Where is the Apple TV heading?

Sales of the Apple TV “hobby” product may have jumped three times last year over the previous year, but Apple has a new crop of competition to contend with if it hopes to ever graduate the Apple TV to the big leagues. Let’s take a look back at where the Apple TV has been, and where it needs to go.

Then

Steve Jobs announced the 40GB Apple TV alongside new iPods at one of its press events on September 12, 2006 (yes, it’s really been that long). Since then, it has experienced one storage increase, two major software upgrades, and support for a handful of new media sources such as YouTube, HD rentals and purchases from iTunes Store, photo galleries from MobileMe and Flickr, and access to the iTunes Store’s podcast directory.

The core purpose of the Apple TV, however, has remained the same since its debut: it’s an “iPod for your TV,” anchored—for better and worse—to iTunes. Its simple goal is to make it easier to bridge the gap between your computer and your living room TV. If your iTunes library happens to be smaller than the original 40GB or current 160GB models, the Apple TV can indeed act as a faithful iPod for your TV. But if you just happen to watch a lot of video on your TV, and your iTunes library has ballooned in size over the year, you probably have had to play the “what should I sync” game of iTunes musical chairs on more than one occasion. That, or you need to leave the computer with your iTunes content on for streaming all the time.

Of course, if you’re looking for more from the Apple TV—you prefer to rent or subscribe to your video content, say—you probably haven’t bought an Apple TV. Which means you are a prime target for the latest wave of the Apple TV’s competition for the living room.

Now

Last week, Google announced Google TV, an Apple-TV-like box that will essentially be everything the Apple TV is not. Instead of being tied primarily to one central store for mainstream content, Google TV merges the Web and traditional television. You can search for a show, and Google TV displays a list of partner services where it can be found, such as Hulu, Amazon, and Netflix. Since Google TV runs Android, the company’s mobile OS competitor to iPhone OS, Google says that Android applications and Flash games will work on Google TV as well. Like Apple TV, you will be able to buy a small set-top box once Google releases Google TV, but Google also forged partnerships to get its Google TV software built right into some televisions; no extra hardware necessary.

Other hardware-agnostic competition has risen to give the Apple TV a run for its money. Netflix, for instance, has emerged almost unchallenged as the king of Internet-delivered video subscription providers. Over the last two years, the company has forged partnerships to get its service onto everything from (previously) no-name gadgets like the Roku, to select DVD and Blu-ray players, and even to gaming consoles like the Playstation 3, Xbox 360, and Nintendo Wii. Netflix’s proposition is clear: why buy video that you’ll probably only watch once or twice, as well as a dedicated set-top box, when you can sign up for a low-cost subscription and watch as much video as you want on a device you already own or were probably going to buy anyway? (We’ll put aside the fact that Netflix is still in the DVD/Blu-ray rental business and that its Watch Instantly selection is only a fraction of what it offers on physical media.)

Even Hulu is rumored to launch a subscription plan for its service. The jury is still out on which devices this Hulu subscription would be available (such as desktop Web browsers, iPad, and others), but it could reportedly cost as little as $10 per month.

Soon

If Apple wants to stay competitive in the rapidly evolving media space, especially when it comes to mainstream content and selling gadgets, it’s going to have to adapt—soon—or risk retiring the Apple TV to the archives alongside the Pippin, Newton, and the G4 Cube. Considering how much of a stake Apple has in the iTunes Store and its ties to the iPhone, iPod, and iPad, though, Apple surely won’t let itself get beat at the media game without a fight.

We have already seen hints at how Apple could be planning a metamorphsis for the Apple TV, and perhaps all of its media-rich products and even the iTunes Store itself, in recent reports and acquisitions. In December 2009, Apple purchased Lala, a music-streaming startup that let users store their libraries on its servers and stream their music and playlists from any computer (Lala even had an iPhone app waiting in App Store approval limbo). Earlier this year, it was also discovered that Apple broke ground on a new data center in North Carolina. Translated: Apple acquired a company specializing in media-streaming technology, then started work on a reportedly “massive” new data center—that can’t all be just to host tutorial videos.

On Friday, tech site Engadget stirred the anxious Apple TV pot by saying it had received information about a major upgrade to the device’s hardware and how it works with the iTunes Store. In a nutshell, Engadget says the next Apple TV could be more of an “iPad for your TV,” sporting a comparatively small amount of flash storage, support for 1080p video, and running on iPhone OS 4.0—essentially becoming a streaming hub for your iTunes Store content stored in the cloud.

But Apple is rapidly approaching a crossroads of the media and gadget industries. While competitors such as Netflix are enjoying success with streaming and subscription models for desktop computers and living room consoles, the iTunes Store got its pay-per-item name by letting customers download and enjoy their content anywhere, with or without an Internet connection, on a variety of desktop, laptop, and portable devices.

Let’s set aside Engadget’s tip (it is just an unsourced rumor at this point), and instead inspect the industry’s tea leaves. It is becoming abundantly clear that a simple storage upgrade to the Apple TV will not satiate the new media consumer. In an age where video has become king, Apple needs to pave a unique highway ahead from these crossroads for its media services and devices, and especially the Apple TV.

Not everyone wants the responsibility of managing media or playlists, let alone maintaining rigorous hard drive backups for the inevitable rainy day. For the increasing number of consumers who want something even simpler than iTunes, Apple needs to introduce a streaming option into the figurative fabric of its iTunes and device ecosystem—open the store, find something you want, click to start listening or watching. Of course, The subscription plans that Apple has reportedly been pitching to studios could could work in tandem for simplifying the iTunes experience.

This way, Apple could enable customers with the option to purchase an all-access pass to stream or download their media for offline viewing, or stick with a stream-only subscription for always-connected devices like the Apple TV. This is a choice that more consumers are demanding with Netflix subscriptions, and the market has opened up enough for Google to finally pounce. It’s looking like 2010 may be the year that Apple is forced to either go pro with its Apple TV hobby or hang up its gloves.

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