living room big-screen TV. In other words, it’s a product that at best will delight some of the “hobbyists” that have always been interested in the product.

Some analysts do have higher hopes. Assuming the new Apple TV will run on the same IOS software that powers the iPhone and iPad, it will be able to run Apps. In that case, Kaufman’s Wu thinks it could be a popular, low-cost game console for people who don’t care about running the most cutting-edge, graphics intensive games. “I think the Apple TV would have the potential to be a million-unit-a-year seller on the basis of that alone,” he says.

Making TV-watching a routine use of its portable devices would still be far more important to the company’s stated goal of being the world’s leading “mobile devices company.” The company could sell as many as 79 million of its iDevices this year, and 102 million in 2011, Kaufman Bros. analyst Wu says. Apple isn’t going to give up on Apple TV, but the real innovation is happening inside iTunes, says the person.

My sense is that Apple doesn’t plan to overplay its hand, by making too much of this mobile TV opportunity. This isn’t another “revolution” in the making. Even if Apple wanted to try for that, studios have all but nullified the possibility by refusing to let Apple sell subscriptions to your favorite shows, to be watched whenever and as many times as you like. That might have appealed to consumers who just like a few shows, and don’t want to pay those hefty monthly cable bills.

Instead, the person familiar with Apple’s plan say executives see the rental service as useful primarily for “catch-up viewing”–the ability to watch that episode you missed, or on a lark check out some show recommended by a friend. Apple’s pitch to studios and networks is that the rental service could ultimately bring in billions of incremental dollars, without threatening the lucrative contracts they have with cable companies.

Still, if the rental service works well, owners of Apple’s devices may soon be calling up episodes of “Glee” or “Lost” as routinely as they fire up Pandora’s music service or a restaurant review site. That would give millions of current and prospective customers more reasons to buy into Apple’s ecosystem–and not into anyone else’s.

Read the original story at BusinessWeek Byte of the Apple Blog